SPX Update: Signs of a Top?

Yesterday I discussed some reasons that the market's current price zone would make a decent level for bears to launch a counter-attack.  I'm hesitant to scream that this is "the" top, because the short-term wave counts are very messy, and there really are no clear interpretations of the charts -- but there is some additional evidence today that may add some confidence to the bear view.

My best-guess interpretation is that there is either a top in place at 1407, or will be after a slightly higher high.  Let me explain the details and caveats:

The challenge with this type of pattern is two-fold:

1.  It's very difficult to anticipate the exact top with this type of pattern (called an "ending diagonal") -- they tend to run on just "one more high" than you think they will.  This type of top is a process, more than an event, so patience is usually in order.

2.  There is a bullish pattern that mimics a bearish ending diagonal -- and it's extremely bullish.  So if the bearish interpretation is wrong, then it's really wrong, and the market launches strongly upwards instead of topping.

Reason #2 is the reason that I'm still a little hesitant here, and I want readers to be aware that this isn't the type of call to get married to.  As my tagline reads: trade safe -- and don't take unnecessary risk or allow your convictions to trump your trading discipline.  If this pattern breaks the other way, it's probably going to run toward 1475-1485.

In fact, almost every technician who's not a student of Elliott Wave Theory would probably interpret the current charts bullishly. Classical technical analysis looks at the current charts and sees a series of higher highs and higher lows, which is bullish.

Incidentally, back in April when the euro was trading near 1.32, I ran into a similar discussion with some other analysts (who were strict classical technicians). I made the argument that euro was putting in a meaningful top, and took some flak about it because euro had been making a series of higher highs and higher lows -- exactly as we see in the current S&P 500 (SPX) chart. Needless to say, the euro topped soon after, and is now trading near 1.23, so my interpretation turned out to be correct (and a pretty profitable call).

So, those are the caveats... and there are always caveats in analysis and trading.  Personally, I have an innate distrust of analysts who are too certain of their predictions -- I think it breeds complacency; and complacency in trading breeds disaster.

In any case, the chart below details the bearish ending diagonal interpretation.

The next chart considers both possibilities, with the bullish interpretation labeled in black.  Again, the bullish interpretation targets 1475-1485 -- but I'm not favoring that interpretation at the moment.

The next chart compares a ratio of the Nasdaq total volume to the NYSE total volume.  This indicator has been pretty reliable at locating tops -- the idea behind it is that when investors start pushing a lot more money into the high-beta Nasdaq, then sentiment is getting overly bullish.  And when investors get overly bullish, we're usually closer to a top than a bottom.  The indicator isn't flawless, and actually had two failures in a row earlier this year -- but over the prior 3 years, it's averaged a 79% win rate.

Finally, a 3-minute chart of SPX which outlines one short-term bullish and one short-term bearish trade trigger.

In conclusion, I continue to feel this price zone represents the bears' best hope for the foreseeable future.  The charts have aligned to give them a window into taking control; and while I can't promise they'll do so, the opportunity is there.  If the bearish interpretation is correct, it could still take several sessions to play out, so patience is in order.  Conversely, if the market pushes more than a little bit higher from here, then that will be a good indication that bulls are maintaining solid control, and we can probably forget about top-hunting for a while.   Trade safe.

SPX Update: Market Reaches Long-Term Resistance

I haven't tried to anticipate a top in this market in some time.  Top calling is a high-risk business, because you're trying to anticipate a reversal in trend before there's any indication that the trend has actually changed.  Inexperienced traders can lose gobs of money trying to pick tops (or bottoms), so I'm not necessarily suggesting anyone front-run the market -- but the market has finally reached the zone I've talked about since July 30.  As I've said since then:  If the bears still have any hopes, this is the zone where they'll need to reverse things. 

The charts are a real challenge to frame in Elliott Wave terms right now.  If the bearish wave count still holds water, it could allow one more small down/up series... but more than a little higher from here, and I'm going to throw out my top call and go back to playing "the trend is your friend."

The first chart I'd like to share is the S&P 500 (SPX) daily chart and takes a step back from the near-term and shows why this would be a good zone for bears to mount a counter-attack.  If bears can't get things done here, then there's room to run back to 1422, and then 1440.

Notice how, in 2011, the market retraced to the equivalent trend line, and then began its collapse from there.  What's nice about a top-call like this is that there's a pretty clear zone where you can see that it's either going to work, or it isn't.  I've said it before, but I believe that, whenever possible, one wants to establish positions at points where the market has pretty clear battle zones -- because if the market crosses those zones, then that conveys fairly clear information about whether to keep or exit your trade.

The next chart takes a look at the near term.  Notice the bearish rising wedge that's formed between the upper blue line and the lower black line.  Bears have a window right now -- but if the bulls keep pushing significantly from here, then they will defeat this pattern.

Next is the hourly SPX chart, which attempts to reconcile the wave counts, although the wave counts are spotty right now.  The terminal ending diagonal pattern I suggested on August 3 is still alive and well, and basically needs to either be complete at 1407, or run down a bit and then back up to a marginal new high for completion.  Again, if the market starts to break markedly higher from here, then fuggedaboutit, and it will be back to playing the trend.

A chart not shown is the Volatility Index (VIX).  Over the prior two sessions, VIX has moved higher in concert with SPX.  Based on past history, when this happens two sessions in a row, there's roughly a 75% chance that the next session will close lower -- so bears at least have pretty good odds for Wednesday. 

