SPX Update: All Roads Lead to New Lows

The short-term picture in the S&P 500 is less clear than I would like it to be.  On Monday, the market tagged my 1336 reversal target (okay, I was 48 cents off) as discussed on Friday, and reversed immediately; so far, that's been the high for the move.  One would think I would be supremely confident at this stage, but let me explain why there's still some lingering doubt over the market's short-term intentions.

Before I go further, the big picture outlook continues to believe that the trend has changed at intermediate degree, and that the trend will continue in the downward direction for some time to come.  Initially, I'm looking for a retest of the October 2011 lows, and ultimately much lower -- we'll examine that in more detail when it gets closer.

Moving back to the short-term outlook:  The interpretation I'm using as my preferred count is a bit challenging, because I'm basing it primarily on the view that the decline from 1334 to 1266 was a three-wave move.  However, it's a bit unorthodox for the larger fractal of an a-b-c expanded flat (blue (a)(b)(c) in chart below), due to the length of the b-wave.  Generally, the b-wave of an expanded flat won't exceed 138.2% the length of wave-a, and this one does.  So, it's hard to be exceedingly confident in this view. 

Further complicating the matter is the fact that the rally from 1266 to 1335 is clearly impulsive (meaning it has unfolded as a five-wave move), which does fit as wave-c (my slightly preferred interpretation), but could also fit as wave-a of a new a-b-c fractal.

Accordingly, I've charted both potentials.  The first chart shows the a-b-c expanded flat (preferred count).

The second chart shows a close-up view of this same count, with some potential targets and trade triggers.

The third chart outlines the idea that this rally was the first leg of a new a-b-c for wave (ii).

Finally, a simple chart of support and resistance for the SPX.

In conclusion, both counts are looking for significant new lows over the intermediate term, and new lows for the week (perhaps after a small bounce) in the next couple sessions. The short-term should clarify a bit as it unfolds.

On a Lighter Note

And last but not least, a bit of exclusive breaking news.  The big news item of late is still the European Union agreeing to bailout Spanish banks (euphemistically referred to as “bank recapitalization”).

The mainstream news outlets have reported that Spain did not approach the International Monetary Fund to request the €100 billion loan -- however my sources have revealed otherwise.  As a matter of fact, I was able to obtain conclusive proof that Spain first asked the IMF for the 100 billion euros, and, fearing austerity measures, actually went to the EU as a last resort. 

Utilizing a source who wishes to remain anonymous, I obtained a copy of the actual letter sent to Spain from the IMF.  This exclusive evidence is reprinted below:

Dear Spain,

We have received your recent application for a       bank bailout       loan in the amount of    €100 billion  ($126 billion USD)    .  After reviewing your application for nearly 20 minutes (to be fair: 18 minutes of this were spent passing your paperwork around the office, pointing at various line items, and laughing hysterically), we regret to inform you that at this time we have denied your loan request for the following reason(s):

                                Delinquent Credit History
                                High Debt-to-Income Ratio
                                Insufficient Collateral
                                The Majority of Our Employees Cannot Roll Their “R’s”
                             
As a result of these issues, we are currently unable to approve you for the full loan amount; however, we would still like the opportunity to serve you.  In order to help you get back on your feet, we would like to offer you our new International Monetary Fund Airline Miles Credit Card with an initial credit limit of       $           250      at an Annual Percentage Rate of only   89.99   %, and with a low annual fee of only $    249.99   !  With the IMF Airline Miles Card, you’ll have the chance to properly manage and re-establish your credit while also accumulating valuable flight miles each and every time you use your card for common everyday expenses, such as groceries, dining, gas, and bank bailouts!  Your accumulated miles can then be redeemed for trips to exotic destinations like Greece, Italy, Portugal, or Ireland. 

Your card payment history will be reviewed each year, and as long as you continue paying your IMF bill on time each month, your account will receive annual credit limit increases equal to $       250      per year.  Assuming your account stays in good standing the entire time, your IMF Airline Miles Card will eventually provide you with all the credit you need ($      126 billion      ) in only 504,000,000 years!

Thank you for this opportunity to serve you.  We hope you’ll consider us again for your future bailout needs.

                                                                                                                      Sincerely,

                                                                                                                      Phil Rizzuto

                                                                                                                      Co-co-co-chairman
                                                                                                                      International Monetary Fund
                                                                                                                      “Why Not, It’s Only Money”

Reprinted by permission, Copyright 2012 Minyanville Media, Inc.

