This Week Should Be a Game Changer -- and Two Charts for Bulls

This week has the potential to be a game-changer for the markets.  On Wednesday, Germany's courts will decide if they're going to support the ECB bond-buying program, and Morgan Stanley has put the odds of the program being killed at 40%. 

On Thursday, the Federal Reserve will announce the verdict on a new QE program.  Most of the pundits I've read seem to think QE3 is all but guaranteed -- but I still think it's a long-shot.  As long as the Fed can keep bullish sentiment reasonably high with their Virtual QE3 (i.e.- talking about it and dangling the carrot), then there's no reason for them to actually launch QE3.

Both of these pending announcements are all but guaranteed to be market movers.  I've been arguing the intermediate bear case for several weeks, but a bullish announcement from the central banks does have the potential to blow that case up.  Of course, conversely, a failure of action from the CB's has the potential to validate it.

It's becoming quite unpopular to be bearish, and there's a feeling that the central banks won't ever let equities head south again.  Maybe so; I can't control or predict Dr. Bernankenstein.  But when there are signals present which have consistently led intermediate tops in the past, what's an analyst to do but assume the odds favor these signals will work again?  Past performance is never a guarantee of future results, but we really have nothing else to draw from besides historical market performance.  Imagine you asked me if I thought it was likely that Congress would enact a law raising the interstate speed limit to 120 miles per hour.  I would say no -- but if they raised it next week, I would still have been dead wrong.

So far the market has performed in line with expectations for the intermediate bearish counts.  It's important to understand that there are different time frames at work, and the margin of error is different for each time frame.  I predicted the top at 1426 and hit that turn to the day using short-term wave counts.  At the time, I thought it would be an intermediate turn, which was proved incorrect; and it turned out to be only a short-term top (I still consider that a pretty decent call, considering that there was no sign of weakness at all heading in).  Everything that's happened since falls within the margin of error for the intermediate bear outlook, and I repeatedly stated that no bearish confirmation levels had been crossed to the downside, and therefore a new high to 1440-1460 remained possible. 

So when and where does that count exceed the margin of error?  Again, from a technical perspective, the upper trendline of the proposed ending diagonal is my adjustment point (upper black trendline on the chart below).  A "normal" ending diagonal may or may not overthrow that line to the upside, but if this is a terminal pattern, then any breakout will whipsaw.  If the market can instead break out there and sustain that breakout, then I will throw in the towel on the bear case until further notice.

When I study the charts, I simply can't ignore signals such as the one discussed on the S&P 500 (SPX) chart below -- and these signals lead me to persist in favoring the bear outlook.  If respecting historical significance ultimately leads me wrong in the end, then that's exactly the way I want to be wrong. 

 

The next chart is one of my proprietary intermediate-term buy/sell indicators.  This indicator has served me well enough over the years that I'm not willing to share the signal components with the general public -- but I have marked each prior signal on the chart, going back to 2002.  This indicator gave a confirmed sell signal at 1426 -- and this is the first time in its history that the market has broken back above a confirmed sell signal this rapidly.  I honestly don't know what to make of that behavior, but either this indicator will prove itself right in the end, or I'll have to add this to my list of "weird" market behavior from the recent past.  This indicator is suggesting that the market is massively over-bought right now.

Next is the SPX 30-minute chart, which still suggests that higher prices are reasonably likely over the short-term.  If the intermediate bear outlook is correct, this should be the final wave up. 

On Friday, I promised to expand a bit on the bull case, so the next couple charts discuss that, and as I've stated, the central banks remain something of an x-factor.

The first chart is unarguably bullish from a classic technical analysis standpoint.  The NYSE Composite (NYA) has broken out above a three-point validated trendline that goes back to spring of 2011.  As long as it sustains that breakout, my bearish intermediate outlook is pure and unadulterated front-running.

Next is an examination of a potential bullish wave count.  I discussed this count months ago, but largely discarded it as unlikely -- again, based on the historical significance of several indicators.  Time will tell if that was a mistake; but if so, that's the type of mistake I'm not ashamed to have made.

While Elliott Wave suggests this count is unlikely, classic technical analysis says the pattern is bullish -- but for now, this remains an alternate count.  Again, depending on what happens next, I will let the market dictate if this count is to be followed or ignored going forward.

Finally, a simple long-term trendline chart of SPX. 

