SPX Update: 1344 Reversal Target Hit, Time for the Expected Relief Rally

There's not much to add from the past few days.  Yesterday played to perfection, and I simply can't predict the market any better than that.  I won't always hit things that perfectly, so please forgive me when I whiff on one!

Anyway, after yesterday's 1339-1344 target zone was tagged, the market spiked immediately. 

Of course, the media attributed this to positive rumors and news out of Europe.  Isn't it funny how "someone" knew to start these rumors just as my target reversal zone was reached?  Obviously, they didn't.  Technical analysis, and specifically Elliott Wave Theory, is all about sentiment.  The chart pattern revealed (at least, under my interpretation) that sentiment would be bottoming yesterday, and voila, it magically did.

If Wednesday's action doesn't clearly illustrate why I believe that the charts are the leading indicator, while the news is a trailing indicator, then I don't know what will.

Accordingly, there's no material change from Wednesday's update, and the expectation is that this bounce will be sharp, but relatively short-lived.  Sentiment should experience a brief spike as well, but expect some bad news to follow near the wave ii top. 

The potential now exists for a dramatic sell-off if and when the SPX breaks 1340.  Think in terms of potential energy:  the market has coiled itself up like a spring, and if the 1340 zone breaks, it will release a huge amount of pent-up energy very rapidly.  

Of course, there are other interpretations of the charts, and the possibility always exists for this to have marked a more meaningful bottom than I'm currently anticipating.  If 1340 doesn't break in the future, then that potential energy never gets released.  I don't view that as likely at present, but I will certainly monitor the market's signals and update you if my view changes.

Below is the expectation for the current rally.  As I talked about yesterday, I expected the market to decline into the target box and then generate a solid bounce.  It appears that's now unfolding.  The chart below indicates the upside targets.

Below is the bigger picture view of the SPX.  No change here either.

In conclusion, if my preferred interpretation is correct, then this bounce should be a fantastic selling opportunity.  I'll keep watching the short-term structure and attempt to narrow down the targets over the next couple days, and -- of course -- alert you if there are any changes to my big picture view.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.

SPX, VIX, Nasdaq, Chevron: Yesterday's Targets Hit, but Bulls are Probably in for More Pain

My expectation heading into yesterday was for strong downward movement, followed by a possible bounce, which is exactly what happened.  All my first-tier targets across stock indices were reached, with the S&P 500 actually breaking below the 1353 target before bouncing.  The Nasdaq broke below its target by a miniscule percentage as well. 

The big picture seems fairly clear to me: the intermediate trend has changed.  I can't be 100% certain yet, obviously, but unless the bulls can suddenly pull out a miracle (read: new liquidity flood from somewhere -- i.e., the Fed or the EU), the pattern looks pretty straightforward.  This could mark a very major turn for the markets, with the ultimate expectation being that the October lows will be broken at the minimum -- and with the distinct potential for things to get much worse.  As it unfolds a bit further, we'll look at longer-term targets.

The immediate intermediate (try saying that five times fast) picture is shown below on the SPX chart.  The expectation is that this decline is only part of a much larger decline, which is in turn part of an even larger decline.

The question I've been trying to answer tonight pertains more to the very short-term picture.  It's possible that red wave i bottomed yesterday, and the market could now be in the process of forming red wave ii.  This probably makes the most "sense" from a technical perspective, but when I study the one-minute wave counts, I'm more inclined to believe that there's at least one more slight new low coming before the larger wave ii snap-back rally.

I've outlined both short term potentials on the charts below.  In the grand scheme, both views are intermediate-term bearish -- so this is simply an attempt to pick apart and analyze the smallest wave structures.

The first chart shows the view I'm favoring by a margin of 70% to 30% vs. the second chart.

There's certainly enough squiggles on the chart to count the decline as complete, and it always gets dangerous trying to chase that last "maybe" wave.  In any case, I view the count below as the less likely short-term resolution.

There are also exceedingly bearish ways to count the short-term picture, which would have the market only winding up for an even faster drop, but there's no way to know ahead of time if those are going to play out, and they're always the underdog -- so I'll save those options for discussion only if the 1340 zone is materially broken.  That's really the key level to watch at the moment, in my opinion.