SPX Update: Overnight Futures Rally is No Surprise

On Friday, I suggested that the market looked like it needed to make a higher high over the short-term, and based on the futures action on Sunday evening, this appears likely to occur.  The futures market is very excited, because apparently Spain is going to ask the EU for a loan for its failing banks.  Yes, you read that correctly. 

In any case, further upside was expected -- the question I posed on Friday was of degree.

If the futures rally sticks, and there are no guarantees it will, then it appears that last week's slightly more bullish count of wave (ii)-up is in play.  Before we discuss that in more detail, let's consider the possibility that last week's wave (4) count is still viable.  The cash market is the final authority, so let's see how things go on Monday -- this count may be eliminated right at the open.

Below is the chart for the more bullish wave (ii) rally.  Please note that both of the count above and the count below are only short-term bullish, and intermediate-term bearish.  My preferred view remains that the market has changed trend at intermediate degree.

The first target for the count shown above is near 1345, the second target is near 1370. If the market materially exceeds the second target, we'll need to give additional thought to more bullish big picture potentials.  Accordingly, I have prepared an alternate big picture chart, though it primarily examines the structure of the decline.  Potential upside targets for the alternate count start in the 1480's.  So I would continue to caution long-term bears to pay attention to the 1365-1370 zone -- if the market reaches and breaches it.

This more bullish big picture count (below) remains the alternate for now, and may not even come into consideration, depending on how the next few sessions go.  However, I do want to publish it, since I've been kicking around the possibility for a while.

In conclusion, further upside was expected by Friday's outlook -- but as I warned, the extent of the upside was (and still is) unclear.  We'll simply have to see how it develops over the upcoming sessions to sort out the short-term potentials.  Trade safe.

SPX Update: Is the Rally on Its Last Leg? Or Its First?

On Tuesday I warned that bears should be cautious, and that a large rally could unfold if the bulls were able to breach 1298.  That's indeed what happened.  Now the challenge is in trying to fit the puzzle pieces together to determine what's coming next over the short term.

The big picture still seems to indicate that the rally is corrective to the larger trend, which is now down.  I would give greater consideration to longer-term bullish potentials if the S&P 500 (SPX) can sustain trade and closes north of 1365.  Unless and until that occurs, I will maintain a bearish long-term stance.

The short term is (of course) open to interpretation, but perhaps moreso than usual.  The interpretation I'm leaning toward is that this rally is actually a continuation of the correction which began back on May 21.  This would indicate that the rally has nearly run its course already.  My best-guess would be another thrust up to a slighly higher high, and then a reversal downward.

But it's not a clear short-term picture.  The alternate potential is that the rally so far is only wave a-up of an a-b-c.  Wave b would follow soon, and be the correction lower in that case.  That downward correction would then be followed by wave c-up which would unfold in similar size to wave a.  I don't like that interpretation as much, because the structure of the decline from 1334 to 1266, and the character of the rally (which has behaved more like a c-wave), both lead me to believe this is a continuation of the earlier correction -- so I would give the a-b-c option roughly 40% odds against the first pattern I discussed. 

The chart below explores the intermediate picture for the SPX, and as mentioned, the preferred count believes the market either has completed, or is on the verge of completing, red wave iv.  The alternate count considers the option of a larger rally.

The second chart examines the short term, and notes the potential inverse head and shoulders bottom, which is a pattern that should give bears pause (paws?) if the market can sustain trade above the blue dashed neckline -- though the preferred count considers that it's entirely possible that the market will break this line, at least briefly.

In conclusion, my best guess over the very short term would be for another small thrust higher (though this isn't required), followed by a reversal toward the mid-1200's.  Over the intermediate term, I believe this rally is corrective regardless of which short-term interpretion is correct, and the market will go on to make lower lows either way.  Ultimately, the best interpretation of the wave structure suggests the October 2011 lows will, in time, be revisited.  Sustained trade and closes north of 1365 would cause me to reexamine this bearish outlook.  Trade safe.

Time for a Healthy Dose of Bear Caution

Most targets have been reached on the downside, with a bit more potential still lingering out there.  During the first part of May (and ever since), I made a projection for the decline to reach 1240-1260 on the S&P 500 (SPX).  So far the low is 1266, which is awfully close.  This is a time for bears to be cautious. 

