SPX and RUT: Still a Dangerous Market

Last update, I warned that the odds strongly favored lower prices, and the market has obliged.  Most markets are now below major support levels and the decline has given little sign of abating.  As I've warned for several updates, this is not the type of market to front-run bullishly: this market continues to meet the definition of trying to catch a falling knife.  At this point, I'm waiting for price to actually find some type of bottom before considering holding any intermediate long positions.

The chart below shows that most major markets have now broken their primary uptrends, as well as broken secondary support zones:

The Russell 2000 (RUT) chart emphasizes why the bullish wave counts have now become lower probability.  With the key level breaks that have occurred in RUT, it is all but impossible to count the summer rally as an impulse wave -- which suggests that rally will be fully retraced before the market finds a meaningful bottom.

Accordingly, for the S&P 500 (SPX), I'm going to focus on the bearish wave count until the market can find support and give some signs of a turn.  All indications are that the market is still within a nested third wave decline -- and third waves are not to be trifled with, except by the nimblest traders.  In third wave declines, indicators often reach oversold and stay there, with only minor bounces along the way. (continued, next page)

Treasury Throws a Wrench into QE-Infinity

Tuesday was an interesting day as the market gapped lower, reversed strongly higher, and then retraced most of the rally by the end of the day.  The market remains balanced at a key support zone, and the market is very oversold, so while those conditions could lead to a rally, oversold by itself doesn't mean anything.  As I've noted on several occasions, crashes generally begin when a market is oversold, not when it's overbought.  A lot hinges on what happens next.

I've poured over many charts this week, and I continue to feel this zone is critical for bulls to defend.  Below this level, and there's simply a lot of air.  I'm watching the charts for the market to declare its intentions, but there are two fundamental issues which could compound the technical situation and combine to create a "perfect storm" if support fails:

1.  We are again facing the "fiscal cliff" dilemma.  This was a precursor to the 2011 crash.

2.  Bulls have been banking on roughly $26 billion in QE-Infinity liquidity injections, due to start hitting the Primary Dealer accounts on November 14, to provide fuel for equities.  However, there has been a potential last-minute game-changer for this month.  The Treasury announced on November 13 that it will auction $25 billion in Cash Management bills on, you guessed it, November 14.  That auction will absorb much of the pending QE-Infinity liquidity.

A failure of support here thus has the potential to compound a selling-panic, because bulls may capitulate en masse if it's perceived that Fed cash isn't back-stopping equities as expected.

So this remains a dangerous position for the market, as I warned when SPX 1425 failed, and warned again when SPX 1403 failed.  Bulls who got out then can always get back in if and when the market starts giving more signs of a turn.  A wise old trading adage:  "Better to be out wishing you were in, than in wishing you were out."

A favorite chart of mine recently (below) shows that most markets are sitting right on support zones.  Bulls need to hold these zones, or the market could easily go into free-fall.  Be aware that markets often become very whippy around major support and resistance, as they try to shake traders out and/or get them positioned wrong.

The S&P 500 (SPX) daily chart is shown below, and little here has changed from last update. 

 
I also want to again note the Nasdaq Composite long-term chart.  Interesting to observe how the market was firmly rejected at the top of the base channel, which was the resistance level I discussed throughout August and September. 

Especially given recent word of today's Treasury auction, I can't overemphasize the need for caution here, and the chart below outlines the "conservative" bear case if support fails. (continued, next page)

How Will Equities React When QE-Infinity Liquidity Hits This Week?

Liquidity is the main driver of equities prices, since excess liquidity usually finds its way into assets, while a paucity of liquidity usually necessitates their sale.  The QE-Infinity liquidity will start hitting the market this week.  The first MBS purchases are scheduled to settle on November 14, so now we'll finally see how this will impact the market.  As noted on Friday, several markets are hovering near long-term support levels, but this zone is a key inflection point, and breakdowns of support here could lead the market into a rapid drop.

The chart below outlines several markets, and the bottom line is bulls need to make a "last stand" here or risk a panic sell-off.

The S&P 500 (SPX) chart below notes the potential air pocket beneath this price zone.  This results from the overlapping summer price range -- markets can race rapidly through such ranges, so a failure of support here could drop SPX quickly into the 1320's.

So... is there any reason for bulls to have any hope here?  This is a dangerous position for the market, so while I'm not encouraging front-running, there are a few signals that bulls could capitalize on, which I'll outline below.  It's a case of potential energy, but it's up to bulls to grab the ball and run with it.

In addition to this price support zone, there are a several reasons for bulls to feel all is not yet lost.  The first is the fact that, as noted, the QE-Infinity liquidity begins reaching the Primary Dealer accounts this week, and that usually translates into an inflationary reaction (equities up; dollar down).  Notably, the potential does exist for a complete (or nearly complete) corrective fractal from the 1474 print high (noted below as the double-zigzag).

Also interesting to note the US dollar seems to be forming a rising wedge, which is usually a bearish pattern: (continued, next page)

Bears Close-in on Claiming the Market for the Long-Term

Thursday's decline captured the target of 20 SPX points from the bearish sell trigger outlined on Wednesday (1403 to 1383).  In fact, all the bearish sell triggers I've outlined since the 1474 print high have now been captured.  The failure of support at 1403 caused significant technical damage to the market, but in this update we're going to examine both the remaining bullish potential and bearish potentials in detail.

The market has reached another inflection point, and further downside from here could spell long-term disaster for bulls.  The odds that the market has seen a major trend change at the 1474 high are increasing daily, and the chart below shows why this zone is important.

Most major markets have broken the long-term uptrends from the October 2011 lows, but are now reaching possible support levels concurrently. 

As promised yesterday, here is the intermediate bullish interpretation that remains standing, shown on the S&P 500 (SPX) chart below.  This would make for one heckuva surprise from bulls here.  While this count is still completely viable, I continue to have no intention of front-running this decline except at low-risk, tight stop entries, since the trend is clearly down at the moment (I trade primarily futures, so am rarely subject to huge gaps down as cash traders can be).  Front-running is only for the very nimble now, because of the danger of the bear count (shown later) which suggests a nested third wave decline -- which means it can go days without coming up for air.

If SPX can generate an impulsive (five wave) bounce, we can run with this count as a more significant and "safer" potential play.  Above 1434, and we can start favoring this count.

Honestly, the charts look horrible for bulls right now, and this count is becoming the underdog -- but there are three things which are causing me to continue considering the bullish wave count:

1.  The QE-Infinity liquidity injections, which start on November 14.
2.  The three-wave rally into the 2012 print high on the Dow Jones Industrials (shown later).
3.  Big money sentiment is quite bearish.  This is often bullish.

The bearish interpretation has been steadily gaining traction, and the rough expectations of the bearish count are charted in detail below.  This should probably be considered as the narrow odds-on favorite at this point in time.  There is a nice symmetry to this interpretation. (continued, next page)

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?