In conclusion, it appears reasonable to assume there will still be higher prices over the near-term.  I remain in favor of the bearish resolution to the intermediate-term... but if you don't like front-running turns (and I've never recommended it for anyone but veteran traders), then remember that the short-term trend is up, the intermediate trend is up, and the long-term trend is up.  Meanwhile, the central bank actions later in the week have the potential to alter either my bearish outlook or the bullish trend.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

Europe Buys Higher Equities Prices

Yesterday's outlook expected upwards movement in the S&P 500 (SPX) toward two different target zones, 1412-1416 and then 1420-1426 beyond that.  The rally substantially outperformed and continued up past 1426, which invalidated my short-term preferred count and now opens up the next target zone of 1440-1460. 

The European Central Bank announced yesterday that they would provide additional bond-buying, which effectively offers more liquidity steroids to an already-pumped-up market which could put Ahh-nold (Schwarzenegger) to shame.  This inspired me to draw up a chart illustrating how the Central Banks have "printed our way to prosperity." 

This chart isn't a full accounting, and completely ignores the actions of the Bank of England, Bank of Japan, and even some of the ECB's past programs.

The Central Banks remain the x-factor in any and all long-term analysis, and it seems that every time the markets try to return to any sense of normalcy, the CB's step in and goose the market with another round of printing/lending/throwing money out of helicopters. 

Yesterday's price action was still well-within the parameters of the preferred long-term outlook, and if this is indeed an ending diagonal for intermediate wave (c), then the long-term pattern still appears on track, and actually looks better with higher prices over the near term. 

The chart below outlines my adjustment point from bear to bull, which is represented by the rising red trendline.  If the market can somehow sustain trade above that level going forward, then I will capitulate the bear case until further notice and simply join the masses in singing the endless praises of the printing press.  Presently, my preferred long-term outlook remains in expectation that a top is forming, though this could be several more weeks in the making. 

Incidentally, while I have been long-term bearish for some time, I do not want to develop a reputation as a "perma-bear."  Newer readers probably don't realize that I was bullish at the October 2011 low of 1074 (and called that turn to the day), as well as very bullish at the March 2009 low of 666 (and also called that bottom to the day, in real-time).  I am not a perma-anything; I'm simply long-term bearish at this time. 

I continue to work both sides of the trade on the shorter time frames -- in fact, my key levels yesterday led right up the market ladder, and the market reached all but the final target: I suggested a breakout above the triangle (which crossed 1408) would lead to 1416; that a break of 1416 would lead to 1426, and that a break of 1426 would lead to 1440. 

I'm also not perfect, and it's always possible that my long-term bear outlook is entirely off-base.  I simply call what I see.  During the weekend, I'll delve further into the bull potentials and expand next week on whatever data I find in support of the bull case.

The next chart is the 30-minute SPX chart, and the price action strongly argues for higher prices over the near term.  Somewhere in here, we should get a sideways/down consolidation in wave (4) of 5, which should ultimately resolve higher in wave (5) of 5.  If my intermediate outlook is correct, then 1440-1460 is the next price target.

(NOTE: small typo on the chart -- blue 4 should be farther to the right.)

Next, a quick update to the Nasdaq 100 (NDX), which has so far performed as expected and is on track for the 2900-3000 target.  I was unsure if SPX would break back above 1426, but I felt reasonably confident that NDX would make new highs, as last discussed in this article from August 22.

Finally, a quick update on gold, which yesterday captured my 100 point target from July (from 1610 to 1710).  Gold could encounter resistance from the broken blue trendline.

In conclusion, yesterday suggested strong momentum, and that type of move usually carries over with residual upwards momentum.  The next target for SPX is 1440-1460; and I'll try to narrow the target down further as the structure takes shape.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

Europe vs. U.S. Economic Fundamentals and the Charts

In this article, I'm going to discuss three important factors the stock market is currently facing, starting with:

Europe

The market has been anxiously awaiting the European Central Bank policy decision, and at 12:30 GMT today, ECB chief Mario Draghi is expected to announce the framework for a new bond-buying program to help bring down the borrowing costs of Spain and Italy.  Investors are looking for Draghi to back up his promise of July 26 to do "whatever it takes" to preserve the euro.

European markets and U.S. futures were rallying on Wednesday night in anticipation, and this could be a make-or-break moment for the markets.  Gilles Moec, senior European economist at Deutsche Bank stated, "Expectations are extremely high. If the ECB does not deliver, we will get into another bad patch."

ECB debt purchases would succeed the bank's Securities Markets Programme that has been dormant since March -- which, not coincidentally, is when the S&P 500 (SPX) began struggling.  I believe it was the liquidity overflow of the ECB's LTRO, not the Fed's Operation Twist, which was the driving force behind the rally that lasted from December 2011 to early April 2012.  The time-lines match perfectly.