The Volatility Index (VIX) chart reveals the potential danger of a more immediately bearish resolution.  The VIX is commonly called the "Fear Index" by the mainstream media pundits, who have nothing better to do than sit around thinking up clever names for things. 

Anyway, the bottom line is that what's good for VIX is bad for stocks, and vice-versa.  The chart shows that the 21-22 resistance zone is important for VIX, and a breakout there could send it rocketing -- which by correlation implies that stocks would be plummeting.  If my short-term counts are correct, that zone may hold one last time before it breaks.

I want to share a couple quick charts which indirectly support my view that the markets could find temporary support after the next new low (assuming my short-term interpretation is correct, and they haven't already bottomed wave i).  First up is the Nasdaq Composite.

Next up is Chevron (CVX), which I believe has a little farther to fall before it puts together a more significant relief rally.  I'm looking for it to hit 100 +/- on this wave.

And finally, a look at some simple short-term support and resistance levels for SPX.  These charts are often handy for quick reference during short-term trades.

In conclusion, I believe the trend has changed at intermediate degree, and that the bull market is most likely over.  The market is in a very dangerous position now, and barring a substantial change in the environment going forward, I believe bounces should be sold. 

Over the very short-term, I do expect at least some slightly lower lows before a larger bounce develops... though I'm less certain of this view than I am of the intermediate view.  Trade safe.

Reprinted by permission, C 2012 Minyanville Media, Inc.

SPX, DAX, COMPQ, CVX Updates: Bulls Might Have a Little Trick Up Their Sleeves

There really isn't much change from yesterday's predictions, however I do have a slightly "new" way of charting SPX which might be worth noting.

Yesterday, I warned that a larger fourth wave bounce might be in the cards, and it seems likely that we saw all (or part) of that fourth wave unfold through most of the session.  Not a bad call considering that the futures were down 47,000 points when I published the article.  In any case, it's tough to say if the entire fourth wave completed yesterday, since fourth waves are nasty and unpredictable environments, much like the inner depths of Bernanke's beard. 

Based on the one-minute chart, I'm inclined to believe that at least one fractal did fully complete, suggesting the wave may be finished -- however, 4th waves are known to string several complete fractals together, so I can't be certain. 

In either case, I don't believe the final lows for the larger wave are in yet.  It would look much better with new lows, and I've outlined a progressive series of targets on the chart below.

The chart I really want to call attention to is the bigger picture SPX chart.  It seems that just about every bear on the planet is watching the possible head and shoulders top which is forming in SPX.  I want to point out that there are different ways to view it, though all of the charts I've seen are charting it with an upward-sloping neckline. 

There's absolutely nothing wrong with charting it that way, but I always get nervous when too many technicians are on the same page, and begin to worry about foul-play from the market.  The market doesn't like to be transparent, so the bulls might throw in a curveball. 

Accordingly, I want to call attention to another way to chart the head and shoulders.  The wave counts suggest that the way I'm charting it below may in fact be "correct."  We'll have to pay close attention to what type of action develops around the potential necklines.

In either case, aggressive bears won't necessarily want to wait and see if my hypothetical is correct.  But it's certainly worth being aware of the potential.

Next up is COMPQ, which appears to be in a similar position to SPX, and looks like it needs to make new lows before any significant rally can get started.

I also wanted to update CVX, whose chart just seems to get uglier everyday.  I'm looking for new lows here as well, followed by a larger bounce, followed by me (and some of my readers, no doubt) shorting the living daylights out of it, followed by all of us living out our days explaining to our in-laws that, no, they can't have any more "small loans."  At least, not until they pay the last one back.

And finally, I want to call attention to the DAX, which did something noteworthy yesterday:  it overlapped the red wave-a high, thereby joining the FTSE in ruling out the super-bullish long-term counts (which I ruled out a long time ago) with very high probability.  It also appears to be in a similar position to SPX and COMPQ -- so the stars seem to be aligning for the bears over the intermediate term.

