SPX Update: Friday's Big Rally Accomplished Nothing

The strength of Friday's Euro-zone Celebration Rally surprised everyone, me included.  But before I get into the current potentials and some levels to watch, I want to address a related topic first.  While the vast majority of readers seem to "get it," there's a fundamental misunderstanding about my analysis that seems prevalent among a small minority of readers -- I'd like to address that misunderstanding in this article.

Market analysis is, first and foremost, about interpreting potentials and probabilities.  There is no such animal as a "sure thing" when it comes to trading and investing.  The analysis I favor, Elliott Wave Theory, allows me to look at the potentials within a given situation and project related probabilities: "If the market does X, then it's likely to do Y."  Again, these projections are probabilities; they are not guarantees.

Veteran traders understand this, but for the less-experienced traders, the best parallel I can think of is poker.  If one has ever played poker, then one understands that, over time, probabilities work out according to the law of averages.  A good hand can win 15 times in a row, then lose spectacularly on the next 6 attempts.  This is why I've stated that one must never trade as if the system they use is perfect: no form of analysis is perfect because probabilities are not perfect -- thus all forms of analysis are subject to some degree of failure.  Beyond that, I'm not perfect -- so sometimes I simply misread the probabilities.  But even if I could somehow read things perfectly every single time, the analysis would still fail at times; it's built into the law of averages.

That's what stop loss orders are for -- and one advantage to Elliott Wave is that the entries and stop loss levels are usually pretty clear.   

The bottom line is:  The market isn't a watch that keeps ticking along on a smooth and predictable path where it does the same thing each and every time "like clockwork" -- it is a dynamic mechanism that reveals potentials and probabilities with every new key reversal or confirmation.  What I do is try to understand the potentials present in a given situation, and then project what appears reasonable and likely from there.  It's important to remember that analysis can only reveal what appears possible from the current vantage point.   As the market changes, the vantage point changes, and the outlook must sometimes change accordingly -- that's how the market works. 

In other words:  I don't "add (or subtract) counts" to my outlook -- the market does. 

What appears possible today may be impossible next week.  The market is not fixed: it's malleable -- and the counts must be adjusted as the price signals dictate.  This is basically how any type of analysis works. 

Even fundamental analysis must be adjusted to compensate for changing conditions.  Perhaps an analyst projected Apple would sell 40 million iWidgets based on current market conditions -- but then unemployment spiked and people stopped buying iWidgets and sales fell short of projections.  At that point, the projected price per share must then be altered accordingly.

When I draw a projected path on the charts, I am attempting to help the reader visualize the path that appears most probable given the current vantage point and market position.  Sometimes the market follows the lines almost perfectly -- in those cases, everything went according to the outcome that appeared likely from the current position.  Other times, it deviates slightly from the projection -- and still other times it does something else entirely. 

There are three general reasons why the outcome might deviate significantly from the projection:

1.  I read the situation wrong.
2.  Outside events influenced things (generally central bank actions)... or
3.  The lower probability outcome came to pass. 

One has to understand that while a given outcome might be only 30% odds -- which is significantly lower probability -- that less-probable outcome is still absolutely guaranteed to occur in 3 out of every 10 instances.

There are no easy answers, though it's human nature to try to dumb everything down and pretend things are as simple as possible. We like our answers quick and easy -- it allows us to go back to watching TV. Unfortunately, the market, and life in general, don't work that way.

So, as the market changes, the signals change.  If an index invalidates a count by crossing a key level, then I have to rework everything with the benefit of the new vantage point.  Frankly, it's a huge amount of work most days (this update alone has required the investment of roughly 16 hours of my time, including many charts not shown) -- Elliott Wave is perhaps the least "automated" type of analysis out there.

Further, please be careful to read the entire text -- often folks "hear what they want to hear" to justify their desires for a specific outcome.  It's not that easy, there are no "get rich quick" solutions in trading or anything else.  

Let's look at a one example of what I'm talking about:  during the entire past week, I have repeatedly stated that the short-term count/projection I was showing would not be confirmed until the S&P broke below 1306.62, and that the projections shown would be invalidated with trade above 1363.46.  I also stated that it appeared probable that the entire correction completed at 1363, because that was the 61.8% retrace level (a very common retrace for a second wave).  My read was correct based on the odds, and I would make it again.

