SPX Update and a Little Bull/Bear Thanksgiving Humor

No material change since yesterday's outlook, though I have outlined the two most likely short-term paths from here.  Odds are good that at least a minor top is nearby, but it appears reasonably likely we'll see slightly higher prices first.  The chart below shows that as long as bulls can hold above 1382, they have a good shot at moving the S&P 500 (SPX) into the mid-to-high 1390's. 

The SPX hourly chart notes that both bull and bear intermediate possibilities remain alive.  Worth noting: virtually none of my intermediate indicators have given buy signals yet and the intermediate trend is still technically "down."  The preferred count sees a correction beginning in the next few sessions, then (most likely) another leg up. (continued, next page)

Monday's Targets Reached; Will Bulls Hog the Whole Turkey?

I admit the article title is a weak attempt toward being cute by invoking the Thanksgiving holiday -- and I realize I'm mixing metaphors with "bulls" "hog" and "turkey."  This is making me hungry (though when I really want to eat bull, I just turn on the TV during a Bernanke speech).  Anyway, I'll try to do better on a Thanksgiving-related title tomorrow. 

Yesterday's update expected a rally, with a first target of 1378-1390 SPX.  The S&P 500 rallied with furor to 1386.87, and closed at the session highs.  The big question now is whether this is simply a bull trap, or a more meaningful turn.  Later in this update, I'll cover some of the key upside levels for bulls to reclaim.

Monday showed strong internals, and that suggests this rally will be more than a one-day wonder.  In fact, the strength seen yesterday is often associated with significant bottoms, as shown on the chart below:

 
My first upside targets were all reached, and the wave could count as complete, but it's entirely possible this leg has further to run.

Given the five-wave impulsive nature of the rally and the strength of market internals, the odds presently suggest that more upside will follow after the first correction.  As noted in yesterday's update, the market reached an inflection point on Friday -- though of course, nothing significant had developed as of the time of publication.  But now we can see that bulls have responded to that inflection point with fury, and this leaves open the possibility that an intermediate low has formed, though presently the intermediate trend should still be considered "down."  The chart below details the near-term path for the bull prospect, as well as the bearish prospect, and notes the key levels for bulls to reclaim.  Sustained trade below 1360 will favor the bears.  (continued, next page)

SPX, US Dollar, Gold: Charts Point to at Least a Near-Term Rally

Last update noted that the market was in a dangerous position and oversold, but that there were some indications that a fourth-wave relief rally was due.  Bulls managed to find support where they needed to, and the charts have now solidified the view that at least a near-term rally is likely to develop in equities.  Also of note, there are QE-Infinity liquidity injections coming on Monday and Tuesday which will total about $23 billion, and which should help put a bid under equities.

We should always assume the trend remains the same until proven otherwise -- and recently the intermediate trend, at least, has been down.  I continue to believe this is a dangerous market for bulls as long as it hangs around beneath the key price levels, but recognizing that danger is not the same as being completely sold on a long-term bearish outcome for equities -- and the fact is, I'm not yet sold on the long-term bear case.  That said, until some key levels are reclaimed, there's no real reason to be intermediate or long-term bullish either.  I've been driving myself to distraction trying to interpret this market's long-term intentions, and the bottom line is:  there simply isn't enough information yet to form a well-reasoned long-term stance.  So, for the moment, I've decided there's enough ambiguity in the charts that the only rational long-term stance is equities neutral.

Something purely anecdotal that bothers me on a contrarian level:  I swear I've seen at least 10 articles recently which are predicting an imminent market crash.  I know it's anecdotal, but that seems like too much rabid bearishness.  One of the basic rules of the market is that the majority are usually on the wrong side of the trade.

Anyway, let's discuss a couple things I'm watching to provide clues which should help tilt the playing field in one or the other direction.

One of the key markets that has yet to tip its hand is the US Dollar.  On July 19, I noted that caution was warranted for dollar longs, and even shifted my stance on the dollar from long-term dollar bullish to long-term neutral... and the dollar dropped like a rock immediately afterwards.  Then on September 20, I noted it could find a bottom in that zone and wrote that "I've finally started to take quick stabs at long dollar positions again."  It has been rallying ever since.

The dollar has finally reached another key inflection point, and I think risk is shifting again and is now increasing on dollar longs.  If the dollar can go on from here to form a five-wave rally (it needs a fourth wave down and fifth wave up), then that would be an all-clear for dollar bulls (and likely for equities bears).  But presently, the move up from the September bottom is still a three-wave rally, which is now facing resistance, and which may be just about complete.  I have to give a very slight intermediate and long-term edge to dollar bears here, because the larger rally from May 2011 counts better as a corrective wave than an impulse wave -- bulls need it to become impulsive to help confirm my original read that the dollar bottomed its Grand Supercycle wave at the 2008 print low.  In any case, I believe the dollar is a crucial market to watch going forward, since if the dollar heads lower, then equities will be "worth more" as measured in dollars (aka: inflation).

Another unclear market is gold, which has traded in a large range for more than a year.  I've outlined some buy/sell triggers for gold on the chart below, but I should note that the 200 point trigger is quite aggressive -- so I would suggest traders remain cautious of any whipsaws occurring around the trigger point (if and when we get there, of course).

Next is the S&P 500 (SPX) intermediate bearish wave count, with the bull count noted in green.  I'm presently projecting at least a short-term rally to the 1378-1390 zone, but sustained trade above 1403 would be the first warning to bears that the (assumed) rally could grow some legs. (continued, next page)

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)