In conclusion, the expectation is that there may or may not be a little more sideways yuck left in the market first -- my inclination is that there's not -- but either way, new lows appear highly probable.  There are short-term targets listed on each chart, and I expect a decent bounce will emerge from one of the targets listed.  We'll keep tracking the short-term structure as it unfolds.  Trade safe.

Reprinted by Permission C 2012 Minyanville Media, Inc.

SPX, Oil, RUT, INDU, US Dollar Updates: Market Entering Dangerous Waters

The market is entering dangerous waters, and there are several indices now at critical support levels. It appears likely that the market is in the early stages of an intermediate trend change. 

It's been challenging lately, with the market looking bearish one day and bullish the next, but such is the nature of trading ranges.  As I've said before, until it breaks one way or another, it's not necessarily advisable to get too attached to a position.  I suspect a trend change is starting, but I'm not yet married to that view, until it confirms.  It also bears mention that this type of market, which is "headed to the moon!" one day and "crashing to the ground" the next, is characteristic of a top.

The bearish trade trigger of 21 points (a break of 1394 targeted 1373) mentioned on Thursday, was easily captured on Friday.  This is as painless as trade triggers get, since this trade took virtually zero drawdown.  There are more trade triggers setting up now across several markets.  Before we get too into the short-term, I want to examine a few long-term charts in detail.

The charts pretty much tell the story.  First up is a very long-term chart of the New York Composite (NYA).  NYA is holding just above what has been an important pivot many times in the past.  The chart isn't log scale, but the log chart reveals the same key pivot.

The S&P 500 (SPX) also tells a similar story, and is now sitting right on the median channel line of the uptrend off the March '09 lows (black dotted line).  It's also sitting on the parallel channel line of the '03 and '09 lows -- which "just happens" to match the trendline connecting the 2000 and 2011 highs (red line).  Both the black channel median line and the aforementioned red trendline are important to the bull case.

The Russell 2000 (RUT) is another market holding just above important support, and has now developed a potential head and shoulders top, just as I speculated it would a month ago.

A study of the RUT weekly candlestick chart may also be revealing.

INDU also sitting on trendchannel support.

Conversely, the dollar looks ready to rally.  This chart has played to perfection since I first published it.  It's important to note that the red b-d trendline (okay, fine -- the trendline is blue, the "b" and "d" are red) needs to be broken for first confirmation.  The blue wave-a high needs to be broken for final confirmation.

Oil continues to look bearish, as mentioned on April 4.  The next target for oil is 91-92.

The bearish SPX count is looking decidedly more probable.  It's important to remember that 1357 needs to be broken to confirm.  The chart below shows the next bearish trade trigger, which could be considered to have triggered on Friday, however, the "safer" trigger is shown in the chart beneath this one. 

Here's another way to view the bearish trade trigger.  There's a bullish trigger shown too, but is seems so very far away now.  However, nothing's impossible in a range-bound market.  Just as the market showed little support when it fell back into the range (as I warned), there is also little resistance in that range, and the market could race through it again.  I'm sure all it would take is a wink and a nod from dear old Mr. Bernanke (aka - The Beard). 

My best guess at the short-term wave count for SPX is shown below.  The odds do favor a larger bounce developing soon, but, as is the nature of odds, they don't guarantee it.

And finally, the short-term view of the INDU.  This chart shows a potential head and shoulders in development, to go along with the SPX and RUT.  The alternate count shown here is still technically possible, but seems lower probability.  It is shown largely because the impulse wave lower has not quite confirmed yet.

In conclusion, the market is very close to confirming an intermediate trend change, but has not quite done so.  The preponderance of evidence seems to suggest that it will confirm soon enough.  Of course, we've seen this movie before.  The good news is that there's plenty of key support levels which have entered the picture, and which should keep us pointed in the right direction.  Trade safe.

SPX and More Update: Bulls Walking a Fine Line

Range bound markets are so much fun!  And by that I mean they can be a pain in the butt.  One minute, everything looks bearish, the next it looks bullish, and the next it looks neutral.  This is why it pays to realize that the majority of what happens within a range bound market is noise.  Until a breakout/breakdown materializes, there's not much for either side to cheer about.