Finally, a chart of the Philadelphia Bank Index (BKX).  BKX has moved above key resistance and reversed to back-test it.  We'll soon find out if the bulls can hold the breakout, or if it's just a head-fake throw-over.

In conclusion, a number of short-term charts have seen minor break-outs, but at the end of a move, it's not unusual to see a breakout that whipsaws.  The long-term charts show that SPX is bumping its head on some decent overhead resistance.  And as I've shown on the SPX charts for a while, if the bears have any shot in the immediate future, then they need to hold this zone.  The window is there for bears to turn things; but if they can't, then the market is cleared for a run back to the previous cycle highs and beyond.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

Just the RUT, Ma'am

Technically, tonight is supposed to be my night off, but I wanted to quickly share my interpretation of the RUT chart.

It's not a guarantee, but due to the depth of the recent retracement, and the structure of the prior rally leg, RUT looks like it will probably return to test the 765 area again.  Under this interpretation, the current rally is either complete/almost complete (blue "(c)?", red "2?"), or will head back to retest the 820 area first (black "B"). 

Trade above 808.53 rules out the very bearish blue and red count, but there is no hard stop for the black ABC count, though sustained trade above 825 would cast doubt on the black count.   

It's important to be aware that the bullish interpretation of this chart (not shown) is extremely bullish -- so if you decide to try and trade this on the short side going forward, stay very nimble.

My "not trading advice" would be: if you get a good low-risk entry (and decide to take it) -- if it doesn't perform from there, then don't push your position.

The Market Continues to Send Mixed Messages

For the last few weeks, the market has behaved like a hand grenade:  if you pulled the pin on a trade, you could make a profit if you let it go quickly -- but if you held on too long, it was liable to blow up in your face.  This type of market is loved and adored by short-term and day traders, but can really wear out the swing traders (and us chartists who are trying to find something useful for swing traders!).

Over the past five weeks or so, I've outlined both the bullish and bearish alternatives, but have largely warned that both sides should stay cautious as long as the market stayed range-bound and failed to reclaim any key levels.  Then, about a week ago, I suggested that the market might be getting ready to finally begin a sustained directional move.  With the benefit of the latest information revealed in the week since, I'm no longer sure this is the case.  I'll explain why:

Over the past week, I've largely suggested that the S&P 500 (SPX) "should" make a new high above 1391, which it's done.  But the breakout is suspect, because a number of indices are lagging badly, including the Nasdaq Composite (COMPQ), Russell 2000 (RUT), and Dow Jones Transportation Average (TRAN) (charts to follow).  These are not small or insignificant markets, and this suggests that even if a new bull leg is in the early stages, it still has some work to do first.  If the intermediate bear view still holds water, then these other markets are actually telling the "real" story, but it's a market of mixed messages right now... which means we might be in for continued chop for the time being. 

Of course, that could always change tomorrow -- but right at this moment, it looks like the bulls still aren't ready to commit; nor are the bears.   

On Friday, based on everything I could gather from the charts, I proposed an ending diagonal formation for SPX.  This still appears to be a reasonable theory, and Friday did "what it was supposed to" and followed my projected outlook.  Below is the updated chart, though since the diagonal is still largely hypothetical at this stage, I've outlined a few things to watch to see if it continues to hold water going forward. 

A diagonal does not need to follow my path perfectly to be viable, and honestly I'd be surprised if it did.
 

Next up is a chart of the RUT, which shows how much it's lagging SPX in performance.  This tells us that certain large-cap sectors are reasonably strong, but the "risk on" trade hasn't quite come into vogue just yet.

Next is the Nasdaq (COMPQ), which is also lagging, and which is another "risk on" index.  However, it's hard to view this chart as bearish.  I wouldn't exactly call it overly bullish yet either -- but the Nasdaq is maintaining a key long-term breakout level, and has just broken out from the recent downtrend.  More mixed messages, though on balance, this chart is slighly more bullish than bearish.

Below is an overview of six different markets, for side-by-side comparison.  Note how everything rallied in unison much more solidly back at the October 2011 lows... so the charts aren't screaming "bull" yet.  Again, though, it's hard to view most charts as terribly bearish, either, since everything except TRAN is maintaining short-term breakouts. 

But TRAN might be a problem for bulls.  TRAN is not considered to be a "risk on" index, but is much more basic to the economy and consists of companies like Fed Ex (FDX), Delta Airlines (DAL), and Union Pacific (UNP).  The fact that it's lagging here sends another mixed message.

Next is a chart which is designed to elicit angry responses from brokers (only from the lazy ones, though!).  It's really not terribly pertinent to the "mixed messages" discussion, except from a very long term perspective:  Keep this chart in mind if you're a swing trader who's felt frustrated during the past couple months.

Finally, a very simple chart that shows another mixed message which was sent with Friday's rally.  Despite the divergences discussed, it's hard to view this market as bearish after the successful back-test we just witnessed.

In conclusion, there have been bullish breakouts in some markets, but other markets are diverging badly.  The broad market is sending very mixed messages, and this suggests that investors are still somewhat undecided.  Barring a significant breakout/breakdown that sends the all-clear, it's probably best to continue to remain nimble.  Trade safe.    

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.