Unless the SPX can get through 1298.98, there is still a chance for one more downdraft into the original target zone.  So far, the rally appears corrective -- so I'm still favoring that outcome of a lower-low by a slight margin, but the market is definitely getting into that "tough call" zone. 

The first chart I'll share is the intermediate picture SPX, because I do believe bears need to remember that a strong snap-back rally is expected for wave (ii) after the current decline bottoms (assuming it hasn't already).  This is worth remembering, because one does not want to short the entire way up during wave (ii) and potentially give back the lion's share of one's profits.

Next is the "scary bear chart" for the Russell 2000 (RUT), which I discussed over the weekend.  Since the first precursor I mentioned (a whipsaw below and back into the diagonal) has come to pass, this potential definitely bears watching here.

Finally, the short-term SPX chart, annotated with my best-guess of the current move.  As I said, this is a tough call right now, so stay on your toes. 

Converse to my bear warnings, here's a warning to the bulls: if the market breaks 1298.98 and then stalls for some reason near resistance at 1300, then things could actually get more bearish than discussed.  We'll have to watch the market carefully over the next few sessions.

In conclusion, the potential does exist for a lower low over the short term, but this is definitely not the time for bears to be complacent.  Assuming the market behaves "normally" here, a strong snap-back rally should be waiting in the wings.  Trade safe.

Temporary Publishing Schedule

As many of you are already aware, my father is quite ill and I have traveled cross-country to be with him during this difficult time.

(Since I live in Maui, everything is cross country -- it's as far from Maui to L.A. as it is from L.A. to New York.  Fun Fact:  Hawai'i is the most geographically-isolated population center on the entire planet.)

Thus, for family reasons, I will be sticking to a lighter schedule this week and next week.  My intention is to try to publish a mid-week update (Wednesday), a Friday update, and a weekend update geared toward next Monday's trading session.  The schedule will be the same the following week (6/10-6/17).  After that, barring some unforeseen event that lengthens my stay, I'll return to the usual daily updates.  And if I find myself with some free time in the evenings, I may even sneak in a few extra charts in-between.
     
Please keep in mind that this schedule represents "the best laid plans," and is subject to interruption by more pressing matters. 

For some reason, I actually feel guilty about this schedule!  I looked it up, more for my own curiousity than anything, and realized I haven't missed a single daily market update in approximately the last 220 trading sessions -- so I've decided to let myself slide this one time, given the gravity of the situation. 

The intra-day and after-hours market discussion forums will remain open for our lively and intelligent community members to continue posting their thoughts, projections, and observations.  If you haven't already done so, I encourage you to join us.  I'm certain I'll still be dropping in from time to time as well, even during this temporarily-adjusted schedule. 

If you have not yet registered on the boards, please read the New Member Requirements.  I'm very set on maintaining a pleasant and collegial atmosphere in the forums, and establishing some basic screening requirements appears to be the only way to accomplish that goal.

In any case, I will return with a new update for Wednesday's session.  In the meantime, as always (you already know what I'm going to say here):  Trade safe!   :)

Market Update: Reliable Long-Term Indicator Suggests the Bear Market is Back

Of note, we're finally starting to see a little bit of the panic that I've suggested needs to develop before the market can generate a tradable bounce.

I found the next point sad, but interesting (warning: rant alert!):  During the weekend, I couldn't help but notice a fair number of media bulls whining for the Fed to "step up" and intervene in the market -- so it would seem that, deep down, many bulls realize that their only hope for the market to continue higher is Fed intervention.  When a market is driven solely by Fed money supply (printing), and not by a fundamentally sound economic backdrop, that's a market bubble.  Why are people begging for the Fed to keep inflating a bubble?  Have we learned nothing from the housing bubble -- not to mention the last stock bubble?  These things never end well.

And what happened to the concept of free markets? Have we Americans strayed so far that we now actually beg the government to intervene and further curtail our freedoms? Try to think five steps down the road here, media-bull interventionists. This stuff is bigger and more important than your portfolio. If you’re that worried about it, you should quit begging Uncle Sam to bail you out and sell the thing.  Stocks carry risk -- it's not the government's job to backstop you… because, in reality, you are asking all Americans to backstop you, using the government as our proxy.

I personally have no interest in backstopping anyone's portfolio but my own, and I'm willing to bet that most readers feel the same way.