But, as I just stated, even 75% odds are guaranteed to fail 25% of the time.

In any case, neither level has been crossed yet -- the market has come very close to both levels, but is still in neutral short-term ground.  How Friday's wave fits into the picture is a bit ambiguous at the moment.

So... let's see what we can find in the way of clues, and whether Friday was the start of something seriously bullish, or simply a big news-driven short covering rally. 

The first key point is that these types of rallies don't necessarily mean the market is going to new highs.  Below is a chart of the monster rally that occurred in September 2008.  I'm not saying that what happened Friday is an exact parallel to this; it's simply important to understand how markets behave, and to remember that the market always tries to get you to do the exact wrong thing at the exact wrong time.

The second key point is that the market has, in effect, accomplished nothing of merit yet with Friday's rally. It simply raced back up to the top of the recent trading range. 1363 is resistance, and above that, the 2011 high of 1370 is also resistance. Those are both key levels for the bulls to reclaim.  Going back to our discussion on probability: sustained trade and closes north of 1370 will increase the odds for a retest, or besting of, the 2012 highs. 

Note that the market is still in an uptrend in the big picture -- and as I've stated several times, the next precursor for the big picture bearish outlook I've discussed is a break of the larger uptrend.

Next, let's look at some supporting evidence.  There was some solid breadth behind Friday's rally, but at least one of the signals I track was surprisingly weak; especially considering the amount of price movement.  The chart below examines the ratio of NYSE up volume to down volume, which works as a good indicator for accumulation.  Accumulation was relatively weak on Friday, especially when seen in comparison to some recent important bottoms.

Another potentially signal that the rally might not be destined for the long-term is the McClellan Oscillator, which is nearly back into the overbought zone.

Looking at the big picture, the double zigzag count I spoke about last week could be unfolding, but trade above 1363.46 is still required to confirm.

Finally, the short-term SPX chart.  Since the move was ambiguous and no key levels have yet been claimed by either side, the labeling reflects the ambiguity.

In conclusion, there is as yet no reason to believe that Friday's rally was the start of something long-term bullish.  That doesn't mean it wasn't, it just means there's no evidence yet.  The double-zigzag count we discussed last week was never invalidated and has remained on the table this entire time -- meaning that this rally, and even an extension of this rally, was/is still within the realm of probability... and it would not necessarily change anything in the big picture.  We'll have to see how the market responds to some key levels going forward to determine if the big picture outlook is shifting toward bullish, or if this was just a flash in the pan.  In the meantime: trade safe.

Reprinted by permission;  Copyright 2012, Minyanville Media Inc.

SPX and INDU: Europe Adds a Wave to the Outlook

Yesterday's outlook expected lower prices, which happened.  The market then launched a strong bounce from the lower end of the trading range -- and then, after the cash market closed, Europe announced that they've solved the majority of the world's problems.  When it was further revealed that, during the course of the summit, Merkel had developed a cure for cancer and a viable Unified Field Theory, futures shot higher. 

If you're feeling frustrated with this market at all, you're probably not alone -- and that's a pretty normal function of a trading range.  It now appears likely that Minute wave ii is becoming more complex than initially suspected.  Unfortunately, this type of development often can't be predicted in advance.  Sometimes a corrective wave will form a complete ABC fractal, then decide to add a couple more ABC fractals (or similar).  This appears to be happening now.

The S&P 500 (SPX) did not make a new low yesterday, but the Dow Industrials (INDU) did, and that opens up the potential of an expanded flat developing in INDU.  The typical target for such a wave is 12720-12775.

Moving on to SPX: After studying the overall structure, and a number of other indices, I've decided it is probably appropriate to label the decline from 1320 to 1310 as a failed fifth wave.  A fifth wave is considered a "failure" when it fails to make a new price low beneath the bottom of the third wave, and when it's unable to hold down a steady job.  (Sorry, just a bit of bad Elliott Wave humor there!) 

Anyway, the targets here are 1337 or 1352, give or take a couple points.  The black alternate count targets are listed, but the basic structure of that count is detailed on the next chart.

