Congress Tries to Push Santa Off the Fiscal Cliff

Last night was an interesting night to be a futures trader.  Congress announced they didn't have enough votes for "Plan B" to avert the Fiscal Cliff, and the E-mini S&P futures (ES) promptly dove 50 points into limit down.  As of the time of this writing, ES is trading about 20 points in the red.

Congress has announced they're now going to do some work on Plan C, which stands for Christmas, and are thus headed home for a much-deserved holiday break after yet another grueling week of endless yapping.

Last night, even though Congress people were fleeing the hill like ants, I managed to corner one on his way out the door.  He agreed to a brief interview, on the condition that I allowed him to remain anonymous.  I acquiesced, and asked what the next plan was.

He replied, "A year ago, we coordinated with the White House and worked out a fool-proof fallback plan to avert the Fiscal Cliff.  We'll be implementing that plan immediately."  Excited, I followed up and asked for more detail.  "It's really quite simple," he replied, "According to the Mayans, the world is supposed to end today -- so we figured, why bother with budgets?  We're only sad that we didn't spend more."  When I asked what the plan was in the event that the world didn't end, the Congressman smiled vacantly and edged rapidly out of the room.  

I plan to follow up on this if we're all still here tomorrow.

The question now is whether this Fiscal Cliff plan failure will this preclude the Santa rally I've been expecting, and the answer is: I don't know yet.  I do know that the cash charts can tolerate a drop in the ballpark of the current futures levels, and still maintain their bullish bias.  In fact, a move such as that would be completely reasonable, as shown on the S&P 500 (SPX) chart below:

I am, in fact, still inclined to give bulls a slight edge, but the real questions won't be answered until we see how the cash market reacts to this news.  I will add that it's a little bit bothersome that this happened right after my November target zone was reached, as target zones are also higher-probability reversal zones.

The SPX bearish wave count is still alive and well, even though I began discounting it back in November.  The SPX structure appears to pivot on the 1411 price point. (continued, next page)

SPX, RUT, NDX: November's Upside Targets Captured, and a Look at the Long-Term

Last update expected the rally to continue.  The market obliged and, in the process, finally reached my standing mid-term target zone (from November) of 1445-1455.  So far, everything looks reasonably good for a trip toward the next intermediate target of 1490 +/-, but if things seem to be shifting back into the bears' favor, I will try to note that in these updates.

In this update, I want to cover a couple of long-term charts, to try and see where we might be in the big picture.  The Russell 2000 (RUT) is of particular interest, because at least two of the waves which make up this structure are as close to "unequivocal" as one can ever find.  On the chart below, red wave i is a pretty clear ABC (or it's I-II, i-ii -- see chart).  Further, the wave labeled as red wave iii is almost certainly a corrective wave, which narrows down the pattern options significantly.

If we assume that both i and iii are not five wave forms, then we are left with two fairly high probability patterns:  one is called an ending diagonal; the other is a bullish nest of first and second waves.

An ending diagonal consists of five corrective waves, and suggests this is a market in the final thrust upwards before a large, long-term correction unfolds.  One nice feature to this pattern is that there is a clear invalidation level: 902.30.  Above that level and the 1-2 nest becomes higher probability.  Because 1's and 2's lead to third waves (usually the longest and strongest waves), trade above 902.30 would make the pattern ragingly bullish (starring Robert DeNiro), and suggest a market on its way to a long-term nosebleed rally.  Both potential target zones are noted on the chart. 

I believe the key to sorting the two patterns out is red wave iv.  If that wave is wave-c of a running flat (the mega-bullish pattern), then it should be impulsive (five waves down).  It appears to be corrective (an ABC), which instead fits the ending diagonal pattern; therefore I'm inclined to give that pattern a slight edge.  Both patterns are intermediate bullish, so it's something of a moot point at the moment -- but we'll keep an eye on this going forward.

Next is the long-term S&P 500 (SPX), which sports a similar wave structure.  The key long-term bull level here is 1551.11.

