SPX, INDU, and VIX Updates: Dow in a Turn Window; VIX Suggests Complacency

When I first glanced at Monday's charts, I thought I would have nothing to add to the prior update -- however, upon closer inspection, there are a number of interesting things to share.  I'm going to keep the commentary brief and focus on the charts today.

The first chart of interest is the VIX:VXV ratio, which I've mentioned on several occasions in the past.  This ratio measures the Volatility Index (VIX) compared to the 3-month Volatility Index (VXV).  In the past, this has worked well as an indicator that VIX is bottoming -- and usually when volatility finds a bottom, it means that equities are finding some type of top.

Note this ratio is currently showing its second lowest reading of all-time -- the lowest reading was in March of 2012, as noted.  This suggests that there's again a very high level of complacency among investors.

The next chart shows two time-cycles which the Dow Jones Industrial Average (INDU) has been responding to since the 2009 bottom; I stumbled upon these cycles quite by accident earlier this year.  Note the cycle shown in blue has reached its turn window; and most prior windows have marked decent turns -- including the 2011 top and October bottom.  The red cycle window last opened near the 2012 top, and won't reach another window until November. 

The next chart is a 3-minute chart of the S&P 500 (SPX) and shows that the sideways move of the past week-plus may have finally reached completion.  The move is still very messy, but the primary count suggests that the correction is complete and the market should move higher over the short-term.  Trade beneath 1395 would invalidate that short-term outlook.

The 30-minute chart still remains essentially unchanged since August 3, but adds perspective to the 3-minute chart above, and outlines some signals to watch.  I'd still like to see the market take a stab at higher prices here; though significant breakouts would negate the bear case for the moment.

Finally, a simple chart of the US Dollar.  On September 3, 2011, I turned long-term bullish on the dollar, but recently, on July 26, I switched from bullish to neutral.  I'm still neutral, and in watch-and-wait mode here -- so the chart outlines what I'm watching at the moment.  Interesting that the dollar may be completing a bullish falling wedge concurrent with SPX completing a bearish rising wedge.

The challenge remains that this pattern may not be a wedge, but a wind up to as stronger continuation move -- so it bears careful watching in both USD and SPX.

In conclusion, unless nothing bearish works here, there continues to be additional evidence that a top may be under construction.  Over the past week or so, I've outlined a number of signals which, on most past occasions, have been precursors to topping markets.  In addition to the signals mentioned today, two other recent signals include the ratio of Nasdaq total volume to NYSE total volume (now historically very high); and the concurrent new 50-day highs in TNX and SPX.

Of course, the last time the market generated this many top signals was late-January 2012, and it ended up marching right through them.  Nothing works with 100% accuracy, and these signals are based on the fact that they've performed well in the majority of past occasions; so it would be foolish to simply ignore them.  Of course, as I've said before: price is the final authority.  So while it appears higher prices are probable over the short-term, for the moment, I remain cautiously intermediate-term bearish.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media Inc.

The S&P 500 is Close to a Once-in-a-Lifetime Signal

In this article, I'm going to focus on the long-term.  I'll discuss the generational nature of a certain signal shortly.

First, let me make one thing clear:  I don't like this market one bit right now.  Usually I can look at the charts and get a good feel for the market on either an hourly or daily time frame -- but for this past week, I haven't felt like I have a definite grasp of anything other than the shortest time frames.  I've been limiting my personal trades to the one-minute and three-minute charts, and haven't held any trades longer than a few hours recently.

I view the current price territory as something of a no-man's-land: the market is currently beneath long-term resistance, but above short-term support.    At times like this, we have to look at other signals besides price; the challenge is that price is the ultimate authority, and other signals are always hit-or-miss... and even some of those indicators are giving mixed messages.  I can't tell exactly what the market's going to do next here; all I can do is assemble the evidence, look at what's happened in the past, and then try to draw a reasonable conclusion. 

The short-term trend is up, and the long-term trend is up. So why be anything other than bullish?  Well, there are numerous signals which, in the past, have been precursors to bearish markets.  Accordingly, I'm going to continue warning of the intermediate bear case unless those signals negate.

And there are no guarantees that these signals will work.  If you're the type of trader who marries their position, or has a hard time (emotionally) with missing a move that went in the direction of the previous established trend, then just follow the trends and don't try to anticipate turns -- anticipating turns is extremely difficult and higher-risk. 

Of course, trading only the trend has its disadvantages, too -- but whatever we didn't do always seems brilliant (in hindsight) any time the actions we took don't work out.

At times like this, it pays to remember that one doesn't need to always be either bullish or bearish.  It's a mistake to think those are the only two options in trading -- in fact, believing one should always be either bullish or bearish is a sure-fire way to lose money fast, because it leads to over-trading when the market is ambiguous.  Cash is a position, too, and successful trading is as much about patience as anything else.

Smart traders will sometimes lean bullish or bearish and take a stab because there's a clear bull/bear battle line, and the risk/reward is good -- but they're also quick to exercise discipline and close the trade if it isn't working.  If a trade doesn't work, never get mad about "missing a move" -- getting stopped out means you did something right, not something wrong -- and as long as you continue making disciplined and well-reasoned trading decisions, you are acting correctly.

