SPX and NDX: Intermediate Signals Remain Mixed

Monday's update noted that the charts indicated that at least a minor top was probable, and so far Friday's print high of 1409.15 has held for two sessions.  The questions still abound about the intermediate term, however.  In this article, I'm going to cover a few things to watch going forward.

The first chart I'd like to call attention to is the Dow Jones Industrials Bullish Percent Index (BPINDU), which has yet to relinquish its intermediate sell signal.

 
Next is an attempt to decipher the Nasdaq 100 (NDX) long-term chart.  Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position.  Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.

The question this chart poses is whether the current decline is part of a complex fourth wave correction (black) or has now marked a complete intermediate low (gray).  It is, of course, possible that the 2012 print high marks the end of the line for the long-term, but that simply doesn't reconcile as well -- though the trend line breaks are of concern to the bull case.  Note the nice three-point validated green trend line that's formed, indicating that it's likely important for bulls going forward.

For the moment, I remain long-term neutral on equities, since (as the charts above hint at in a "tip-of-the-iceberg" sort of way -- there are a lot more charts I'm watching and not publishing), there are still too many mixed messages out there to gain a clear read.  Accordingly, I've decided to split the S&P 500 (SPX) charts into a bull chart and a bear chart (which makes my job a little more work, but should make the charts easier to follow for readers).  Each chart notes some key levels, signals to watch, and projected outcomes.

First up is the bull chart: (continued, next page)

SPX Update: Looking a Step beyond Global Uncertainty

Humans hate uncertainty.  We want guarantees, we want warranties, and we want insurance policies.  We want to know the future, and we want promises (preferably in writing) which assure us of that future.  And yet, what else is life but a constant, ever-shifting drama of uncertainty?  The irony behind our desire for certainty and security is that the very tension of uncertainty is the same psychological force that so often drives our greatest gains in personal, and societal, growth.

Our extreme discomfort with uncertainty pushes us to invent, to learn, to grow, and to try and expand our understandings.  It pushes us to become better people; to become more than we are today.   

Global uncertainty can make the stock market seem like it should be an unpopular place -- and yet, always bumping against that global psychology and in opposition to it, there is personal uncertainty that makes the market appealing.  Why do people invest in stocks?  There simply is no other reason to invest, except the quest for financial security and expansion -- which is really just the quest to leave uncertainty behind.

Of course, we can no more eliminate uncertainty than we can become physically immortal; uncertainty is an intrinsic part of life (and of the universe itself, even down to the quantum level).  Despite the obviousness of that fact, the majority of us spend our lives fearing (and often running from) the uncertainty of the unknown, in a perpetual state of low-grade anxiety.  Thoreau described this perfectly when he said: "Most men lead lives of quiet desperation."

I believe understanding this psychology is a key to understanding the market.  So often, people look at the seemingly ever-deteriorating world and say, "How can anyone buy stocks right now, with so much global uncertainty?"  The problem is, this view only accounts for half the total psychology of uncertainty.

The traditional market wisdom says people buy and sell based on fear and greed.  That's true on a simplistic level -- but I believe that if one looks a bit deeper, one finds that both fear and greed (in this case) stem from the exact same psychological source: the quest to overcome uncertainty and gain more security (even for people who don't seem to "need" more security -- we're rarely satisfied at a plateau, and more security for some can equate to additional wealth/power).  So we're fearful when we're running from it, and we're greedy when we're chasing it -- but it all ultimately traces back to the same base desire.

This is why even when the world looks bleak and "everyone" is fearful, people are still buying stocks:  at that moment, their desire to gain personal certainty/security is greater than their fear of global uncertainty.

This is one reason I think it's a mistake to look myopically at global uncertainty when deciding whether to buy or sell for the long-term.  The fact is: there's always something going wrong with the world.  And if that's all there was to consider in the psychology, then we'd do nothing but sell stocks short.  Don't forget to consider the other side of that equation.

Speaking of uncertainty, the market is still in a position that leaves the intermediate-term unclear.  Last update expected higher prices, though the S&P 500 (SPX) exceeded the upper edge of my target zone by a few points.  Several of my intermediate indicators have now switched to buy signals, but others still remain on intermediate sells. 

There are some indications that at least a minor top is due, but this rally has shown a lot more legs than virtually anyone expected, and that always leads me to believe that front-running is a bad idea for inexperienced traders.  The approach I usually take at such times is to make a few quick stabs at low-risk entry zones, but with very tight stops.  If I get stopped out, I have limited my risk -- but once I catch the turn (assuming I protect profits properly afterwards), it almost always makes up for the small losses I've taken along the way.    

Disclaimer:  The above is not trading advice, and may or may not work for you.  Consult your broker, your accountant, your lawyer, and your know-it-all in-law (the one who was driving you nuts over Thanksgiving) before doing anything at all, ever.  Ask your doctor if you're healthy enough for trading.  Side effects include high blood pressure, blurred vision, nail-biting, intermittent feelings of hopelessness and inadequacy, and the nagging sensation that you left the stove on.

It's worth noting that the rally has recovered 50% of the two-month-long decline from 1474 in only five sessions, so I'm giving a slight edge to the bulls here for intermediate-term odds.  However, as mentioned, neither the bull nor bear intermediate case can be made with fervor yet -- so the chart below details both options, and notes the key invalidation levels.  Sustained trade beneath 1365 would favor a retest or besting of the 1343 swing low, and a break of that swing low would almost certainly be huge trouble for bulls. 

Below is a bit more detail on the bull case.  The decline counts very well as two three-wave corrections lower.

The Philadelphia Bank Index (BKX) has also overlapped it first important upside level, but not its key intermediate upside level yet.  Note that there is a lot of potential energy coiled in the present pattern. (continued, next page)

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)