Since the market has performed in line with the preferred bullish intermediate wave count all month, I'm going to focus on that count until the market says I shouldn't.  The chart below details the bull count, and notes the alternate bear count.  The bear count would find a top soon, but there's really nothing to yet indicate that we should be looking for anything other than a minor top.  The caveat is that although the bull count continues to appear quite probable, do note that my November target zone of 1445-55 has now been reached, and thus an added level of caution is in order.  Traders may want to raise stops to protect profits. (continued, next page)

Here Comes the Santa Rally

Yesterday's update was unabashedly bullish across all time frames.  I noted the market was likely to find a bottom directly, and wrote, "I am currently viewing the decline as a complete, or nearly complete, c-wave lower to wrap up yet another second wave.  This suggests a strong rally is waiting in the wings."

While I felt I conveyed my bullish stance quite clearly, I later realized that I had neglected to detail (in plain English, anyway) exactly what I was seeing in the charts that caused me to turn bullish at Friday's low.  I sometimes forget that, to those just learning Elliott Wave Theory, the whole thing can seem slightly more complex than trying to build a fully-functional suspension bridge entirely out of Spam and nachos. It has a language all its own -- but I use that language so often, I sometimes forget that readers don't necessarily understand what the heck I'm talking about.

So in this update, I'm going to discuss what I saw on Friday, why 1420 lost its significance for bears, what I'm watching going forward, and why.

One of the main markets that's given me the bull bug is the Nasdaq 100 (NDX).  Yesterday, I wrote:

The NDX has formed a fairly clean five wave rally off the November print low, and that does suggest trouble for bears.  It's also now in a zone where a meaningful bottom could form.  If the count shown below is correct, this represents a low-risk buying opportunity with the potential for a great deal of upside.

Hopefully, some readers took advantage of that low-risk entry.  First let's take a look at the chart (for those following along at home), then we'll discuss why I wrote yesterday's paragraph and what it means to traders.  I've added a number of educational annotations to this chart, to help detail my views.

  
There were two simple logical conclusions that led me to view this chart as quite bullish.  In Elliott Wave, five wave rallies move in the direction of the larger trend, and they cannot exist in a vacuum (in other words, you must pair the five-wave rally to the rest of the pattern; it cannot stand alone).  So The first factor in my analysis is the five-wave rally off the November low.  That leads me to the conclusion that the market must complete at least one more five wave rally in the upward direction (at the minimum).  Two five wave rallies, separated by a corrective decline, complete an ABC.  Three five-wave rallies, separated by two corrective declines, complete a larger impulse wave (a larger five-wave form).  One five-wave rally cannot exist on its own in this position, so the rally from 2494 to 2699 must be considered as Wave-i or Wave-a.

Next, I zoomed in on the smaller time frames and counted five-waves down from 2696 to 2620, and that led me to another conclusion:  if that decline is only the first wave down and not the end of the correction, then it appeared likely that the decline would ultimately retrace beyond where the larger Wave-i/a began at 2494... and that would break a cardinal rule of Elliott Wave, which says the correction to the first five-wave rally (the correction is called Wave-ii, or Wave-b) cannot retrace beyond where the rally began.  This led me to the conclusion that it was quite likely the entire downward correction was over.

At this point, trade below 2620 would create a problem for that outlook, so that's the key level to watch for anyone who positioned long at yesterday's open.

The room for error lies in the fact that the market rarely forms "perfect" waves -- so it's always possible that my interpretation of Wave-i/a as a five-wave structure is incorrect.  If it's not a five-wave rally since the November low, then the above points are moot, my preferred outlook is wrong, and the market is free to decline below 2494.

For now, we're going to assume that my interpretation is correct.  Let's take a look at NDX daily to illustrate why NDX probably presents a problem for SPX bears.  The bottom line is, it appears likely that NDX is headed to another rally leg of at least equal length to the leg from the November lows.

And if SPX follows suit and builds another rally leg of equal length to its previous leg, it will break above 1474 -- which then takes the bear count completely off the table (because of the retracement rule discussed regarding the beginning of first waves).

The next chart I'd like to examine, partially for educational purposes, is the S&P 500 (SPX) bearish wave count.  The scenario shown on the chart below is not my preferred read on the market for the intermediate term -- it's my first alternate outcome if I'm interpreting the higher degree wave structures incorrectly (in other words, if some of the waves I'm viewing as five-wave moves are actually three-waves, and/or vice-versa -- as I noted, the market rarely forms "perfect waves" and the majority of the work is left to the analyst to uncover and interpret).