The market is not looking nearly as bullish as it did a couple days ago, though this could still be the "typical scary wave (2) correction" I talked about then.  I do want to call attention to the bigger picture though, as there are a few things the bulls need to resolve if they want to convince people to continue to buy bucketloads of their inflation-driven inventory.

On the big picture chart below, we can see that so far, we have nothing but a lot of failed backtests of the old uptrend.   The only index that looks reasonably strong on this chart is the Dow Jones Industrial Average Marginal Mediocre (INDU).  It's the only one not looking "average."  The rest look like if they experience much more downside, there's going to be trouble.

(Right click and select "Open in New Window (or Tab)" to bring up the full size chart).

The next chart is the count that bulls are hoping for, and it could still play out this way.  Even under this blue bullish count shown below, the market looks to me like it needs some more downside before any larger rally can get started.  

The head and shoulders trigger did elect yesterday, but if the bull count is playing out, don't be surprised to see that target fall short.  Bears need to be very cautious on any substantial whipsaws of that trigger (see second chart).

The black bearish count shown below would, of course, spell trouble for bulls.  As I mentioned yesterday, a close beneath 1380 would be bearish. 

The next chart examines a more bearish potential in detail.  If the bears wish to maintain any hope of this count working out, they need to defend the area in and around the yellow box.  If the bull count is playing out, then the wave labeled as blue 1 on the chart below is instead going to mark the bottom of c of (2) as shown above (the bullish count isn't labeled on the chart below).

And finally, the intermediate trade trigger chart shown yesterday.  Until market breaks out one way or another, there's not much to get excited about big-picture-wise.

In conclusion, the market looks like it's hanging by a thread (again).  Over the very short term, I'm expecting new lows are still to be made, but beyond that, the bulls probably need to pull things together fairly quickly to keep their intermediate hopes alive.  Trade safe.

SPX and RUT Update: Know Your Limitations

When you use a system like Elliott Wave (or anything else), it's important to know what it can do and what it can't do.  Range-bound markets, especially near potential turning points, are particularly brutal on most forms of technical analysis.  I'll try my best to present you with some helpful info anyway.

A range that appears in a young rally that's not yet overbought is one thing: it often means a consolidation before a new thrust higher.  A range that appears at the end of a (seemingly) tired rally can mean the same thing (new thrust higher coming) -- or it can simply mean that the rally has run out of buyers. 

If the market has run out of buyers, what will usually happens in a situation such as this is the market would test the higher prices with a breakout.  If there is still buying interest, the breakout will run.  But it's not unusual to see instances of a brief breakout that runs into a wall of sellers, leading prices to whipsaw.  One can see just such a pattern in eur/usd recently (see chart below).

This happened because the short term breakout was bought, and for a moment buyers outnumbered sellers so it jumped higher.  But it immediately ran into intermediate and long-term resistance, and a wall of standing sell orders that overwhelmed the short-term traders who bought the breakout.  Once that short-term buying money was spent, there were only sellers left. 

Moves like this reveal the pschology of traders.  Most are trying to squeeze every last cent out of a move, and greed can overtake reason.  So even with long-term resistance just overhead, many bought the short term breakout.  How do I know?  The strong sell-off that followed is proof positive.  Sell-offs like the one that followed can only occur if the majority were on the wrong side of the trade, and that adds fast fuel to a fire as the short term money suddenly starts bailing.

I saw the short-term breakout, but I was also well-aware of long-term resistance just overhead.  So how do you play it?  Well, my particular read was that euro still had a little bit of room that it could run before smacking into long-term resistance -- so, being unwilling to ride out a potentially high drawdown, I covered my shorts on the breakout.  However, I felt it was too risky to go long since the reward was marginal, so I sat and waited a bit.  Then I got short again on the whipsaw.  It cost me a few bucks of potential profit, but it was the less-risky play, in my opinion. 

Two lessons:

1)  Often we simply have to let the market declare its intentions.  No one can know for sure ahead of time if a breakout will run or whipsaw.  There are sometimes clues, but the market is always the final arbiter.