Now, because 1306 has not been traded under, the alternate count is still alive.  I continue to give this count lower odds, because the retracement level of 1363 was 61.8% of the prior decline, and that's wholly appropriate for a Minor wave (ii) -- but the market is always the final authority.  We'll see how excited investors are about Europe, because this alternate count is still technically possible.  I think if the trendline connecting 1422 and 1363 is materially broken, then at that point, we should probably give strong consideration to this potential.

The chart below shows the preferred count, big picture targets, and some things to watch.  Keep in mind that red Minor wave (iii) should take several weeks to months to unfold -- targets won't be reached tomorrow and there will be rallies along the way.

In conclusion, the short term expects higher prices, and a reversal to follow -- but the more bullish alternate count cannot be ruled out yet, and traders should stay alert to it if the upper trendline is broken.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Short-Term Picture Clarifying Again

Yesterday, I had a lot of doubt, and a number of questions, about where we were in the short-term picture, and the good news is that most of them have now been answered. The bad news is that yesterday I ended up leaning slightly toward the view that the market would head down for the short-term, and that turned out to be a complete miss.

It now appears that the original outlook (which projected a low beneath 1310 and then a rally to 1335) published on Friday and Monday was correct, and that Minute wave i bottomed at 1309.

What appeared yesterday to be a small fourth wave turned out to have more legs than was readily apparent, and the SPX rallied 11 points and change, which, judging by the bear reaction, was the largest one day rally in history.  Honestly, this is the type of sentiment one wants to see near a second wave peak.

I remain of the view that Minor wave (ii) peaked at 1363, largely because the 61.8% retracement it obtained is just about perfect for a second wave. However, until the market trades beneath 1306, the option of another a-b-c rally remains on the table. Accordingly, I've prepared a short-term chart with some levels to watch in case my outlook is wrong and there's another large a-b-c rally coming.

The question on everyone's mind is whether the current Minute wave ii rally is complete, and the answer is a resounding "probably."  It's a bit of a messy chart, but the rally has reached a number of resistance levels, and appears to count as a complete abc structure.  Trade beneath 1320 would add confidence to this view.

I worked out a count on the one-minute chart, using the Dow Jones Industrials (INDU) for form, and while it counts differently than SPX, it also appears reasonably likely the structure is complete.  A slightly higher high would be within the margin of error, but again, the key levels on the first chart should not be materially exceeded or this will have to be re-examined.

Finally, a big picture SPX chart which shows some of the key long-term support and resistance levels.  Note the "alt: (y)" label,, which shows the approximate area the market would be expected to top if the more bullish double-zigzag unfolds.  Again, I am handicapping that as low-probability, but I'm not arrogant enough to completely ignore the possibility. 

In conclusion, the bounce from 1309 to 1334 again fits the pattern at this stage, and unless the market throws a curveball here, we should soon see a strong decline (which breaks the 1266 low) begin in the very near future.  Trade safe. 

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Questions for the Short-Term, but Long-Term Bearish

Let's recap what we know for sure:  Monday hit my anticipated target perfectly, and there are now five waves down on the S&P 500 (SPX), which satisfies the minimum expectation for Minute Wave-i -- as such, the larger expected wave-ii rally might be underway.  After Minute Wave ii completes, it is expected that Minute Wave iii-down will travel beneath the 1266 swing low.  Ultimately, the larger degree Minor Wave (iii) should travel into the 1100's. 

I have some questions over the short-term, though, and the only one capable of answering these questions is the market -- hopefully in the next session or three.  Here are my short-term questions:

1. Is the current rally Minute Wave ii, or the lower degree Minuette Wave (4)? (I'm favoring the Wave (4) interpretation.)
2. Is the current rally over?  (I suspect it is -- though it could have one more slightly higher high.)
3. If the rally is Wave (4), will Wave (5)-down extend and blow through the lower target zone?

I'm favoring the idea that this corrective rally has about run its course, that it's Minute Wave (4), and that the market will make a new low beneath 1309.  I'm split on the idea of an extended fifth wave here, and there's really no way for me to know in advance. 