Again, the market finds itself in a position where the bull and bear counts are both pointing in the same direction (up) presently, and this count also suggests higher prices still to come.  Bulls do need to break the 1438 swing high to confirm -- hence the black "alt: (1)" annotation.

Now to cover why the market dictated this chart be adjusted in-between Wednesday and Monday.  The overlap at 1420 created an issue for the old bear count -- which depicted a higher-degree c-wave rally -- and that issue is based on the fact that c-waves are always 5-wave moves.  Within those 5-wave moves, waves 1 and 4 cannot cross paths (except in special cases, called ending diagonals).  An ending diagonal appears highly unlikely, based on the shape of the move.  So once the potential wave 4 moved into the price territory of wave 1 (below 1420), that told us the c-wave was off the table, and I changed the labels to reflect the next highest probability bear pattern.  I have adjusted the labeling again slightly since yesterday (since the bear outlook remains my alternate, I am not really focusing on this chart in most updates).  (continued, next page)

SPX and NDX: Will Bulls Seize This Opportunity?

Wednesday's update noted that the market was approaching an inflection point, and to watch the SPX 1440-1455 zone for signs of a reversal.  Later in that same session, the S&P 500 (SPX) reached an intra-day high of 1438.59 and reversed strongly.  This is again a very interesting position for the market, because the decline has unfolded in an apparently impulsive fashion, and can now be counted as five complete waves down.  Normally that would suggest at least one more leg lower, of at least equal length -- but I have my doubts for a number of reasons, and suspect the market may find a bottom fairly directly.

I am currently viewing the decline as a complete, or nearly complete, c-wave lower to wrap up yet another second wave.  This suggests a strong rally is waiting in the wings.  I'll cover a couple reasons for this view, beginning with the SPX chart below.  I'll caveat with the note that this is a very vague wave structure on SPX, though, so the possibility does exist that a larger decline is beginning.  Once the market sees its first decent bounce and retraces somewhere in the 50% zone, we'll be able to consider the prior swing low as important to the near-term bull case.

The chart below is the interpretation I'm presently leaning toward, and suggests a bottom fairly directly, followed by a strong rally to new highs.

Examining the hourly chart yields a slightly different perspective on the alternate potential.  The odds favor that bulls will find a bottom directly, but if they can't, then the shape of the previous rally would force us to consider the possibility that the present decline is part of the larger wave (2) which could retrace 50-62% of the total rally.

While I'm favoring an intermediate bullish resolution, the bears do still have hope.  I've noted 1434 as the key bullish pivot for some time, and the market was unable to sustain trade above that zone, which keeps bears in the running for the time being.  Accordingly, I'll update their chart with the bear potential.  While I still consider bears the underdog here, the market always reserves the right to change my mind. (continued, next page)

SPX, INDU, BKX, and US Dollar: Market Approaching a Key Inflection Point

Last update (Friday) noted that trade above 1416 would suggest a first target of 1422 and a second target of 1433.  Both targets have since been reached, amounting to 17 points of profit.  Of note, the S&P 500 (SPX) exactly tagged (to the penny), and reversed from, my "critical bear level" of 1434.27.  It remains to be seen if bulls can sustain trade above that zone.

I am continuing to give the edge to the bulls for the intermediate term, but the SPX has reached/is reaching another interesting potential inflection point.  Since November 29, my standing target for SPX has been 1445-1455, and we've come within 11 points so far.  This is a zone bears may attempt to defend, so longs should stay nimble going forward.

Beneath us, I would watch the 1420 area as the first important support zone, and sustained trade beneath that zone would serve as a warning to bulls, at least over the short-term -- with the possibility of a more bearish intermediate outcome.  Until then, as long as bulls maintain that support zone, the market is cleared to keep moving higher.

The next two charts help outline the importance of this inflection point, and the outcome here will help define the bigger picture.  According to Elliott Wave Theory, the market moves in three-waves when it's moving opposite to the direction of the next larger trend (correcting), and in five-waves when it's moving with the larger trend.  I'm continuing to favor the bulls for the intermediate-term, because the decline from 1474 counts better as a three-wave move, which suggests it was a counter-trend correction to the long-term uptrend -- but it's still not a clear-cut picture, and thus both possibilities remain valid.

