SPX, INDU, NYA, RUT: Market Wants a Debate

In keeping with the spirit of election season, the bears have decided it's time to open a debate.

On Tuesday, bears broke the market down through some key trendlines in several markets.  The analytical challenge I'm running into remains the same as mentioned last update: there are a lot of mixed messages being conveyed by different markets, and it's difficult to find a pattern that holds across all of them.

The one market that has largely convinced me that higher prices are still ultimately coming is the Dow Jones Industrial Average (INDU).  I can't get past the three-wave rally into the new high, which suggests the final high isn't in yet -- and this is a pattern I've learned to never ignore.  It doesn't work 100% of the time -- nothing does -- but it does work the vast majority of the time.  The main question has become how deep the correction will run, and as I suggested on Monday, wise bulls probably wanted to get out of the way once that lower red trendline broke.

I can now count five clean waves down into the recent low.  Where I'm most unsure is whether those five waves form wave 3 of c, or ALL OF wave c.  On the chart below, I've drawn-in the potential for wave 3 of c, with a fourth and fifth wave still to come -- but there really isn't a clear answer. 

An interesting fractal study I want to share is General Electric's (GE) pattern of March-June 2012 in comparison to the current S&P 500 (SPX).

SPX below.  The beginning of the structure looks remarkably similar to GE, but they diverged recently, as SPX has materially exceeded the lower support line -- and has done so on a confirming MACD reading.  This is the signature of a third wave decline (c-waves are third waves), the question for SPX is the same as INDU -- whether this is ALL OF (c) or whether there is a correction to come, followed by new lows.

The simple SPX chart below still outlines the key intermediate pivots (continued, next page).

SPX, BKX, RUT, VIX, TRAN, NYA, IBM: Market Refuses to Leave the Intermediate Chop Zone

Last update expected that the market was due to turn lower for at least a minor top, and turn lower it did -- however it moved a bit lower than expected, and this has now thrown the intermediate outlook back into the ambiguous zone.  This weekend, I've charted more markets than I can count, and wrestled with what to present to readers to try and keep the whole thing reasonably understandable.  I finally decided to boil it all down to a simple chart of the S&P 500 (SPX) to avoid confusion.  Don't worry, there are plenty more charts coming in this update, but I think it's easiest for readers to focus on the simple message in this chart:

The bottom line is: this is still the intermediate "chop zone" and until the market break down or breaks out, there are multiple options still open -- and the problem I've been running into this weekend is there are simply a lot of mixed messages being thrown off by different markets.  I'm going to present a few charts that convey the case for each side -- and maybe the best assumption from this data is that the market may just continue chopping around for a bit longer.

If it does cleanly break through this zone, the losing side might just want to get out of the way until things clarify again.

One of the more bullish charts I studied is the Philadelphia Bank Index (BKX), which, at the moment, sure looks like a fourth wave triangle -- and it's right where you'd expect to find one.  Sustained trade beneath the (C) wave low would open up more bearish prospects.

Also still looking bullish is the NYSE Composite (NYA) (continued, next page)

SPX and INDU: Key Levels and Next Targets

The intermediate outlook is materially unchanged and continues its bullish bias.  The short-term outlook has become slightly ambiguous, but suggests a minor top may be near.  It is currently expected that this will only be a short-term top, and that new swing highs will follow.

I've loaded up the hourly chart of the S&P 500 (SPX -- shown below) with virtually all the relevant info, so I won't retype every data point here.  The bottom line is that a correction lower could be due as soon as today's session, though a bit more upside would be within the margin of error (the second chart may help with this).  In either case, if the next decline is indeed the expected small second wave lower (blue (ii)), then ideally it would be a bit scary and cause a fair number of traders to turn bearish.  Conversely, if it does not correct as deeply as shown, that would actually stretch the wave (iii) targets even higher.

I'm viewing 1438-1439 as the key bearish pivot, and sustained trade beneath that level would dictate that more bearish intermediate outlooks be considered.  Ideally, if this is to remain a correction to an uptrend, this wave should not break the lower black trend line that connects blue (2) and blue (4) -- so that occurrence would act as a second subsequent warning if 1438-1439 were to be broken.  Beyond that, trade beneath 1425 would put the bears in control.  The chart annotations pretty well detail everything I'm watching, and my expectations, at the moment.

The 5-minute SPX chart looks at the short-term trend-channel, which is still intact.  The short-term trend remains up as long as it holds, but a breakdown here would be the first warning that a correction was unfolding.  The chart also notes the potential of a small head and shoulders top, along with the classic measured target if prices were to break down through the dashed red neckline.

The Dow Jones Industrials (INDU) is in essentially the same position as SPX, and it's also unclear here if there's a bit more upside due before the correction.  Note that both hourly RSI (SPX chart above) and 30-minute RSI (INDU below) are showing bearish divergences.  (continued, next page...)

SPX, INDU, NYA, NDX: Bears on the Run

For several weeks, I have projected that after this correction completed, the market would make new swing highs for the intermediate term.  In the most recent update, I discussed two short-term possibilities: a short-term turn near 1444-48 SPX, or a run directly to new swing highs.  I listed 1453 as the key level to differentiate one outcome from the other, and the market both sailed through that level and also closed above it, which now causes me to favor the view that the bottom is in at 1425.  It's simply going to take a break of that level for bears to get anything going at this point. 

