SPX Update: Is This 2009 All Over Again?

The market hasn't had much good news lately, yet so far the sell-offs have been pretty mild.  It feels like neither bulls nor bears want to commit, and no key levels which give a significant edge to either side have yet been claimed.  Yesterday, the Russell 2000 (RUT) came within pennies, but still failed to break 765.

Before I get into the current charts in detail, I want to share an interesting analog I stumbled across while I was doing some historical chart studies on Thursday night (this is what I do while normal people are watching TV).  Below are two hourly charts of the S&P 500 (SPX):  2008-2009, followed by the current market.  At the moment, the patterns look remarkably similar. 

If readers recall the time just after the 2008 election, the news cycle was similar (in sentiment) to the current news cycle: rapidly alternating hope and fear.  My recollection is that the overall mood was darker then, but I'm not sure if that was actually the case, or if we've just gotten used to it.

Whether the analog will hold or not remains to be seen, of course.

This current pattern is every technician's worst nightmare, because the possibilities from here are extremely numerous.  The advantage in 2008 was that the larger pattern was much more defined and the correction (referenced above) was clearly counter-trend to the larger existing downtrend. 

In any case, coming back to the present: quite frankly, at this exact moment, all I can do is speculate about the short-term.  Of course, speculation is all trading ever truly is, but usually the charts are a bit cleaner than they are right now. 

I'm trying to factor in everything currently in the charts (short and intermediate term) in order to draw a coherent overarching picture:

1.  Short-term, the decline from 1391 still looks corrective.
2.  New swing highs above 1391 have continued to appear slightly more likely.
3.  On an intermediate level, since 1266, the pattern seems to have too much price overlap to be viewed bullishly.

While studying the charts and trying to reconcile all these factors, I realized that an ending diagonal fits all existing criteria, and the wave forms, quite well. 

So, while the pattern shown below does break the interesting analog from the first two charts, it also fits all currently available price info, which means it's worth sharing.  This pattern would also allow additional bullish sentiment to develop, since it would mean there are one or two more sideways/up waves still to come.

The big picture SPX chart is little changed and the wave peak could be in place at 1391.  If that's the peak of the wave, it represents a very bearish short-term pattern, but at some point, the market needs to actually sell off to validate that potential pattern -- and so far it just hasn't wanted to.

Friday is a non-farm payroll day, and that lends to volatility, so I suppose the opportunity might be there for either Friday or Monday -- but bears are running out of time over the short-term.

Regardless of what the market's short-term plan may be, my intermediate outlook currently remains leaning bearish.

In conclusion: the short term picture remains hazy, and has continued to reward nimble traders and punish the over-confident.  The short-term is still up for grabs at this moment, though the ending diagonal shown earlier would make a fitting end to this pattern.  Trade safe.

Reprinted by permission, Copyright 2012 Minyanville Media, Inc.

SPX and RUT Update: Bulls Losing Key Ground

The short-term pattern on the S&P 500 (SPX) remains a mess, but the intermediate picture appears close to clarifying more definitively.  The Russell 2000 (RUT) lost some potentially key short-term price territory yesterday.  A trip beneath RUT 765 is now required to "seal the deal" for the bears. 

If RUT moves below 765, it will be extremely difficult to match the current move to any type of intermediate bullish pattern, and instead will suggest that RUT has been warming up for a more serious decline.  The chart below shows that RUT has also formed a potential head and shoulders pattern, which seems to confirm the Elliott Wave fractal. 

Again, 765 is the key intermediate-term level here, so I don't want to convey that bears are completely in the clear yet; because they aren't.  However, Wednesday's deep retrace overlapped some key short-term price territory (774), which was the apparent peak of wave a or (1).  Elliott Wave rules do not allow waves 1 and 4 to cross paths, so this overlap suggests that the recent rally in RUT was an ABC corrective rally, which means the intermediate trend is down.