For the intermediate term, I strongly suspect that Minor third wave down is now underway, but the caveat is that the market needs to confirm with a print beneath 1306.62.

If my preferred intermediate outlook is correct, and we are now in the early stages of a Minor degree third wave decline, then there are some things to be aware of.   Third waves are powerful, especially third wave declines, and bounces will be muted and sometimes fall short of targets.  Third waves gain their power from the fact that the majority have been caught wrong-footed.  If you're on the wrong side of the trade, expect this wave will not let you out without damage -- because everyone else will be trying to get out too, and that will keep the bounces muted. (This is relative to the time-frame of course -- Minor degree waves last weeks to months, so I'm not talking about day trades.)

So, third wave declines require the majority to head into them positioned long.  Here's the funny thing about sentiment: I suspect that the majority of people wouldn't really believe my projections, because if they did, then we couldn't have an extended decline.  People who think the market is headed significantly lower aren't holding equities; they are either short or flat.  And people who are short or flat have nothing to sell to drive the market lower in the first place -- so if I'm right, the majority are still long right now: it's something of a requirement. 

Right around the time the majority turn bearish, it will be time for a large bounce.

Let's move onto the charts, and take a quick look at the intermediate picture.  The questions I outlined above are reflected on this chart (as well as the next one).  If Minute ii-up is underway, then just move all the blue lines over to the left.

 

Next, the short-term chart, and the expectations of the wave (4) count.  After re-examining the first stage of the decline, I have moved the Minor (ii) high to match the price high at 1363.  I now suspect that the move from 1363 to 1346 was, in fact, the first wave... though it looks a bit odd because it had an extended fifth.  This also matches the strength of the recent decline into the 1309 low, since that would still be a portion of the Minuette wave (3). 

The alternate black count may or may not have more rally left in it.  If the market does more than a very marginal new high, suspect the black wave ii count.  Conversely, if the move starts to accelerate lower from here, suspect either the extended fifth or the alternate count, and we should start looking for lower targets.  If this is a standard fifth wave decline, it should make a new price low, but there should be numerous bullish divergences on the indicators when it does.

In conclusion, the short-term was dead-on clear last week and I hit the last 3 turns almost to the penny, but things just aren't always that clear, unfortunately, and the short term is now a bit hazy.  It will clarify again soon enough.  Regardless of the market's short-term path, the intermediate term appears decidely bearish.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: ST Clarification Needed from the Market

Well, the last several days of projections have been dead-on hits at every turn, and now the market has broken the 1310 level I suggested.  There are now five clear waves of decline, and the decline has accomplished the minimum expected/required.  As such, a snap back rally could occur at any time.   

Here it gets a bit muddy:  I've looked at a lot of charts tonight, but I just can't see around the next bend right now.  The preferred count has peformed flawlessly so far -- but now we're going to have to see how the market responds to a few levels and hopefully the picture will clarify a bit during today's session.

The first chart I'd like to share shows the preferred count in blue/red and an alternate in black.  So far, yesterday's small rally appears corrective, and if the 1309 swing low is claimed, I would expect the decline to reach 1298-1302.  However, there are enough squiggles to count the wave as complete and the decline reached my minimum target, so 1309 may have been it for wave i.  Note that an extended fifth wave could easily reach the 1260-1265 zone.

As I stated, we'll have to see how the market responds here: the second chart will show a few key levels and trendlines to watch.

Here's a chart that might help tell the story as it unfolds.  Notice how the rally reached a confluence of two resistance levels (the median line of the blue channel, and the upper line of the red channel).  A breakout above the median line would suggest a run toward the upper line of the channel.

Finally, I hesitate to publish the next count... but after studying the charts, I can't get it out of my head.  I would be remiss not to mention it, but let's consider the count below as "speculative" for the moment.  I'm bothered by the apparent acceleration of the decline on Monday, and it suggests the market may be weaker than expected.   We'll see what happens over the next couple sessions to add confidence to, or rule out, this spec count.

Note the new pending bearish sell trigger.

In conclusion, the decline has accomplished the minimum target I projected for this wave, and though I am favoring the idea that it will make another swing low beneath 1309, a larger snap-back rally could develop at any time.  Trade safe.

