SPX and INDU: Rally Due for a Breather?

Monday's update expected the S&P 500 (SPX) to head toward the 1426 +/- level, and noted that price zone should be watched for a possible turn.  SPX reached nearly 1424, and then reversed into a 20 point decline.  That decline does appear to have been impulsive, but there are presently two equally viable ways to fit that impulse into the surrounding structure, as shown on the chart below.  The chart also notes a pending bearish sell trigger if SPX sustains trade below 1403.

  
This has been a pretty sloppy market for the last couple sessions, and try as I might, I cannot yet reconcile the rally from 1385 as an impulse wave (a five wave move).  This means it's either incomplete and will head to new highs (black, below), or it's the b-wave of a larger expanded flat (shown below in blue), which will culminate in a decline toward 1384 or lower.  Sustained trade below 1400 would more strongly favor the expanded flat.
  

The next chart shows why I slightly favor the idea of a larger correction here.  SPX, RUT, Nasdaq, and NYA have all back-kissed the underside of major trend lines, and it would be unusual for them to simply power through without more of a pause. (continued, next page)

NYA Update: No Material Change

Just a quick update tonight since there's not much to add to yesterday's comments.  I spent a lot of time charting tonight, but have selected to share just one chart for the sake of illustrating the point.  Below is the NYA, which suggests bears aren't out of the woods just yet.  I'm sharing NYSE Composite (NYA) because the apparent triangle in SPX doesn't work on this chart (nor does it work on INDU -- see yesterday's short-term SPX chart) -- this is because the wave which would be labeled as "e" in the triangle (8235.23) exceeds the apparent "c" wave bottom (8235.89), which invalidates a triangle for this index (which, in case you forgot, is the NYA). 

The rally into yesterday's high appears to be only three waves, at multiple wave degrees.  In other words, the main question this chart poses is: higher prices now, or higher prices later?  Watch the invalidation levels for clues. 

Note the future wave notations aren't intended to be time-accurate -- I'm simply working in the available space of the chart.  Trade safe.

SPX Update: December Means It's Time to Start Throwing "Santa Rally" in the Title...

Will bulls get their Santa Rally?  Let's look at the evidence...

Last update noted that some new intermediate buy signals had triggered and expected that the rally still had/has further to run.  Friday appeared to be a triangle consolidation, so there's been no material change, and I still expect higher prices -- however, I have spent some ongoing time deciphering long-term charts (somewhere in the neighborhood of 400,000,000 hours during November), and believe I may have finally unlocked the intermediate wave structure.

When the correction first began in September, I was initially viewing it as a fourth wave decline -- largely because the structure appeared to need a fourth wave, and most of my indicators suggested that 1474 was unlikely to mark a major top.  But then the decline continued past the fourth wave invalidation level, and that raised questions for the bulls -- however, all throughout the decline to 1343, I continued to feel that the decline was most likely a corrective structure (meaning new highs are/were still out there for this market).

Without further ado, here is the S&P 500 (SPX) chart which I believe unlocks the intermediate structure.  If you're new to Elliott Wave Theory, the most basic concept is that the market moves in five waves when it's headed in the direction of the next larger trend, and in three waves (or combinations thereof) when it's heading against the next larger trend.  I believe the rally counts best as five waves, and the decline from September counts best as two three-wave structures.  This would mean the long-term trend is still "up."

I've been giving a slight long-term edge to the bulls for a while, and while the market hasn't yet reached the point where we can say the bears are out of the running, unless the market starts declining in a true five-wave impulse, I think we have to give serious consideration to the wave count shown below.  Note that the decline found support almost exactly at the 61.8% retrace, which is perfect for a second wave decline.  This count suggests the market is on the cusp of a massive rally -- a third wave up at Minor degree.  About mid-way through a third wave, the masses recognize what's happening and jump in -- and momentum continues in a relentless fashion.

I'm still not ready to say this count is "the one" -- but my gut likes it a lot.  Now it's up to the bulls to prove it with some key level breaks (noted later).

 
Zooming in a bit, the count below currently appears to be the most viable short-term interpretation:

And zooming in even more, here's an attempt to break down the smallest waves, along with a whole bunch of info on some key price points.  1426 +/- should be watched as a possible turn level. (continued, next page)

SPX Update: Intermediate Buy Signal Triggered

Yesterday's update expected further upside, which the market provided, though it spent most of the session moving sideways.  Of note, more of my intermediate indicators have shifted to buy signals.  The Dow Jones Industrials Bullish Percent Index (BPINDU) shown below has now given an intermediate buy signal, and we can see from the chart that these are generally pretty solid.

I have been marginally in favor of a bullish intermediate outcome for some time, and, given what's occurring in the indicators, I'm close to shifting to a more bullish footing -- but I'm going to give the market a couple more sessions to prove itself here.  A lot can happen in a day or two in this crazy central-bank-driven market, so I'd like to see these intermediate indicators firm-up just a bit before getting too far ahead of the price action.  With these types of buy signals, if they're going to fail, they generally fail almost immediately.

Both the bull and bear count remain pointed at higher prices before a meaningful top, though there are several paths the market may take to get there.  Below is an hourly chart of the S&P 500 (SPX).

I've shifted my preference on the short-term count back to my original read (my first read is right more often than not), which was that the 1377 swing low marked the bottom of wave (iv) of (1).  The market always reserves the right to force me to adjust it again, depending on how the next few sessions develop (some of this stuff is sooooo much easier in real-time, as the market can knock certain options off the table right at the open).  The next mid-term target of 1445-55 is unchanged, though the intermediate target has been adjusted higher. 

Note the potential of the black alternate expanded flat:  sustained trade below 1400 would suggest a target of 1379-85.

Finally, the bearish intermediate count is still viable.  There are several factors still keeping this count on the table for the time being.  The next upside target for this count is 1426, which is close-by -- so that would be an interesting target for bears to try and kill the fresh buy signal. (continued, next page)

SPX Update: Near-term Rally Likely to Continue

Last update expected the correction to continue over the near-term (though I published no official target for a bottom), and also noted that the rally to that point appeared impulsive, suggesting that the next-larger-degree trend was still up.  Yesterday, the S&P 500 (SPX) found a bottom at 1385 and put in a very impressive bullish reversal.

On one of yesterday's charts, I included a very specific annotation: "Trade below 1391 that holds above 1377 and subsequently breaks above 1409 is likely to lead to a relentless rally for several sessions."  This is exactly what happened yesterday -- so the up-trend is thus expected to continue over the near-term.  The market has now allowed me to calculate some new, additional upside target levels to (hopefully) tack on to the 30+ points we captured on Thanksgiving week.

From a longer-term perspective, I still believe the bulls have a slight edge, but there's yet no key markers to eliminate the bearish wave count, so we'll continue to track its progress and expectations for the time being.  Bears should take note of the strength and speed of this rally, which is eclipsing the last decline, and indicates that bulls may have more firepower in reserve than bears do.  What's really nice is that both the bull and bear long-term counts are again aligned over the near-term, which is always helpful for trades utilizing shorter time-frames.

First up is the daily chart of the SPX, which notes a few key trendlines, and shows that the long-term uptrend since 2009 still remains intact (indicated by the blue trendline, which goes back to the 2009 lows).  The lower red trendline is now a three-point validated trendline, and thus likely the key support for bears to break in order to take control of the long-term.

Next up is the bullish wave count, along with the next-tier targets for that count.  It appears the 1445-1455 target zone has become reasonably good probability. (continued, next page)

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)