One of the key tenets of Elliott Wave Theory is that price travels in a series of five waves when it's heading in the direction of the larger trend, and it travels in three waves (or some variety thereof) when it's moving against the larger trend.

In other words, the overlap at 774 suggests that 765 will eventually be tested and likely broken.  The market could head lower fairly directly, but, as always, reserves the right to first stretch out the pattern sideways if it so desires (and by "sideways," I'm referring to the range that's formed between 765 to 808). 

Looking at this chart, we can see that the decline from 820 is still three waves, and thus could still be viewed bullishly.  A new low beneath 765 would break that three-wave appearance.

The hourly RUT chart shows the updated pending bullish and bearish trade triggers.

The short-term SPX chart remains messy, and is of little use.  I am completely uncertain if 1391 will mark a meaningful turn, or if the bulls have some more firepower.  The pattern currently still looks like a bull flag, which could suggest higher prices over the short-term -- however the setup is very similar to the last time the market broke out and then came to rest on the black trendline (on July 20).  The market gapped down the following day. 

Given the information in the charts at this moment, an eventual bearish resolution to new lows beneath 1266 still appears probable over the intermediate term.

The NYSE Composite Index (NYA) also suggests the rally may be over, or nearly so.

In conclusion, new swing highs over the short-term would actually look better for the pattern but are not required.  A bit more upside would still leave the larger fractal looking bearish from an intermediate perspective -- it would, in fact, take a meaningful breakout from the bulls to invalidate the current bearish appearance of the intermediate charts.  This would probably require a bullish announcement of new liquidity from Europe's central bank.  Trade safe.

Reprinted by permission, copyright 2012 Minyanville Media, Inc.

SPX and RUT Updates: Happy FOMC Day!

Before I get into today's discussion, I wanted to clarify my last update regarding monetary policy.  Many readers (understandably) took my discussion of additional printing to be a reference to QE3.  Let me clarify that I would be shocked if the Fed announces QE3 this week.  The market's very close to the highs of the year, and the Fed just extended Operation Twist; so I can't see them announcing QE3 anytime soon.  When I was speculating about the potentials of a new central bank liquidity program coming in the relatively near future, I was referring primarily to Europe.

Tomorrow is FOMC (Federal Open Market Committee) Announcement Day, which of course means we all have to wear something green and hand out little cards shaped like clovers to our friends and family.  Cries of "Happy FOMC Day!" will echo through the halls of our nation's grade schools, as starry-eyed children dream of finding the mythical pot of gold that's rumored to lie at the end of the printing press (don't spoil it for them: childhood is a magical time).  In the evening, the bars will fill with adults who've been lured in to drink the green beer... which, in honor of the ongoing devaluation of our nation's currency, will be sold at the discounted price of only $899 per pitcher.

Or maybe I'm thinking of St. Patrick's Day.  FOMC Announcement Day usually means a whipsaw market.

The market continues to send mixed signals.  Over the weekend, I talked about the up volume to down volume ratio, and how its reading on Friday suggested a higher high still to come.  The market made a new intraday high on Monday, but has traded sideways-down since, and closed in the red on Monday and Tuesday.  This actually damages the bullishness of the prior signal, at least over the short-term.  This is similar to the signals being sent by this indicator before the actual bottom was reached in October of 2011, and thus now suggests that the odds favor a new low coming, beneath the last swing low of 1329.

This recent trading range has reminded me of September 2011 in a number of ways already; so we'll add the above signal to the list of similarities.

The one-minute chart is a complete mess and is also sending mixed signals, and I simply can't interpret it with any value at the moment.  I can see it as a possible ending diagonal c-wave (complete at Tuesday's low and suggestive of an immediate continuation of the rally), or a bearish (short-term, at least) nest of 1's and 2's, but I can't find anything that clearly sorts one possibility from the other.  I'm inclined to favor the ending diagonal, but only slightly.