Last week the market did basically nothing, and I've been excluding the short-term section of the updates of late, because I haven't felt there's a clear short-term direction... and I suppose, given the meandering nature of the past week, that my read has actually been correct.  The market may drift around a while longer -- it appears that numerous forces are working at cross-currents to each other right now.  As I said last week, this type of top is a process, not an event.  Of course, with that statement, I am presupposing that this is a top, and that the current signals won't negate.  A solid and significant breakout would suggest bulls are still in control.

I'm going to continue limiting focus on the short-term until it clarifies again.  Instead, let's look at some of the intermediate and long-term evidence and signals.

The SPX monthly chart shows a rare event that I've been keeping my eye on for a while:  the pending potential cross of the 50 month and 200 month moving averages.  It's fair to call this signal "once in a lifetime," since these two moving averages haven't crossed on SPX in over 66 years (they last crossed upwards, in April, 1946).  When they cross downwards, this is commonly called a "death cross" and considered a bearish signal -- but before bears get too excited, it calls for some discussion.

While this signal hasn't actually happened in SPX for 66 years, SPX did come very close in 1978.  This was at the tail end of the long secular bear market of 1966-1982.  I say "tail end," but this is of course relative, and it was still 4 more years until the bear market actually ended.  This monthly death cross happened a couple years later in the Dow Jones Industrial Average (INDU), in August of 1980.  The INDU then crossed back up (called a "golden cross") in April 1982.  However, in both those death cross instances, the bear market wasn't over -- and while we can look back and say it was near the "end" of a secular bear market, two to four years is still a pretty long time by the standards of most investors.

The Dow also experienced a monthly death cross during the Great Depression, in January of 1934; and the moving averages didn't cross back up until February 1946.  There's no argument that this was a useful long-term signal at that time.

And then there's Japan.  The Nikkei (NIKK) experienced a monthly death cross in early 1998, when the index was trading near 17,000.  This cross is still active -- and the Nikkei is currently trading almost 50% below the signal level.

So while this signal is so incredibly rare that we have limited historical evidence to draw from, the past history suggests that it's a bearish signal for the long term.  But, as the famous last words go, maybe "this time will be different."

The next chart I'm going to share discusses another recent signal that tends to be a top precursor. Last week, ten-year bond rates hit a 50-day high, as did the S&P 500 (SPX). The last time these two things happened together was March 13, 2012 -- and before that, October 27, 2011.

Note that this signal led the top in March by several weeks.  While not quite as long-term as a monthly death cross (what else is?), this is still an intermediate signal, so it doesn't mean the market's necessarily going to collapse tomorrow -- it just increases the odds that an intermediate top is under construction.

The next chart is the SPX daily, and discusses the next resistance levels, should the bulls break through 1407.

Next is the NYSE Composite (NYA), and I find the current fractal interesting for its similarity with 2010-2011.  The fractal here does suggest more upside is possible before a significant turn.

Trying to fit an Elliott wave count to the current charts is still an exercise in patience/frustration.  This chart shows one of the mixed-message signals -- as I mentioned on August 5, the breakout and backtest of the blue trendline can't be viewed as anything but bullish.



Finally, my best guess at the short-term.  This chart is materially unchanged since August 3rd, when I suggested an ending diagonal as a potential resolution to the present move.  I suspect the market might need to test higher prices eventually (not necessarily immediately) -- though as long as the bears hold 1407, there is always a chance that level ended the wave.

Of some note, with Friday's close, the SPX had 6 positive closes in a row.  When this happens, there is a 70% chance that the 7th close will be negative.

In conclusion, I'm effectively neutral on the short-term.  I remain cautiously bearish on the intermediate-term -- however, the market's behavior in late 2011 and early 2012 is still fresh in my mind.  During that time, the indicators repeatedly gave signals which were historically bearish, but the market ignored them and kept marching higher anyway.  As a result, I'm still hesitant to suggest anything but caution on either side of the trade.

On a lighter note:

In weekend Olympic news, the United States beat Spain on Sunday to win the gold medal in Men's Basketball.  At the press conference which followed, Fed Chairman Ben Bernanke stole the show when he revealed that the Fed "is standing by and has all the tools necessary to obtain gold medals for each and every U.S. Olympian" -- provided that nobody cares if all the gold content is replaced with paper. 

Later Sunday evening, Former MF Global CEO Jon Corzine announced that he had officially won the Fed's first "gold" medal -- in the challenging and aggressively-competitive category of Creative Accounting.

Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Little to Add...

Yesterday's flatline market added little in the way of clarity to the intermediate picture, and I debated not even publishing an update tonight.  There's been no material change from yesterday. 

I took a SWAG (Scientific Wild-@ss Guess) at the short-term structure; there's honestly no clear interpretation.  I'm slightly favoring the view that this structure leads to at least a short-term breakdown -- but it's simply going to take a directional break to clarify this move.

The wave from 1405 to 1398 appears impulsive.  The challenge is: this could fit a number of different corrective structures, including an expanded flat from 1404 (can be ruled out below 1398.8) -- or the a-wave down of an ongoing triangle (noted by the "or c" annotation on the chart -- can be ruled out beneath 1396). 

Unless this is a running triangle, 1396 is the line in the sand for the triangle count.  

So... after an ambiguous session that traded within a 7 point range in an ambiguous market, there's just not much to add here.  Trade safe.

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.