Let's have a show of hands: how many readers want to continue being taxed silently through inflation caused by QE programs -- and want to keep paying higher and higher prices to put gas in your cars and food on your tables -- so that you can back some media personality’s portfolio?  Yes, you sir, in the back... hey, aren’t you a mainstream analyst?

And in the meantime, the Fed is punishing savers by continuing to drive interest rates to zero.  To some degree, Americans are forced to carry high risk portfolios in a stock market bubble because the Fed has made safer investments worthless.  So, I suppose in that sense, I can understand the begging for continued intervention.  The logic goes something like this:  "Please Mr. Bernanke, you've forced me to carry this high-risk portfolio to try and earn some return on my savings... I know its value is inflated, but can you please keep it inflated?"

But we are creating our own demons here; one thing leads to the other.

Is there more to it than that?  Sure there is -- but I'm ranting about monetary policy at the moment, not trying to consider every side of the argument.  As I see it, it's a no-win scenario at this point, and it seems like a system-wide reset may be the only solution.  Left to its natural course, I think the free market would reset.

It seems we have two opposing forces at work in the market now: 

1.  The laws of nature, which seem to consistently demonstrate that bubbles return to their starting point; versus
2.  The specter of ongoing Fed (or other central bank) intervention.

Everything in the charts suggests that the laws of nature will win in the end.  The question is: have we reached the end (will the Fed let the free market be free again?) or will the Fed pull another rabbit out of Bernanke's beard?  (Trust me: there's rabbits in there, and who knows what else.)  And further, can another QE-type program even continue to keep the market elevated in the face of ongoing deflationary forces?

So, my official stance here, just so there's no equivocation:  barring further Fed (or other large central bank) intervention, this market will ultimately return to the 2009 lows.  I believe it will eventually do so no matter what -- the question is if they will (and are able to) continue kicking the can further down the road to delay the inevitable a while longer.  Is now the time?  I don't know; I can't see that far ahead -- but the potential is definitely there.

Alright, enough ranting. 

In Friday's update, I suggested two short-term targets for the S&P 500: 1284, and 1262 beneath that. The first target was reached and breached, and it does appear likely that the second target will be reached as well.
The first chart I'd like to share is the promised long-term indicator suggesting the bear market has returned.  This chart is the NYSE Composite (NYA), which is an index that doesn't get much media coverage. I like to track it because it represents thousands of stocks, and therefore is a much more broad and accurate representation of the total stock market than, say, the Dow Jones Industrials (INDU), which only consists of 30 stocks.

This is a monthly chart, and it shows that the MACD indicator has now formed a solid bearish cross.  We can see that there are only four prior occurences of this cross during the past decade, and each one led to a prolonged bull or bear run (depending on the direction of the cross).  The current pattern is similar to the double-cross formed near the 2000 top. 

Also of note: The triangle formed by the upper blue line and lower dashed black channel line projects potential disaster if realized.

The next chart shows the Volatility Index (VIX), also known as the "Fear Index," which usually moves in the opposite direction to the market.  We can see that VIX usually needs to trade into the 30's before there's enough panic to generate a meaningful bounce.  Sometimes it needs to trade much higher. 

New readers may ask:  why is panic necessary for a bounce?  Well, it goes back to the simple concept of supply and demand, which is what drives stock prices.  The basic idea here is that if there's no panic, then the majority of longs haven't sold yet.  And if the longs haven't sold yet, then there's a lot of sellers still waiting in the wings -- and those sellers represent supply.  That pending supply of stock needs to be worked through in order to clear the way for the equation to tilt the other way again (for demand to outstrip supply), and thus for prices to bounce higher.  So, some level of panic is usually needed to clear out the sellers who are still hanging on for dear life (those who don't read my column!), which drives prices lower and thus also makes equities more attractive to new buyers.

Long-time readers will recall that in late April and early May, I noted that VIX had formed a base and should be headed into the high 20's to low 30's at the minimum.  It's getting into that projected price zone now -- but do keep in mind that my projection was the minimum expectation. 

Here's the long-term VIX chart, which shows that we still haven't reached any of the zones commonly associated with a more significant bounce.  And yes, I do think that there's probably a "Zone 2" for Global Financial Crisis levels... and I'm not looking forward to the day the market reaches that level of panic.  2008 was terrifying for everyone who was paying attention -- even for those of us who were bearish at the time. 