Central bank liquidity operations have a huge impact on equities, since equities prices are driven solely by liquidity ("excess" liquidity drives up asset prices through inflation).  Thus, until the details are revealed, the pending ECB policy decisions are currently an x-factor in my projections and analysis.

The U.S. Economy

The next two charts are courtesy of my friend Lee Adler at the Wall Street Examiner, and portray the ISM Manufacturing Index (which represents goods) and the ISM Non-Manufacturing New Orders Index (which represents services).  Non-Manufacturing numbers are due to be released today.  Levels below 50 on either index tend to indicate economic recession, and the Manufacturing Index is already there.

The first chart is ISM Manufacturing:

Lee's comments below:

In June the current slide reached 45.2, the same level the index had reached in March 2007, 7 months before that bull market ended. With the number still below 50, the rally's days are probably numbered, although it's impossible to tell from this data just how long the lead time might be this time. Federal withholding taxes were weak in August through last week, so there's some reason to believe that business has continued to weaken. High gas and food prices and weakening exports are apparently having an impact.

The manufacturing sector represents about 11% of the economy. The services sector data representing the bulk of the US economy, normally released a few days after the manufacturing data, typically lags the manufacturing index by a month or two. The ISM manufacturing new orders index therefore appears to be a good leading economic indicator but in terms of its bigger year to year trends, it is not very useful as a stock market indicator.

Below is the ISM Non Manufacturing (Services) New Orders Index, not seasonally adjusted through July.  The August index will be released on Thursday, September 6. If it does not follow the manufacturing index, and stays above 50, then the stock market uptrend can probably hang on for a while longer. If it drops below 50, then there's reason to believe that the rally will soon end.

So, the U.S. economy isn't particularly rosy (as if I needed to tell you this), but today's number will be important for fleshing out the picture.


The Market Charts

The first chart I'd like to share is my interpretation of the long-term SPX pattern.  The main question in my mind is whether the top is in, or whether there's a run slightly higher still in the cards.  My preferred view since the anticipated swing high at 1426 has been "the top is in," however, since 1391 has not yet been crossed heading downwards, I'm still unable to add confidence to that view.  In either case, this is expected to be a major top under formation and, in my mind, only a material breakout through the upper red trendline would challenge that view.

The next chart depicts an interesting relationship and historical pattern I've observed between the SPX price movement and its 81-week moving average.  The chart explains the details.

The charts above represent the long-term outlook.  Changing time frames rather dramatically, the chart below discusses some short-term levels to watch, and the higher-probability short-term outcomes if each key level is broken.

The next chart represents a best-guess at the short-term wave count (as discussed yesterday), but this pattern is very difficult to interpret, and I wouldn't be surprised to see the market do something unexpected here -- especially given the anticipation and pressure surrounding the ECB announcement.  Until the bulls reclaim 1413.95, there is the potential of an extremely bearish short-term outcome, and trade beneath 1391 is likely to precipitate an acceleration lower. 

Conclusion

There's a lot going on today, and the ECB has the potential to disappoint the market.  I think the best possible outcome for bulls really isn't that wonderful: the ECB might be able to kick the can further down the road and delay the inevitable for a few more months.  I seriously doubt they're actually going to solve any of Europe's long-term problems, however the new policy does have the potential to generate a temporary result in equities and will thus need to be watched closely.

The U.S. economy appears to be on the brink again, and today's ISM numbers should be revealing.  It does not seem coincidental that the fundamentals are suggesting a major market top is forming, while the price charts (in my view) are also suggesting the same thing.  The x-factor seems to be the question of how much longer the central banks can keep pulling rabbits out of their hats... as of right now, many indicators are suggesting that they're running out of rabbits.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Key Levels for the Short-Term

Yesterday's outlook discussed the fact that the rally from Aug. 30 appeared corrective, and was thus likely to be fully retraced -- and that happened pretty much straight off the open yesterday.  The short-term pattern is finally starting to shape up into something vaguely recognizable, and while there are still different interpretations, there are now some additional clear short-term levels to watch going forward.

My intermediate and long-term outlooks remain bearish.  The short-term is less clear, but leaning bearish.

Accordingly, I'm going to lead off with the S&P 500 (SPX) 15-minute chart, which is loaded with annotations and outlines the key short-term levels.  There are two bearish options for this pattern: a leading diagonal, or a bearish nest of first and second waves.  There's nothing yet to differentiate the two patterns, but I'm ever so slightly leaning toward the more bearish interpretation, which would see the market gearing up for a solid drop in the more immediate future.  The chart explains the rest.