SPX, CVX, and US Dollar Updates: Long-term Projections and Market Outlook

Friday's outlook expected a small rally, and the market traded right into Friday's rally target zone.  But before I get too much into the short term, let's see where we are in the big picture. 

Long Term Outlook

The projection shown below is what I believe is unfolding, but this big picture count is by no means a "done deal" yet, and bears have a few things left to accomplish to add some more confidence to this projection.  One key confidence builder would be a break of the red uptrend line from the March 2009 lows; and the next confidence builder would be to see the current (assumed) third wave down knock out the December 2011 lows.  Then we'd like to see wave (1) knock out the October 2011 lows. 

The last time I published this chart was May 11 -- when I also departed from the charts a bit and outlined some of the fundamental challenges facing the world.  Anyway, as they say, "so far, so good” – at least in terms of the projections; not so much in terms of the world.

 

Let's look at this chart another way, without the projections -- and then let's ask ourselves, is the type of severe long-term decline I'm projecting even possible?  The charts say: absolutely. 

Long-time readers will recall several times I've pointed to trading ranges in the past, and projected the market to move through them rapidly -- which it usually does.  The simple theory here is that the more often the market trades through a particular price point, the weaker support and resistance become at that price point.  The chart below discusses the rest.

Here's another quick glance at a chart (the NYSE Composite/NYA) that says an extended decline is quite possible -- again: provided bears can break the uptrend off the 2009 lows (which I believe they will).

To sum up the long-term outlook:  I believe bears are now in control for the long haul.  Assuming bears break the uptrend lines, it appears quite likely that the market is in for an extended decline.  Of course, the bulls can still do some things to cast doubt upon it: Trade back above 1422 SPX would require this outlook to be re-examined. 

Intermediate Term Outlook

Let's zoom in a bit and take a look at what's likely to occur on a slightly smaller scale.  The market still has two main options here, but based on the retracement levels hit (61.8%), I am favoring the first outcome by a 75% margin.

As mentioned, the onset of wave (iii) hasn't been confirmed yet, and there are still some options for bulls over the near term.  The first key is for the B-wave low of 1306 to get knocked out.  That would rule out the alternate (x)-wave count shown below, which I'm currently handicapping at 25% odds.  Note the 190 point bearish trade trigger.

Let's also take a look at a key related market: the US dollar.  My dollar projections have played out well recently; below is the chart I published on April 15.  My confidence at that moment was only medium -- but confidence grew after the red e-wave bottom. 

This chart has evolved a bit over time, and in early May, when my confidence in this projection increased, I added additional price targets. It really is uncanny how well the chart above has played out -- note how it's followed the blue line projection perfectly since April 15, and also came within 6 cents of reaching the first target (mentioned in the chart above) for a breakout move of 3.68.  If you bought near the e-wave bottom, you captured a profit of $4000-$5000 per DX futures contract.

I feel the dollar is in a major bull market (as I have since I called a long-term bottom in September 2011), and that continued dollar rallies will likely keep the lid on equities.

Below, a look at the Dollar's monthly chart (although technically this belongs in the long-term outlook section, I wanted to keep all the Dollar charts together). 

Short Term Outlook

The short-term is never as "easy" for these updates to contend with as the bigger picture.  Short-term trading requires far more in the sense of real-time market reads, and what looks likely at the close of one day can suddenly appear completely out of the question five minutes after the next day's open.  Nevertheless, I make a go of it every day, and Friday's short-term outlook was a dead-on hit.

The charts below outline the outcome which seems most probable over the short-term, along with some things to watch.  There are two alternate potentials over the short term, both of which are plausible.  The first is that the complete ABC pattern is simply wave A of (4).  The second is that this is a higher degree wave (2) rally, and could stretch on a bit longer than anticipated, or lead to a deeper decline than anticipated.

I suspect that wave 4 is probably correct and that it completed right where I projected it would, at 1337.  If so, then new lows should now follow directly.  Obviously, trade back above the 1337 highs would indicate one of the alternate short-term counts was playing out.

Below is the one-minute SPX chart.

