Bears Caused Technical Damage on Wednesday

Wednesday's strong sell-off created some potential technical problems for the bulls, particularly in the Dow Jones Industrials (INDU), where the decline overlapped the wave (1)/A high.  I literally ran out of time while charting last night, and I'll simply have to publish what I have now and fill in the blanks in the next update.  It's not helping that I came down with the Martian Death Flu yesterday, and feel severely under the weather.

The first chart we'll look at is INDU, since this is where a potential key price overlap has occurred.  Note the decline has now overlapped the blue wave A high.  I suspect a snap-back rally is close at hand (toward black (2)) -- though this is purely anticipatory, based on the five-wave decline... the bulls need to break above the head and shoulders neckline and the red falling trendline first; until they do, the charts maintain a strong short-term bearish bias.

This chart has a lot of annotations on it, and only outlines the bear count -- I'll outline the remaining intermediate bull potentials for INDU in more detail tomorrow; for now, I've discussed them only on the final chart of the Nasdaq 100.

   
The next chart is the S&P 500 (SPX) bear count, which can't be locked-in yet, but which seems to be gaining traction.  SPX did not overlap its key wave (1)/(w) high yet, so it is still conceivable that this is a fourth wave correction.  Again, this chart only outlines the bear potentials.

The hourly SPX chart has a bit more detail, and notes my preferred short-term path.  This market meets the definition of "trying to catch a falling knife" and it should be strongly noted that trying to anticipate a bottom after a decline like yesterday's is quite difficult and often ill-advised.  Nevertheless, I wanted to share my thoughts and observations on what appears to me to be a reasonable short-term path.  Don't bank on this, though, as the decline could simply continue unabated.

Finally, the Nasdaq 100 (NDX) chart does have a bit more detail on the bullish intermediate potential still in this chart.  The rally from the June lows appears to be a five-wave impulsive form (meaning it is in the direction of the larger trend, though it could be the final wave of that trend).  So far, the decline is still a three-wave form.  This leaves open the option that this is a second wave decline (and INDU/SPX still share this option), which would be allowed to create the price overlap witnessed in INDU.

NDX could provide some key tells going forward if the decline turns into a five-wave structure (noted by the gray (4) and (5)) -- and if that happens, it will suggest the trend has indeed changed for the long-term.

In conclusion, the bears have done some important technical damage in INDU, and the potential we've been discussing over the past couple months for a more bearish outlook now has to be seriously considered.  The bulls could always pull out a last minute stick-save, especially with the QE-Infinity liquidity due to start hitting the market on November 14, but as long as the market hangs around these price levels, it's in a dangerous position for bulls.  Trade safe.

With the Election Over, Will the Market Break from this Pivot Zone?

The election's finally over, so it appears the country will have at least four more years under the reign of the Most Powerful Man in the World -- I refer, or course, to Fed Chairman Ben Bernanke.  I think there was also a Presidential election.

So what does this mean for the market?  Well, Obama staying in office suggests no radical changes in the guard, which means the market can likely count on QE-Infinity, and the generally inflationary policies of the past few years, to continue.  Barring a massive external deflationary event, this would seem to be bullish for equities over the longer-term.

The market, however, remains caught in a pivot zone and difficult to read.  As I noted last week, there is an excellent chance an intermediate low is forming here, but no key levels have yet been claimed to the upside to build confidence.  Across markets, there is still conflicting information in the charts.

On the S&P 500 (SPX), the decline from the 1474 has a great deal of price overlap, which so far leads me to believe it is corrective -- however, a material breakdown of the green support zone (noted on the daily chart below) could be quite damaging to the market's technical picture.  Unless that happens, though, the most probable view is that the decline is complete or nearly so, and that new swing highs will follow.

The short-term SPX chart is open to a lot of interpretation.  I've noted one potential wave count (which sees a complex 2nd wave correction unfolding) along with some buy and sell triggers.

I'm still watching the Philadelphia Bank Index (BKX) for clues.  So far, the bottom I noted last week as a complete fractal pattern has held, but I would become quite uncomfortable for the bull case if that bottom fails -- especially if the blue wave (1) high is broken. (continued, next page)

No Material Change... and Don't Forget to Vote (or not)!

No real change from yesterday's outlook, with the added info that bulls have thus far held the 1403 level and maintained the hope of a wave (4) bottom.

Accordingly, I'm only going to do a brief update.  The 15-minute SPX chart notes short-term support/resistance, and a bearish sell trigger.  Note the potential head and shoulders which everyone and their uncle's elder roommate is watching.  The fact that so many have noticed it leads me to think that means a lot of bearish front-running, which leads me to think the market heads UP near term.