Whether there are lower prices coming over the very short-term or not, the 15-minute chart says there are still pretty good odds of a trip toward 1400-1410 (or higher).  I would be cautious about front-running any hypothetical turns.

The hourly chart shows that bears have so far at least caused the bulls to pause at the current overhead resistance levels, and there is some additional layered resistance up through 1407.  So far, the correction of Monday and Tuesday looks like a bull flag, which is also suggestive of higher prices.

At least one reader asked why the invalidation level is 1422 instead of 1415, and this is an intelligent question.  The reason I'm using 1422 is to allow a margin of error since I'm considering 1415 as the top of a failed fifth wave, and it's not entirely clear if that's indeed the case.

Readers will note that I've added the text "mega-bear" to the invalidation annotation, and the /a and /b labels behind the (i) and (ii).  This is because some indicators are now beginning to suggest that the current ugly rally may be wave b of a larger flat correction (this would mean a rally back toward, or even a bit above, 1422, and then a reversal back down beneath 1266 before ultimately heading to new highs).  We'll see how it plays out from here; but if the market dictates, then I'll need to illuminate and expand on that potential in a future update.

I've also updated the short-term Russell 2000 (RUT) chart, and added a bit more detail with horizontal support and resistance levels. 

In conclusion, there are reasonably good odds of higher prices still to come over the short term.  Trade safe.

No Material Change

There's been no material change in the outlook from yesterday, and as such, I'm taking the night off!  I have decided to do 4 updates a week for the time being, as there's usually (at least) one day each week when nothing really changes, and the current hours are killing me.

I did want to clarify that in yesterday's update, when I talked about potential monetary stimulus, I was referring to Europe.  I have little hope for a QE3 program from Uncle Ben at this time.  Trade safe.  :)

SPX and RUT Updates: Has the Market Finally Reached a Tipping Point?

A few readers have asked why I haven't published much in the way of longer-term projections recently (outside of a few hypothetical if/then type charts, which were contingent on key level breaks that never came), and the simple answer is: there haven't been any longer-term projections I've had much confidence in lately. 

About a month ago, once the market rallied back above the 1363 swing high, everything got a bit hazy for the longer-term outlook.  And while July was a good month for the short-term portion of this update, I haven't done much focus on the bigger picture because I felt there were no clear targets to focus on.  In retrospect, this was the correct approach. 

This has been a challenging market across the board, and the market has repeatedly punished traders who've held positions longer than a few days.  And while I've been preaching for several weeks that traders should remain cautious and nimble, and that no result could be counted on as long as the market stayed range-bound, I now believe the market has finally reached a decision point.

I suspect that what happens over the next week or so will telegraph the intermediate-term direction fairly clearly.

I'm not a big fan of following news and believe that news is generally noise -- in other words: the charts tend to lead the news.  However, I have always stated that genuine central bank policy actions (not rumors, but actions) do not qualify as news noise, because central banks represent liquidity... and liquidity drives the market.


As I've been discussing for several weeks, the charts haven't been crystal clear for the longer-term, but did appear to be coiling for a big move.  It would now appear that the market has been waiting on the central banks.  This coming week, leaders will be meeting to discuss monetary stimulus -- and the charts suggest that the market has finally reached a tipping point, coincident with these meetings.  Interestingly, the charts could support either outcome:  A disappointment for the bulls (i.e.- no printing) should lead to a sustainable decline; but an announcement of more printing should lead to a sustainable rally.

So the two main potentials visible in the charts seem to match the reality of the central bank fundamentals quite well.   The nice thing about following the charts is that no matter which announcement comes and which way the market breaks, the charts will then provide us with longer-term targets.  I'm pretty sure that the news won't provide that much detail.

Friday's bullish trade trigger I published for the Russell 2000 (RUT) was activated early in the session, and then easily reached and exceeded its target (as I stated Friday, the target was conservative).  I now want to update the bigger picture RUT chart, previously published on July 15, because the targets for the pending trade triggers ("pending" meaning they never triggered and became active) have changed.  Since the pattern has changed since they were originally published, I want to update them now before price crosses any trigger points -- additionally, there are two new short-term trade triggers which I've added.