Next is the 30-minute SPX chart, which hasn't changed much over the past month.

Finally, a quick update to the SPX monthly chart and the position of the potential cross of the 50-month and 200-month moving averages.  I covered the historical significance of this in detail in this article.  The two averages have edged ever so slightly closer to crossing, and are now only 4 points apart.

In conclusion, while the intermediate outlook is still bearish, the short-term continues to leave its options open -- but I'm favoring the view that the pattern is finally wrapping up and the four-week-long trading range will soon be in the rear view mirror.  Trade safe.

 

Reprinted by permission, copyright 2012 Minyanville Media Inc.

SPX Update: A Month of Congestion

I, for one, am running out of patience for charting this market's short-term congestion, so I'm considering quitting futures trading and taking up a new career in a more exciting and action-packed field, like stamp collecting.  With the exception of the brief (and anticipated) head-fake to 1426, the S&P 500 (SPX) has traded in a 20 point range for four weeks now.  

Fed Doublespeak Friday created the expected volatility (and then some), but accomplished nothing productive in terms of price (or in terms of Bernanke's talking points, for that matter). 

We're still in a no-man's-land price zone, and while my preferred outlook ultimately anticipates lower prices, the bears haven't yet claimed any levels to add confidence to that view.

Chart-wise, I'm going to start off with the very big picture view of the SPX.  The black channel was created by connecting the 2002 and 2009 lows and then placing a parallel copy of the trendline at the 2007 high.  The market has reached the zone where the fractal could be complete, and I still lean toward the view that it is complete -- but as yet there's no way to definitively rule out the possibility of a run toward the upper red trendline (in the mid-1400's). 

The big picture expectation is that the cyclical bull market is nearing an end.  As an aside, note the comparison of daily MACD readings in the bottom panel.

The next chart is an SPX monthly chart, and focusses on an interesting pattern in the monthly MACD readings.  Incidentally, the NYSE Composite (NYA) monthly MACD sell signal did persist into September, as I mentioned was likely in the last update.  This chart does argue that the bulls' days are numbered.

Next is a look at the Dow Transportation Average (TRAN), which is wrestling with support at the lower triangle boundary.  For comparison, the Dow Industrials (INDU) is shown in the lower panel.

The SPX 30-minute chart remained essentially unchanged for the entire month of August.  As boring as the market was, it followed the projected outlook very well.

My expectation is still that an intermediate trend change is underway, but the very short-term charts are open to a lot of different interpretations.  Sometimes I can look at a one-minute chart and call every little turn in advance for hours on end -- other days, I have no clue what the market is going to do next, and have to wait for it to "prove" itself.  The fact is, there's no system that allows us to know the market's every move in advance (and if there was, nobody would share it!). 

It's important to know when a system is vulnerable to noise, and this is one of those times. Elliott Wave just doesn't provide a clear direction for Tuesday from the current pattern, so the next chart is pure classic technical analysis; which might be more useful (and more realistic) than trying to label the market's every little squiggle at this stage. 

Based on the larger view, I believe this will resolve lower; but I'm uncertain if that will be immediate or will come after a retest of the high.

In conclusion, the market gave a host of top signals in conjunction with the expected turn at 1426; so I'm sticking to my guns for the time being on my preferred view that "the top is in."  To be fair, the decline thus far has been ambiguous, and hasn't added any confidence to that view -- but it hasn't done anything to detract from it either.  In my last update, I warned that the market was in a zone where it could bottom and reverse -- however, the rally on Friday was overlapping and looked corrective, which suggests that this isn't yet a meaningful bottom.  So far, it still looks more like a top.  Trade safe.     

Long Term Market Outlooks for Fed Doublespeak Friday

I'll get to the charts in a moment, but first, the news everyone will be talking about is whatever comes out of the Fed's doublespeak today at Jackson Hole. 

My prediction is that the Fed will (again) announce that they're not going to be launching QE3 right at this exact moment... but hey, their fingers are on the QE button and they have lots of Tools at The Ready, plus a really nice tool shed to store them in, and maybe -- just maybe! -- they'll be repainting that tool shed sometime soon with money printed out of thin air, which will stimulate the economy in a big way by adding at least one part-time job (the painter), plus it will consume paint, and then everything will be Just Fine, You'll See -- unless it isn't -- in which case The Fed is Always Willing to print more money via QE3 because, hey, their fingers are on the QE button...