And the SPX daily chart below, which hasn't really changed in the last couple months:

Trade safe, and don't forget to vote.  Unless you're one of those people that knows absolutely nothing about the real issues facing this country, or what this country stands for in the first place, in which case you should probably just stay home.

(Warning: Rant Alert!)  I think this idea that "everyone should vote" is incredibly stupid -- some people clearly should NOT vote.  My personal preference would be that a passing grade be earned on some basic test in order for an individual to be allowed to register to vote in the first place.  It would consist of simple questions about our government, and if you couldn't answer these questions, you'd have to go the hell home and learn something before being allowed to decide the fate of the free world (or if you're a Chicago voter, instead of going home, you would be sent back to the cemetery from which you were exhumed).

"Well, Pretzel," I can hear you muse, "What types of questions are you talking about?"  Funny you should ask, because I just happen to have a short list of examples floating around in my head.

Example Questions in Order to Vote:

What is the Constitution?
a.  The supreme law of the United States of America.
b.  A "living document" subject to the current whims-du-jour of the very leaders from whom it is intended to protect us in the first place.
c.  A new car from Hyundai.
d.  A sandwich. 

Who said, "You can please some of the people all of the time, and all of the people some of the time, but you can't please all of the people all of the time."?
a.  Abraham Lincoln
b.  Abraham Lincoln, but he actually said "fool" instead of "please."
c.  What do you mean "you can't please all of the people all of the time"?  Why not?!?
d.  And who's Abraham Lincoln?

What form of government is outlined in the Constitution of the United States?
a.  A Republic.
b.  A Democracy.
c.  Wait, if I were smart, I'd realize that this actually helps me answer question #1...
d.  Can I go home now?

SPX, INDU, NDX, NYA: Charts Show Fractured Markets

Last week the market gave several buy signals, but Friday's action aborted some of those signals.  Hourly MACD on the S&P 500 (SPX) flipped to a sell signal, and several markets formed very bearish reversal candles.    

The good news is my short-term target from Wednesday (of 1430-1432) was reached before the market reversed, capturing 20 SPX points of profit.  The bad news is the intermediate-term outlook has been clouded by the strength of Friday's reversal, and bulls will need to reverse the market directly to maintain their hopes.  Trade below 1403 SPX would suspend the potential intermediate turn I talked about in Friday's article.

The chart below outlines the three viable wave potentials from here.  The reality is: at this point, if the market crosses back below 1403, that will tell us more about what this wave structure isn't than about what it is.  As noted, trade below 1403 would invalidate the wave (4) bottom and open up the possibility that this decline could have much further left to run -- though it's difficult at this point to say exactly how much farther.  The old expression "the trend is your friend" would be wise to keep in mind if this happens, as trade beneath 1403 would indicate the intermediate trend is still down.

The wave count discussed on Friday of a fourth wave bottom at 1403 is still the best fit to the entire structure, so if bulls can hold 1403, they give themselves a fighting chance at making new swing highs directly.  Trade above 1423.62 is the first short-term step for bulls to start feeling good again, and trade back above 1434 would be a confidence booster.

On the bearish side of the coin, the SPX trendline chart notes a potentially dangerous pattern for bulls if the market sustains trade beneath the 1395 zone.  Trade into that price zone would also break the long-term uptrend line of the past year.

The Nasdaq 100 (NDX) currently presents one of the more bearish-looking long-term charts out there (below), and muddies the overall outlook. (continued, next page)

SPX Update: Intermediate Low in Place?

In Wednesday's update, I noted that the market had likely put in a bottom at 1403 SPX, and I suggested a rally would begin to unfold.  I also published a short-term rally target of 1430-1432 for the S&P 500 (SPX), and on Thursday, the market came within 1.65 of my target. The bulls have taken the first steps toward validating an intermediate bottom, but there is still some work to do before we can declare the bears out-of-the-running.

My work suggests that an intermediate low is in place, and the market is now headed toward the (first) intermediate target of 1480-1490, but any trade beneath 1403 would invalidate that outlook.  The first step for bulls to gain confidence is to overlap the key 1430.64 price point.  Conversely, over the short-term, sustained trade beneath 1416 could suggest problems for the bull case.

The hourly chart notes the alternate potential of a 2nd wave rally, though I'm only giving that potential 30% odds at the moment.  I'll note the key downside levels going forward.

The 5-minute chart anticipated the rally perfectly, and Friday's market looks destined to hit the 1st-tier 1430-1432 target which was published on Wednesday -- when my blue target box looked a lot more lonely than it does now.  Considerably more upside is possible, and if the high-degree preferred wave count is correct, the market is on its way to 1480-1490 at the minimum. (continued, next page)

SPX Update: This is Still the Bulls' Battle to Lose

Before I get into the market update, my heart goes out to all those impacted by the super-storm on the East Coast.  Those affected are in my thoughts and prayers, and I wish you all the best in recovering.