On July 15, when I published this chart, I wrote:

This market may actually become more challenging going forward, because it is still trading in a large range, and strange things can and do happen in trading ranges...  I think traders should remain very nimble until the market breaks out of this range.  

These types of ranges can be very challenging to trade profitably, and if one doesn't take profits quickly, the ongoing price overlaps can nickel and dime one's account to death. A range like this suggests the market is coiling and building up potential energy for a large and sustained directional move, to be launched at some point in the future.

I continue to believe that this trading range has been part of the energy-building process -- but there are now, finally, some indications that market is ready to make a decisive move soon.

Below is the updated chart:

A close up version of the RUT chart with some additional support/resistance lines and info is shown below.  Note the 781 level applies over the short-term only.

It's interesting how much RUT has lagged the S&P 500 (SPX) during this recent rally.  SPX has made clean new swing highs, but RUT hasn't even broken through its lower-high July peak yet.

The SPX chart below shows that there is a confluence of trendline resistance in the zone just overhead.  Bulls need to break through this zone to gain clearance for a larger rally, so if bears want to maintain intermediate hopes, then this is where they need to launch a counter-attack. 

The pattern of the last two months is finally reaching another point where it could close the fractal.  If bears can close the fractal in this general area (the current blue C-wave would equal A near 1395) and then retake 1329, they will almost certainly gain control of this market for the next several months.  If they can't close the fractal here, then bulls have a good shot at launching a strong and sustained rally from this pattern. 

Again, what happens over the next few sessions is highly likely to reveal which side will control longer-term direction, and I've listed a couple preliminary targets, dependent on some price trigger points. 

I had drawn up a longer-term chart, but I want to hold off on publishing it until the market has clarified a bit more and is out of the noise zone.  Instead, I've outlined the key levels to watch on this chart.

A chart that might be serving as a warning to bears is the up volume to down volume ratio, which measures accumulation.  Friday was a very strong accumulation day: in fact, it was the strongest accumulation yet seen in 2012.  This suggests that while there may or may not be some consolidation or retrace here, eventual higher prices are pretty good odds over the near term (if not longer).

My first reaction when I looked at this chart was, "Somebody knows that there's monetary stimulus coming, and they're front-running it."  We should know soon enough.

In conclusion, the market is again flirting with the upper edge of the noise zone, and thus there's still not much to talk about for the intermediate term, at least not with any conviction.  However, this now appears to be a major decision point:  if bears can close the fractal soon, they can still take control of the longer term.  If they can't, then it's probably time to start wearing some bull horns. Trade safe.

SPX and INDU Updates: Are You a Bull or a Bear?

"Are you a bull or a bear?"  In today's modern world of lightning finance, where stocks are more widely-owned than at any prior time in history, a person's answer to that question is probably even more fundamentally revealing than his or her political affiliation.

But it's a loaded question.  When it comes to investing, trading, charting, and analysis, there are at least two psychological factors which all humans share, but which both need to be controlled and minimized as much as possible in the bull/bear equation:

1.  We all tend to see what we want to see.  In charts (and in life, for that matter), we often find whatever it is we're expecting to find.  This tendency is linked to:

2.  Our desire to be right.  The more consistently we're right about things, the more we feel smart, successful, and valuable.  This is such a deep-seated need that we actually go around the block at times to blind ourselves to anything which could prove us wrong.  Anyone who's married knows that their spouse has weaknesses that he or she refuses to see as true; and so do you and I.

We all have some degree of bias, that's unavoidable.  But as a result of the factors above, we tend to give additional weight and credence to data which supports our underlying bias, because that data actually rewards us emotionally (it appears to prove us "right").  For the same reason, we sometimes discount data or evidence that runs contrary to our bias (it would, heaven forbid, make us "wrong"!).  Most do this without conscious awareness; it actually requires conscious effort to do the opposite -- to suspend bias and "turn the charts upside down," so to speak.

