SPX, NDX, BKX, INDU: Charts and Fundamentals; Why the Rally Should Have Legs

Last update noted that probabilities favor that this rally leg since November is only half-way complete. I continue to favor that view. Yesterday performed as expected for a nested third wave rally, and the bear count (which I’ve discounted since October) is very close to being invalidated once and for all. Trade above SPX 1474 would accomplish that.

This market has an awful lot of bullish potential, but what can bears do to put an end to it all? In this update, we'll cover, in brief, some key signals and price points to watch going forward. There is also one important fundamental factor, which suggests more rally fuel, which I’ll cover later.

The first chart I'd like to share is the Philadelphia Bank Index (BKX) which, as long-time readers know, I believe has acted as a critical "tell" over the past months. BKX has finally vindicated my view that the November low was, in fact, an intermediate bottom, and that the decline into that low was corrective. The chart below is the daily BKX and covers the two most likely wave counts.

(If you’re new to Elliott Wave Theory and don’t understand how it works, you may want to review my article on the subject: Understanding Elliott Wave Theory, Part I)

As noted on the chart, the first bearish option isn't particularly bearish, at least over the intermediate term. The first bearish option would see this as a three-wave rally, which could complete after another small leg up or two, then a large correction (50-62%), followed by another new high.

The bullish count is exceedingly bullish, and, without any present evidence to the contrary, I am left to continue favoring that count. Currently, the bullish potential is such that one probably simply wants to chase the market higher with stops, since if this is the "nested" third wave depicted, it will only correct from time-to-time on its way higher (much like yesterday's action).

The S&P 500 (SPX) outlines the preferred bullish option, and notes some key levels. The bears' final hope here is that the wave I'm viewing as wave 3 is actually wave C of an ABC correction (shown in more detail on the INDU chart which follows). Trade above 1464 would put the bear count under severe duress, and trade above 1474 would finally lay it to rest.

In my opinion, the Dow Jones Industrials (INDU) continues to make the bear count low probability. The pattern here is a bit harder to reconcile as an expanded flat and -- while there are always corrections along the way -- that suggests the rally will continue to have legs for the foreseeable future.  I have outlined the first two key levels bears need to reclaim in order to begin creating doubt.

(continued, next page)

SPX and US Dollar: Rally Likely Only Half-Way Through

Last update, the market had finally flipped me from bullish to neutral -- but I noted that the market was clearly set-up for a large directional move (in fact, I titled the article "2013 Should Come in with a Bang").  I also noted the market seemed to be waiting on the fiscal cliff resolution.

I've been pretty consistenly bullish since November, but I won't deny that by last update, the bears had shaken my faith quite a bit. They pushed the market right to the edge; however, I felt they had not yet tipped it over and that critical support had not yet been breached.

Well, now we have our resolution, and -- proving that procrastination can be a winning strategy -- Congress has managed to live up to the phrase "Necessity is the mother of invention."

There is a very bullish set-up in the charts, and it's likely that we're only about half-way through this leg of the rally (with potentially much more to come over the long-term).  November's intermediate target of 1490 +/- seems quite likely to be reached in the next few weeks or sooner. 

As I noted in the last update, the Philadelphia Bank Index (BKX) was signaling the potential that the whole decline was complete, and overnight futures are now indicating that potential is indeed the reality. 

The short-term BKX chart, which was posted as a waypoint on Monday, is updated below:

Given where the futures are trading this morning, the bear count is likely to be invalidated directly upon the open -- and a big gap up fits the pattern of a nested third wave rally (the expectations of the pattern) therefore, I'm not inclined to update the bear count at this time.  I feel the bear count will become extremely low probability once the market trades above 1448, and that break will all-but-guarantee new highs above 1474.

At this point, it will take something completely unexpected, or a break of 1398, before I consider the bears as serious players again.

It should be noted that there is extremely bullish potential in the current market.  This appears to be a third wave rally at several wave degrees (note the red ii at the November low), which opens up potential for a preliminary long-term target of 1680ish.  There is another option, called an ending diagonal, which is less bullish, but would still see a trip into the high 1400's at the minimum.  The bottom line is that the preferred intermediate counts of the past several weeks range from "pretty bullish" to "exceedingly bullish."

I do hope my warnings recently kept bears from over-committing.  I know a lot of technicians were quite bearish of late, but I felt the bears never quite clinched the deal for a number of reasons.  And every now and then in trading, just as in life, gut instinct beats everything.  As I noted on 12/27:

Bears have a definite shot at taking control, and there are a number of signals right on the cusp of rolling into their favor -- and yet I have a gut feeling that bulls will somehow manage (yet another) stick save here. 

Last update, I published the triangle potential that I had noticed in the US dollar -- and until 78.60 is broken, that potential remains for the time being.  However, I continue to favor dollar bears for the intermediate term (either directly, or after further consolidation), and below is the preferred wave count for USD.  The first alternate is the extended sideways correction (triangle; not shown), which basically just stretches out the consolidation before ultimately heading lower.  I would rethink that outlook if bulls reclaim 81.46. (continued, next page)

2013 Should Come in with a Bang

Some markets are inherently difficult to predict and trade.  They whip up and down, they make higher highs, then they make lower lows, then they reverse.  They shake everyone out of both sides of the trade -- and then, after they've messed with enough players, they run.  This is one of those markets, and it's gearing up to run.  That pattern is such that it probably shook out many bears right near the top, and has since shaken out many bulls.  Now it's almost time for it to pick a direction.