Despite two days of storm-related market closures, there's been no material change in the outlook since Friday.  It is still anticipated that the market is likely to find a bottom in this zone and head toward 1480 -- though if for some reason it doesn't, then things could get very bearish.  

The S&P 500 (SPX) chart below outlines the preferred path, as well as the short-term (ST) alternate path (which allows the margin-of-error of a marginal new low), and the intermediate-term (IT) alternate path (which allows for a major trend change at 1474).  It's obviously too early to confirm a bottom here, especially since the short-term trend is still down -- so we'll watch how it unfolds going forward.  (continued, next page)

SPX, INDU: Bulls Need to Find Support Soon

I'm going to use an analogy I've used before, because I believe the current market fits:  The market is like a rubber band stretched to its breaking point -- either it will snap back and begin a strong rally over the next few sessions (quite possibly as soon as today's session) or it could break.

As we look at the options, it's important to remember that QE-Infinity hasn't actually started yet.  Some bears are calling QE-Infinity a "failure," and even the mainstream media (who should know better) has been guilty of this.  The effects of the QE MBS (Mortgage-Backed Securities) purchases won't be seen until the Fed cash actually makes its way into the Primary Dealer accounts -- there was no liquidity flood released when the media announcement happened.  And no liquidity added even once the first purchases were made, as MBS settlements are done on a forward basis.  The first MBS purchases aren't scheduled to settle until November 14, so that's roughly when we'll finally begin seeing the "real" effects of QE-Infinity, which is anticipated to be inflationary (i.e.- rising equities and commodities prices).  

The old adage of "don't fight the Fed" sticks in my mind going forward.

Yesterday's preferred short-term count played perfectly, as the market rallied up to my wave 4 label and reversed immediately to a new low.  So, the short-term count was correct -- but what about the intermediate-term counts? 


The predictive power behind Elliott Wave analysis is underpinned by two key strategies:

1.  Using the available price action to attempt to anticipate the pattern that will unfold going forward.
2.  Understanding the key levels where that anticipated pattern becomes invalidated and mutates into something else.

This is why I usually give both a preferred and alternate count.  The preferred count is "here's what looks most likely, given the price pattern that's currently visible"; the alternate count is the "okay, that fell apart, so this might be unfolding instead."

This task can be quite difficult in certain markets, because some patterns start off looking like a specific high-probability pattern, but then turn into something else entirely.  This happened near the recent peak.  The Dow Industrials (INDU) in particular looked like a nice clean pattern called an "expanded flat," but then went on to mutate into something much more extended.  The upshot of Elliott Wave, even during such predictive failures, is that it does provide clear levels where we can recognize that the first predicted pattern was wrong -- and sometimes the short-term work can still get you a winning trade even when the larger pattern fails.

To stick with the example of INDU, on October 19, I suggested it was due a correction to roughly the 13400 zone -- and also noted that "sustained trade beneath 13398 would open up more bearish intermediate prospects."  Even though the larger pattern failed, Elliott Wave allowed the patient trader to locate a low-risk entry-point, and further allowed the patient and nimble trader to bailout with minimum damage when the trade didn't work (as we know, patience isn't the only skill required of successful traders).  A really nimble trader could even have played the decline on the short-side and made a profit along the way. As an aside, this drives home a big part of what trading is all about: managing risk.

So, here we are in today's market -- trying to put the puzzles pieces together into a "most likely scenario," while at the same time looking for key levels that will suggest the preferred scenario is failing and "something else is going on."  I realize things can get a bit confusing to readers at times, because I'm working on several different time frames, and sometimes the five-minute (or one-minute) chart looks crystal-clear, while the daily or hourly is more of a toss-up, or vice-versa.  As best I can, I try to fit them together into something readers can understand.

And sometimes, it seems like detailing the alternate prospects is a ridiculously-complicated task which will only confuse everyone -- and to some degree this market fits that bill.  During these times, I try to note a few key levels where it's time to capitulate or reverse position.

There's been zero change in the INDU preferred count -- in fact, this count performed perfectly yesterday, accurately predicting the pop and drop reversal to within a few points.  The $64,000 question is whether we should anticipate the blue "4?" rally and reversal.  Hopefully, we'll be able to determine whether that's probable as the action unfolds.

The alternate intermediate count that isn't shown is morbidly bearish -- so if the market markedly fails target support, then bulls who didn't heed my Monday warning might want to consider that failure as a second chance at taking a vacation.

For SPX wave counts, I'm only going to focus on the daily chart today, since the questions and potential outcomes are essentially the same as for INDU. (continued, next page)