The further emotional challenge is that questioning our bias creates uncertainty.  And as humans, we strongly dislike uncertainty -- we crave a sense of consistency, stability, finality, and resolution.  We want security; we want guarantees and insurance policies; we want our answers simple, straightforward, and easy to comprehend.  Then we want to stop thinking about it.

A quote I've always liked comes from F. Scott Fitzgerald:  "The test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function."

There's a simple reason that a fair number of analysts seem to be either perma-bears or perma-bulls, and I can tell you, from my own experience, exactly what I think that reason is: it's simply because it's a heckuva lot easier to operate that way.  Pick a side and stick to it forever, and you save yourself an unimaginable amount of work and stress.  Plus you attract a core group of die-hards who are also "perma" somethings, and everyone is happy, even if they miss a decade of profits because the market went the other way.  Don't get me wrong: this group isn't happy from a financial standpoint (obviously) -- but they are happy on a far more important emotional and psychological level.  The perma-analyst is feeding their basic human need for acceptance, and makes them feel reassured that they are "right."

I bring this up because when I look at the present pattern in, say, the S&P 500 (SPX) chart, I think of a Rorschach ink blot.  I can imagine a psychiatrist asking, "Tell me what you see in this chart," and then passing it around a room full of traders:
 
"I see a bull!"
"I see a bear!"
"I see my father yelling at me for getting an F in math!"

What do you see?  (Also, to that last trader: it's time to let it go about your father. You're an adult now; take responsibility for your own life!)

I'm sticking with the bearish intermediate outlook (aka: the preferred count) for the time being, because the risk/reward is good, and the count has played out amazingly well, going all the way back to April (it hasn't performed flawlessly, of course, there have been a few minor miscues, but that goes with the territory).  For July, it has performed exceptionally well, and here's a quick review of the preferred count's July performance: 

-- Hit the 1325 bottom within 8 points
-- Hit the 1380 top within 11 points
-- Hit the recent 1329 bottom within 6 points
-- Captured yesterday's rally to 1362

The resounding message of this market has been "don't get greedy on either side of the trade."  Has that changed yet?  I'm not sure.

And the bottom line message I'm trying to convey is: I'm not married to my prior analysis.  Everything is based on the best information available at the time, but the market is a dynamic mechanism and reserves the right to alter its appearance -- so if the picture seems to be changing into something more bullish for the intermediate term, then I'm going to do my best to change footing accordingly.

The short-term picture is muddy as of Thursday's close, and I think new swing highs (above 1380) aren't completely out of the question here; in fact, I'm now roughly neutral on the odds.

Let's take a look at the Rorschach charts and see what we can come up with...

The first chart's focus isn't price; it's a chart I've already shared twice this month.  Now, for the third time in July, the market experienced a huge up-day with somewhat weak internals.  The chart below shows the ratio of advancing volume to declining volume.  Since it's a ratio, it's always relative to the total volume of the day, so it's not seasonally impacted by high or low volume days.  And yet again, Thursday's ratio shows that the accumulation levels were minimal. 

Bulls haven't really committed to these rallies; the rallies appear to be mostly short-covering.  Despite this, on the prior two occurrences this month, bulls have still managed to squeak in some new swing highs, so this indicator doesn't preclude short-term rallies.  It doesn't even preclude intermediate rallies -- it's just one more statistic that gives the bears better odds.

The next chart is the big picture SPX, and discusses the most likely short-term options -- again, it is unclear if the rally has peaked or will continue, but the 62% retrace level we've reached is a higher-than-average spot for a turn to occur, if it's going to. 

The very bullish big picture alternate count is still lurking out there as a potential, and I'm watching for signs that might suggest its appearance, in which case I'll shift intermediate footing.  Based on all the current evidence, that count still appears to be the underdog.