Just because I'm bearish doesn't mean I have to like the situation we're in -- I'm merely acknowledging and recognizing it.  Unfortunately, I do believe it probably needs to happen to purge all the fiscal and monetary mistakes we've made -- in much the way a surgeon needs to remove a cancer to keep it from spreading.  It's unpleasant and painful, but ultimately necessary for healing to occur.

Moving on to the intermediate targets, the next chart of the SPX has so far performed admirably since I first published it in early May.  The expectation for further downwards price movement remains.  I have noted a couple more bearish potentials, and we'll simply need to see how the market responds to some key levels going forward.

Next, the short-term SPX chart, which continues to reach each downward target and has now captured well over 100 SPX points of profit.  The preferred short-term target of 1260-1265 remains unchanged from last week.

Finally, I do want to publish one bullish alternate count, which I feel is lower probability, but worth mentioning at this juncture.  The Russell 2000 (RUT) currently has the appearance of a bullish falling wedge. In Elliott Wave terms, a pattern like this is termed as a "diagonal."  This pattern is one of two things -- one very bearish, and one bullish.  At this point, it's not possible to sort them out conclusively -- the best I can do is try to assimilate everything else I'm seeing and therefore conclude that the bullish outcome is the lower probability. 

In any case, I'm going to publish the chart, in order to give readers some idea of things to watch for -- so they can figure out in real-time if the lower-probability bullish outcome is occuring.  The chart notes some clues to watch, and is only annotated with the bullish potential -- I feel we've covered the bearish preferred count in depth elsewhere.  Again, I would stress:  this is an alternate count, and only provided for reader education and warning.

In conclusion: in early May I went out on a limb and suggested that an intermediate trend change was in the early stages.  The evidence continues to pile up for that case, and it now appears that nothing short of central bank intervention will prevent this decline from turning into a protracted bear market.  I think the bulls are running on fumes here, and if they can't turn this market up very soon, the technical damage will probably be too great to overcome.  Trade safe.

SPX and Chevron: Low-to-Mid 1200's Likely Just Around the Corner

As I warned yesterday, it appears likely that the next wave down has indeed kicked off.  There are still other potentials (always are), but I'm going to stick to talking about what's most probable right now.  There are invalidation levels to watch, and if the market approaches those levels or throws a major curveball here, then we'll examine the alternate probabilities more closely.

(If you're new to Elliott Wave Theory, it might be helpful to cover the basics, as discussed in this article.)

The current expectation is that the S&P 500 is headed to the mid-1200's at the minimum, and ultimately much lower.  It will be interesting to see if the central banks mount another attack soon, or if they're going to drop the "equities must stay inflated at all costs!" approach, seeing as it's basically done virtually nothing to improve the real economy.  Unless you count making the prices of gas, food, and everything else higher for Americans as an "improvement."

The first chart we'll examine is the intermediate expectation.  This chart makes some assumptions, and is skewed to the side of being "bullishly" conservative.  The alternates to this count are much more bearish.  In any case, these projections will almost certainly need to be revisited at the next swing low.

The second chart examines the short term outlook.  There's a new bearish trade trigger that will elect beneath 1298.90.  (Please note that triggers are active when beneath the pivot and suspended when above it.)  This trigger targets 1262, and that number lines up perfectly with the expectations of blue wave (3).  When two different methods of calculation yield the same target, it often means that target has an above-average probability of being reached.

The third chart is the one-minute SPX, and is provided largely for educational purposes, to help those who are playing along at home and attempting to learn Elliott Wave Theory.  Note the (b)-wave triangle, and how wave (c) of red 2 is an almost perfect .618 ratio of wave (a) (there's that golden ratio again!).

And finally, Chevron (CVX), which has been a cash-cow for everyone who's followed along since I called the top near 112.  Yesterday, Chevron made me beam like a proud father, and did the "how close can I come to hitting projections to the penny?" dance (check yesterday's chart for comparison).  Hopefully it will keep playing along.

I've drawn-in some targets for blue wave 3 and red iii.  This count is invalidated with trade above 100.86.

 

In conclusion, the projections from early May (mid 1200's) still look solid and everything still appears to be on track.  Honestly, the main thing making me a bit nervous is the fact that everything's played out so well to this point.  Sometimes the market will decide to smack me around a bit after I've been on a win streak for a while, so, you know... fair warning.  The levels are pretty clear here, so barring an invalidation level being crossed, it should be smooth sailing for bears to new lows.  Trade safe.

Reprinted by permission.  Copyright 2012 Minyanville Media, Inc.