The first chart is the bullish count, though it's important to keep in mind that there are different paths the market can take to reach these targets -- and very few markets move in a straight line.  I try to adjust the projected paths when possible and as needed.

PLEASE BE AWARE OF THE TYPO ON THIS CHART, WHICH SHOULD READ: "I'd more strongly favor the BLACK count with sustained trade beneath 1420."

The next chart shows the hourly count when viewed through a bearish lens.  The bears want this to be a three-wave rally (an ABC), which would make it a correction to the prior decline.  Bears will need to make a stand soon to maintain their hopes, and the market has almost reached the zone where a corrective rally could expect to be rejected.

The chart below depicts an ending diagonal (c) wave.  A related option, not shown on the bull chart above, is that of a leading diagonal first wave, which would play similarly over the short-term.  A leading diagonal or ending diagonal would make one more quick thrust up before a strong reversal toward 1385-1400.  The difference between the two is that the leading diagonal would still be intermediate bullish, and march higher after that decline.  Thus, we should watch the 1440-1455 zone carefully for any signs of reversal -- the chart below notes some signals to keep an eye on.

Those are the caveats for bulls regarding the current price zone.  The caveats for bears are different.  One problem for bears, as I see it, is that once the market sustains trade above 1434, we're back into a thinly-traded range (between 1434 and 1464), and there may not be much in the way of resistance until the upper edge of that range.  This would jive with the bullish interpretation of a third wave higher (blue (3)) underway.  Third waves are pure trending waves, and are unforgiving of traders who cling stubbornly to wrong-sided positions.  

Looking down the road a bit: If the market can get through the congestion zone, then we reach the old resistance zone from 1464-1474.  The market was rejected from that zone on three prior occasions.

There's an old trading adage that says, "The more often resistance (or support) is tested, the stronger it becomes."  My belief is the exact opposite:  "The more often resistance (or support) is tested, the weaker it becomes."  The logic behind my statement is that with every trip into resistance, more selling is exhausted.  With every trip to support, more buying is exhausted.  Eventually, the market chews through all the sellers or buyers in a given zone, and then simply breaks through and runs.

Moving back to the charts, the Dow Jones Industrials (INDU) briefly overlapped its key bullish pivot, then reversed from that zone.  When we look at this chart, we are again confronted with the three-wave rally into the 13367 print high (the "tell" I noted way back on October 8) -- and thus I have to continue giving decent odds to the view that new highs beyond 13367 will be reached over the next couple months.  Bears have work to do if they want to change that viewpoint. (continued, next page)

Publication note...

My apologies, but unfortunately, this week my schedule is largely filled with some very time-consuming personal matters to attend to -- so publication for this week will be spotty.  Trade safe.

SPX Update: Just the Short-term, Ma'am

Last update noted that the rally might be due a breather, but the price action since has been inconclusive.  I get bugged when I can't reconcile the charts at the 5-minute time frames and below, and that's the case right now.  The 5-minute SPX chart makes sense in two contexts, but the contexts are diametrically opposed from each other.  Basically, either my last read was correct and the market is forming some kind of screwy expanded flat 2/b (blue), or it's just completed the first wave of a new leg up.  The expanded flat makes more sense in the context of the price action that came before, but it just doesn't quite jive with the move since 1415.

I pretty much despise nights like this, because I've now spent roughly 7 hours charting, but feel like I have little to show for it.  The chart below discusses a few levels to watch, and some potential targets, but I'm hesitant to get too married to anything here.  Stay nimble if you try to trade this mess.

 
Next is the INDU chart, which performed well per the last update and came within a few thousands of a percent of reaching the first target -- but the wave seems to have become more complex.  The interpretation below jives reasonably well with the blue SPX count above -- so maybe my sense of frustration is misplaced... it's always possible I've got this reconciled perfectly and the market will perform exactly according to plan.  As I said, though, stay nimble here.

In conclusion, last update I warned about the possibility of a confusing and frustrating trading range forming, and that may well be what's going on.  A clear break of the range (especially on INDU) should help lead the market into more clarity.  Trade safe.

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