The short-term SPX chart is below, and discusses some key levels that will swing the short-term odds in favor of bulls or bears.  Note that micro wave 4 (small blue label "or 4?) could become more complex and simply chop sideways for a session or three.

Next is the Dow Jones Industrial Average (INDU), which has already exceeded its 62% retrace.  I have labeled this chart with the short-term bullish (still intermediate bearish) potential, which sees a new swing high coming in the area of the "C/(y)" label.  There are more bullish potentials in the present pattern, but they are not currently shown on the chart.

Finally, a short-term Russell 2000 (RUT) chart that suggests a pending bullish buy trigger.  The target, should the trigger become active, is conservative.  There is an aspect of this chart that disturbs me for the bear case, but it's only a potential at present, so I'll discuss it next week if it becomes appropriate to do so.

In conclusion, as I've said for some time, as long as the market stays range-bound, there's not much information being conveyed, and neither the bulls nor bears have crossed any of the key intermediate levels to confirm a more solid outlook.  A few days ago, bears were quite excited -- but at the time, I warned that the bears would accomplish nothing if they couldn't reclaim 1306 (which they didn't do).  So it still appears to be an undecided market. 

The intermediate odds still seem to favor the bears, but to date, there's been nothing in the price action to confirm the indicators -- and price is always the final arbiter.  One more new swing high (marginally higher than 1380) would remain within the tolerance of the intermediate bear outlook.    

Neither side has been able to get anything done in two months, and in the meantime, the pattern has built up a lot of potential energy -- so when it eventually starts breaking more decisively, it should have fuel to run for a while.  Until then, all we can do is take it day by day (which has worked pretty darn well all month) -- and try to shift intermediate footing if and when appropriate.  Trade safe.

SPX and US Dollar: Charts Lead the News Again

There's been no material change in the counts from yesterday, so I'm going to keep the update short and sweet.  Yesterday's update anticipated that the market was likely beginning a relief rally to the 50 or 62% retracement level.  This count remains valid, although sustained trade above the 62% retrace will call it into question and suggest that something more bullish may be afoot.

No change from yesterday:

Last night, while ES was still deeply in the red, I posted my interpretation of the short-term counts over in the forums (charts reprinted below).  Based on the futures action this morning, the counts I posted last night appear to have been the correct interpretation, and yesterday's rally was wave 1 of C (or possibly the start of something more bullish):

Here's the down-to-the-minute breakdown, for those of you following along at home:

The SPX daily chart below discusses two key zones for bulls and bears on an intermediate time frame.

A chart which I'd like to call attention to is the US Dollar, which recently hit its first target (which I published in mid-April).  The chart explains why I'm calling attention to it: There are two counts shown on the chart, and the less-bullish of the two could be finishing up right now.  Therefore, caution is warranted for those considering dollar longs, at least until the market declares that it's intending to follow the more bullish count. 

A funny thing happened after I finished this chart, too:  Europe announced it was going to save itself (I know: again!), and the Euro launched a huge rally against the dollar.  However, I think we need to be very careful about discounting that notion, because I had this chart done well before that announcement was made...

The more bullish count sees a correction, followed by more upside, but the implications for the less-bullish count are that the dollar rally is over on an intermediate basis.  We'll have to see how it develops from here, but the first target has been captured, concurrent with the potential conclusion of the wave structure.  I have been bullish on the dollar non-stop since September 2011 -- but I would now consider my stance as neutral on the dollar as of this moment. 

In conclusion, the bearish intermediate count remains preferred, but as discussed all month, unless and until the bears can reclaim some key levels, I remain fully cautious and on alert to the possibility of bulls pulling out a last-minute upset.  The bullish alternate count I published recently has not been invalidated -- and this "Save Europe" news announcement, coming right where it has relative to the charts (which are at a potential pivot point), is hard to ignore.  The charts are still at a point where things could go either way, and as long as the market stays range bound, there are simply no clear answers.  Trade safe.