It's too early to say for sure and declare bulls the long-term winners, but there are some signs that this rally has the potential to pull the indices at least another 10% higher.  The first case in point is the NYSE Composite Index (NYA), which, as I've been warning since September, still looks quite bullish.  Bulls have now held the breakout level on two back-tests, and the last test resulted in a very strong bounce -- so unless that level fails, it's simply wishful thinking to view this chart as bearish in any way.

The next case in point is the Nasdaq 100 (NDX).  On September 20, I warned that NDX appeared to have formed a complete five-wave rally, which meant it was likely to correct lower.  The problem now for bears is that if the blue (2)/b high is broken, that will strongly suggest that the recent decline was a second wave lower.  This would mean that the current rally is going to be a Minor Third Wave up -- which is every bulls' dream.  Third waves are usually the longest and strongest wave, since they represent a "point of recognition" for the masses.

Again, it's too early to be certain here, but a third wave up would largely be confirmed by a break of the (2)/b high at 2846, and could put the bears on ice for months. 

On the S&P 500 (SPX), while my short-term outlook stayed bearish until 1425, my preferred intermediate outlook has remained bullish for some time.  The question that now needs to be asked is whether it was "bullish enough" -- the next swing high may mark ALL OF wave (5), or only wave (i) of (5), with (ii)-down, (iii)-up, (iv)-down, and (v)-up still to come. 

Of course, I'm getting way ahead of the game here, and the first step, of course, is for those new swing highs to occur... but it looks increasingly probable that the projected turn at 1425 was a meaningful one.  Obviously, closes back beneath that level would create problems for the bull case (continued, next page...)

SPX and INDU: Rally Poised to Capture Monday's Target

Monday's outlook captured the turn and performed about "as good as it gets," as shown on the S&P 500 (SPX) chart below.  This chart now reveals the current price action, overlaid on top of yesterday's projection:

I realize that Elliott Wave Theory can be confusing at times, so please keep in mind that I am projecting two different time frames in this update (as in most updates):

1.  On the longer time frames, the preferred view is that new swing highs north of 1480 will be made, one way or another.  There are several more bearish alternate wave counts, but currently these appear to be long-shots; thus they will be discussed in more detail only if the market dictates.
 
2.  On the shorter time frames, I'm slightly favoring the view that a new swing low (with a current target in the 1410-1420 SPX zone) will be made before the "final" low is in place and the market rallies beyond 1480.  The first alternate short-term wave count is that the low is in place already, at SPX 1425.

Yesterday's projected turn off the low is now in place.  Since the preferred outlook is tracking very well across all time frames right now, there's no reason to alter any portion of it just yet.  The Dow Jones Industrials (INDU) shows the preferred short-term and intermediate term paths at larger scale.  If the wave counts are correct at all degrees, then SPX is expected to travel a similar route -- and again, the main question is still whether an intermediate low is now in place, or whether a new swing low will be made first.

The SPX chart below discusses the caveats and warnings which are applicable to each time frame.

The daily SPX chart shows less detail, and focuses more on the big picture outlook's projected end result (continued on next page...)

SPX and INDU: Market Approaching a Turn?

Friday's update expected further upside to follow after Thursday's expected test of 1425-1430, but the market instead made a slight new low in Friday's session.  I suspect the upside was simply delayed a day as the correction became more complex.  After studying a number of charts, I believe the odds are good that the market will rally over the short-term, and then reverse back down to make another marginal new low.  From there, I currently expect it to reverse back up and make new swing highs.

It is possible that a more meaningful bottom is in place already, but the micro wave counts suggest this is slightly less likely (see charts); it is presently expected that the next low will be significant.

(If you're new to Elliott Wave, it might help to familiarize yourself with the basics, as found in this article.)

Below shows the preferred short-term S&P 500 (SPX) path in blue.  If for some reason bulls fail to reclaim 1438.43, then all bets are off, and the short-term outcome would be more immediately bearish.  My preferred outlook is that bulls will retake the 1438 level, and 1444-1448 is my current short-term target.  Sustained trade above 1453 would suggest the alternate count of a failed fifth at 1426 -- which would mean the bottom is in, and there would be new swing highs directly (see 2nd chart).

Stepping back a bit, the larger preferred SPX view is shown below. 

On the Dow Jones Industrials (INDU), I've outlined the preferred path in more exacting detail (below).  If my micro interpretation of the structure is correct, SPX should follow a similar path.

The 3-minute INDU chart details why I've chosen that count for the short-term.  Again, the short-term alternate count considers the possibility that the bottom is in (continued, next page)...

SPX, INDU: Bulls Face Their First Real Test

Last update expected the S&P 500 to test the 1425-1430 support zone, which is what's happened since.  This is now the first real test of the intermediate bull case.  My preferred expectation has been that this decline is part of an ongoing correction, and as long as the 1425-1430 zone holds, it should resolve with new swing highs.

One more marginal new low would be okay for the bull case, but a solid breakdown of this support level is likely to lead to a 30+ point decline.

The next chart outlines some key levels for SPX.

Finally, one can't help but notice the similarity of the current fractal with the April top earlier this year.  If bulls somehow fail to hold key support here, that probably foreshadows a repeat performance.  

In conclusion, as long as the bulls hold this expected test of support, the market is likely headed to new swing highs.  This is where fractal analysis can be a bit tricky to project too far out though, because the current wave down may only mark wave i-down of a larger (c) wave down.  This is not my current expectation, but I'll watch the shape of the next rally and note the key levels as it unfolds.  Trade safe.