For the past week, I've noted that the market had reached an inflection point -- and while the market's reaction to an inflection point isn't always predictable in advance, these points do represent a challenge to the market, and thus always open up the potential for a change of trend.  The bears managed to seize control at that inflection point, and have not yet let up their chokehold since. 

Meanwhile, Congress has only had a year to work out the Fiscal Cliff dilemma, so of course here we are in the eleventh hour, still trying to figure out what to do about it.  In alignment with this uncertainty, it's interesting the position the market has placed itself in -- it hasn't locked-in the bearish count, and it hasn't locked-in the bullish count.  It's still floating in inflection point limbo, and it seems to be waiting for the starting gun to fire.  One thing that does seem clear is that it's going to make a large intermediate move very soon -- but the market seems uncertain on the direction yet.  When the market commits, I'll follow suit.

Everyone seems to be looking at how bearish it would be if the Fiscal Cliff deal doesn't get done -- but what happens if it does?

There are still mixed signals in the charts, and the daily chart of the Dow Jones Industrials (INDU) helps illustrate the challenge.

   
Zooming in on the INDU chart, we can see that the rally since November is only three-waves so far, but it has not yet knocked-out the critical low to lock-in the rally as corrective (corrective moves are always expected to be fully retraced).

I'll admit, many things look very bearish -- but until the market dictates otherwise, I have to continue considering the bullish wave counts as viable possibilities.  12765 on INDU and 1385 on SPX is where the bulls become severely handicapped.  Below is the S&P 500 (SPX) bull interpretation with noted levels: (continued, next page)

Publication note

Unfortunately, I had a minor family emergency occur as I was beginning the update, and it has required my full attention for the last several hours -- so the update will return on the weekend.

Good luck out there, and trade safe.

SPX, NYA, US Dollar, VIX: Inflection Point at the Edge of the Cliff

Last update noted that the market had reached an important inflection point, and that remains true today.  It's interesting how the market has aligned itself to react to the news over the next few sessions.  Obama cut short his Christmas in Hawai'i (where I reside) to fly back to Washington in order to discuss the "Fiscal Cliff" and how to avert falling off it.  The market seems to be keyed into those talks.

Meanwhile, I keep thinking of a scene from the movie Margin Call, in which Paul Bettany is standing atop the ledge of a skyscraper and says, "The fear most people feel when they stand on the edge like this is not actually a fear that they will fall.  Instead it's the subconscious fear that they might jump." 

One sometimes wonders which it is for our leaders: the desire to avoid falling... or the other.

In keeping with this theme, bears have taken the S&P 500 (SPX) right to the edge of its own cliff, and it's now teetering near the important support zone of 1411.  After the November bottom, the market suggested a "safe" target zone of 1445-1455 which it reached -- but since then, the market has kept its options open.  There is no clear answer just yet as to what its intentions are, but it is worth noting that it found a top within 1 SPX point of my bear count's expectations, then reversed solidly  Accordingly, objectively, I'm forced to give the bearish count equal weight for the time being.

Elliott Wave analysis is fractal-based, so when we work with it as a predictive tool, we're often attempting to anticipate the fractal that's being formed, in order to know where it leads.  Some fractals are quite clear and "high probability" interpretations.  Others are vague and need clarification through the market's next move.  This is one that could still go either way.

Below is the bearish interpretation of the fractal, and some keys to watch which will aid in clarifying what this pattern "is or isn't."

Next is the most straightforward of the bullish interpretations.

Since many fractals mimic others, I often look at related markets in order to try and gain insight and clarity.  I pay close attention to the currencies -- though the reality is that currencies are not always correlated to the equities markets, they are usually helpful clues.  It's generally a decent bet that a falling dollar equals inflation, which typically means higher prices in dollar-denominated assets, such as equities.

The US Dollar hasn't quite "locked in" a bearish fractal, but it's come awfully close... so no "definite answer" yet here either.  The red wave 2 high is now key for dollar bulls to reclaim, while the red b/ii low is key for dollar bears. (continued, next page)

Is Santa Bringing Coal for the Bulls or the Bears?

Christmas Eve has arrived, and now the question is: who's going to get coal in their stockings?  The bulls and the bears have both held the key levels they needed to, in order to create maximum confusion over who will own the longer-term.  I have remained intermediate bullish since November -- and still continue to slightly favor the bulls for the time being -- but this is an important inflection point, and I'm prepared to switch footing if the market dictates.

The first key levels I'm watching are 1411 in the S&P 500 (SPX) and 13010 in the Dow Jones Industrials (INDU).  Sustained trade beneath those levels would leave the market vulnerable to a larger decline.

I've drawn up a lot of charts for this update, so we're going to get right into it.

The first chart I'd like to share compares the SPX, the German DAX, and the London FTSE.  These European markets are one of several reasons I continue to give a slight edge to the bulls on this side of the pond.

Next is the SPX bull count, which is facing a test, since my mid-term target of 1445-1455 was reached and the market immediately reversed lower.  Bulls need to claim that resistance zone in order to clear the way for new multi-year highs.  At this point in the wave structure, trade above 1448 should lead to a very bullish resolution.

Below is the 30-minute view of the same count.  Note MACD is in the process of a bullish crossover.

 
As noted, this remains an inflection point for the larger picture, which means the structure hasn't closed itself to the bearish potential.  Below is the bearish interpretation of the fractal.  The bulls will become more vulnerable if the market sustains trade beneath 1411. (continued, next page)

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)