Not that we've seen this movie before or anything. 

I am assuming they won't launch QE3 here, especially since they just extended Operation Friendly Game of Twister -- plus the market is near 4-year highs, which means my QE Flow Chart indicates that no new QE is coming right now.  This chart has worked exceptionally well for over a year, and has completely eliminated the need for difficult analysis that involves actual research. 

Before this chart was invented, CNBC pundits used to try to predict the likelihood of QE3 based on overly-complex factors such as:

• Inflation
• The economy
• What color tie Ben Bernanke was wearing ("muted," "flamboyant," etc.)
• The relative thickness of Ben's beard ("thick and loose," "tight and stingy")  
• Whether Ben's beard matched his tie and the two messages agreed, etc.

But most analysts are now using only this chart to predict Fed response.  Here it is again, in case you missed it last time:

The odds are good tomorrow will be volatile, since that's pretty much the norm when the Fed double speaks and the market tries to follow along with Ben's statements of "QE3 is coming!  No it's not!  Yes it is!  Maybe!  Ha!"  Therefore, I want to start off with a big picture chart of the S&P 500 (SPX), since zooming-out often helps take the edge off volatile days.

The market has been awfully sloppy since June, so I've spent some time looking for similar fractals to see if they help decode the recent rally.  I found a fractal from 2008 which is extremely interesting due to the similarity not only in the shape of the waves, but in the actual price pivots.  I've annotated the corresponding pivot levels from the recent rally.

Next up is the 30-minute SPX chart.  No material change here since the expected peak at 1426.  The alternate count does remain viable and bears should stay alert now, because if that count is active, it should be finding a bottom soon.  The preferred count still believes it's more likely that the top is in, but there's been nothing in the way of confirmation yet.

Next is the short-term SPX chart, which will probably confuse the heck out of non-Elliotticians.  If you don't "get it," then just ignore it.

MORNING EDIT: With ES (E-mini S&P 500) futures up 9 points this morning, suddenly the 2nd alternate count looks a lot more reasonable than it did when I created the chart last night...

I also want to call attention to a couple other big picture charts: first up, the monthly NYSE Composite (NYA), which is a huge index that's pretty-well representative of the entire New York Stock Exchange.  A few months ago, NYA formed a monthly MACD crossover, which I called attention to when it occurred.  This long-term bearish signal hasn't been negated, and appears it will probably carry over into September.

The Russell 2000 (RUT) has failed to make a new high with SPX.  The chart really shows the sloppy corrective appearance of the recent rally -- the "weirder and whippier" comment of July 15 has proved accurate.

In conclusion, tomorrow could be a make-or-break day for one of the potential wave counts.  Bears should remain somewhat cautious at this point, because if the more bullish alternate count is going to play out, the market could begin a decent rally from here -- so I'm putting out the alert that if my preferred view is wrong, the market is now in the zone where it's finally likely to bounce.  One potential warning sign (not shown) was that VIX closed outside its upper Bollinger Band on Thursday, and this often leads to at least a short-term rally in equities.

If the preferred count is correct, however, then the 1426 high could still be subject to a retest, but will continue to hold for the foreseeable future, and the decline should start picking up steam once 1391 is broken.  The short-term will probably hinge on the strength of the Fed's doublespeak today.  Trade safe.

Reprinted by permission; copyright 2012 Minyanville Media, Inc.

SPX Update: Zzzzzzzz... for SPX -- but Not for VIX

Thankfully, there's been no material change yet again (I say "thankfully," since I spent the majority of the day and night dealing with pressing personal issues).  Though the alternate count can't be ruled out yet, I'm still sticking with the preferred count, which continues to believe the top is in -- largely because of the sheer number of top signals that fired off heading into that turn.

Also interesting to note that VIX has been up strongly in recent days while SPX has flatlined.  This is often seen at market tops.

  

The updated 30-minute chart looks pretty much the same as yesterday's chart. In fact, I would have simply reprinted yesterday's chart (because I doubt anyone would have noticed), but I spilled ketchup on it.

I've updated the 5-minute chart as well, which has formed a small flag-like consolidation.  Price has done a lot of work all month in this 1400-1416 price zone, and that suggests there are a fair number of traders who've taken a stand here.  One group is destined to be on the wrong side of the trade in the near future.

In conclusion, there are no new conclusions from the last several updates, and almost anything I could type down here would only be courtesy of the Department of Redundancy Department.  Trade safe.