2)  It's important to be aware of what's going on across time-frames.  I feel the equities market may be facing a similar situation now, the difference being that equities could run a lot farther if they break out (the risk/reward is better, in other words).  There have been some short-term bullish signals, but there is also resistance just overhead.  Which will win?  We may find out soon.

This is one of those times that the systems simply can't predict with high confidence exactly what's going to happen -- at least, not until the market gives some more information.  My caution here would be to avoid getting too attached to any particular outcome at this juncture, and stay nimble.

The first option is the standard bullish impulse wave up.  This would have the market ultimately heading into the mid 1400's.  Probably the main argument in favor of this count would be the simple "trend is your friend" concept.  The count also matches well with a bigger picture buy trigger, noted a bit later.

There's a short-term bearish sell trigger noted on the chart, which will elect on a break of the fairly-obvious head and shoulders at the red trendline.  This would fit as wave c of (2) per the bullish count, with wave (3) up to follow.  There's no guarantee that the trigger will elect, so one should be cautious if considering front-running that trigger.

Trading ranges are difficult environments to read, because the market really isn't giving out much information.  Shown below is another way to look at things, using the RUT for illustration, though this could apply in SPX as well.  This count would fit the "fake-out breakout" potential in the market.

Looking at the bigger picture, and ignoring wave counts for a moment, there are a couple of intermediate trade triggers set up.  This chart also shows simple support/resistance lines, which can be quite helpful in a range-bound market.

As I said earlier, I would play this market cautiously.  What that means to me is I might use the breakout points shown above as pivots.  For example, I might be long above the breakout level, but flat (or short, depending on how things look) beneath it.  Then flat or long again back above it.

In conclusion, this market is a tough nut to crack right now.  Until it breaks one way or another, there's simply too little information available at the current levels -- however, there are a few triggers to watch and see how the market reacts to them.  I'm really looking forward to things resolving one way or another soon.  Trade safe.

SPX and INDU Updates: Bulls Win Again

Recently it seems that virtually everytime there's a choice between a bearish count and a bullish count, the bullish count wins.  This was once again the case yesterday, as the bulls did what they needed to in order to knockout the bear count (in the Dow, at least). 

There now appears to be a complete five-wave form on multiple time frames, so it's likely that a correction is due at the minimum. 

The bears will hold out hope that the recent highs will mark ALL OF wave (v) up, but given the track record of bearish vs. bullish counts, I'm going with the more bullish count as the preferred view, which would see the recent highs as marking wave (1) of (v), with more upside to come.  We'll have to watch the decline carefully, and if it seems to be turning into an impulsive form and starts breaking some key trendlines, then we'll consider the more bearish option in greater detail.

The bullish Dow triangle count, shown on Sunday, appears to have played out to perfection.  Below is the original chart, followed by the updated chart.

Again, since the rally has now completed five smaller waves up, there is always the possibility of a larger top in this position.  Current expectation is that these five waves are only completing wave (1) up, but any trade beneath the E wave low would be a big red flag to bulls.  Barring that, we should probably continue to give the benefit of the doubt to higher prices.

Below is the short-term SPX chart.

And the bigger picture SPX chart, with an initial target possibility.  We'll narrow down targets after the assumed wave (2) bottoms.

On a bright note, yesterday's Euro/US dollar call was a big winner, as eur/usd dropped substantially.  This is the one thing which is causing me to give some serious consideration to the more bearish alternate count -- the dollar appears to have put in a base and could be due for a lengthy rally.  Now, dollar/equities correlations come and go -- however, a bullish dollar indicates that traders view QE3 as significantly lower probability.  And no QE3 hope is bearish for equities.

In conclusion, we'll have to watch this next decline carefully for signs of an impulsive move.  If that happens, the possibility of a fifth wave failure will loom large.  But if we get a garden-variety scary (to bulls) a-b-c down, which is currently the expectation of the preferred count, then it becomes quite likely that the SPX is on its way into the mid to high 1400's.  Trade safe.