Finally, a number of readers have asked where a good level to get back into a Chevron (CVX) short would be, so I have outlined a bearish sell trigger on the CVX chart below.  I believe CVX just completed an ABC rally for a nested second wave.  If this outlook is correct, it's in for a rapid decline in the near future.

In conclusion, it appears likely that Minor wave (iii)-down of Intermediate wave (1)-down is now underway.  We'll continue to watch key levels, to either build confidence in this view or to rule it out.  The market has stayed on track with my overall projections for the past several months, so there's little reason for me to doubt this outlook at the moment.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: Rally Likely Over -- Ready for the 1100's?

With Thursday's solid decline, it's likely that wave (ii) ended at 1363.46, about a point and a half shy of my target zone.  In my defense, it appears that the final fifth wave up most likely failed, which accounts for the target short-fall.  There is one last short-term hope remaining for bulls, but it's lower probability at this stage -- I'll cover that option in a few moments, but first, let's take a look at how my Elliott Wave analysis is doing overall for the intermediate picture.

Below is the preferred count I published on June 1.  The decline fell 6 points shy of my target zone (and the red wave (ii) illustration here was never meant to be anything other than a rough guideline) -- but overall, it's probably safe to say, "not too shabby."  This is one reason I stick with Elliott Wave as my go-to analytical tool:  I simply know of nothing else that can call two intermediate turns this accurately before the first turn has even happened.

 

Let's update that hourly chart, add in some more clutter, and see where we are now in the intermediate picture.  My wave (iii) targets have been slightly adjusted from the June 1 chart.  Bear in mind that the market is a living, breathing, dynamic environment -- so further adjustments will likely need to be made on the fly.

Next, let's zoom in a bit to the 15-minute chart.  I am uncertain if wave 3 has bottomed or not, so don't bank on that wave 4 bounce -- instead watch the red dashed trendline in the one-minute chart (shown next).  My best guess is that 3 has reached a possible very short-term bottom (or nearly so), based on the one-minute chart, but it's not entirely clear.  Yesterday's 18 point bearish trade trigger target (which I've removed from the chart) was easily reached during the session.

Below is the one minute chart.  These can be extremely tricky to interpret and my confidence in this particular instance is only medium.  The chart does note the invalidation level for the bearish wave (4) interpretation (1347.39). 

Again, don't necessarily bank on that wave 4 bounce here.  As long as the market stays below the dashed red trendline, bears have no reason to fear anything; breaking that trendline is the first step for bulls to get something going.

Next is an indicator chart I haven't had the opportunity to share since late last year.  This indicator combines the readings of TRIN (a breadth indicator) with the down volume to up volume ratio (which indicates selling pressure), and shows that when the two indicators reach the signal line in concert, it becomes extremely high probability that there will be lower lows made in the near future.  This fits with my interpretation of the wave structure, but it's always nice to have some additional confirmation.

By the way, the last time I referenced this indicator (December 2012), it failed to work!  I don't think that will be the case this time, though -- the odds are definitely against a second failure here, so there should be lower lows in the market's near-term future.

Finally, I do want to outline an alternate intermediate possibility.  This potential is lower probability, but there's no way to rule it out yet.  The strength of the decline was fully appropriate to kick off the assumed third wave, so there's currently no reason to to think a double-zigzag will develop here -- but we'll stay alert to this going forward.

The main purpose of the chart is actually to outline the very bearish 190 point sell trigger which will be activated with a breach of the lower dashed blue trendline, but I figured I'd save space and annotate the alternate count onto this chart too.  The bearish sell trigger also jives with the idea of a third wave down.  My preliminary target zone for the larger third wave is 1120-1130, but that would not mark the entire wave down -- there would still be a fourth and fifth wave, which, if correct, should allow the market to reach the trigger target in the high 1000's.

In conclusion, it appears reasonably likely that the market has begun the expected third wave decline.  Third waves represent a "point of recognition" for the masses, and they tend to be strong and unrelenting.  Discounting the alternate potential for a moment: if this is indeed now wave (iii) down, then bounces will often come late; upside targets for bounces will frequently fail; oversold indicators will reach deeply oversold conditions and stay pegged there; and declines will run deeper and faster than most think they should.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.