SPX Update: 1503 Acting as Resistance

The S&P 500 (SPX) may be in the process of forming a complex corrective wave, as the entire move since 1491 presently appears corrective.  For the bigger picture, this suggests it should ultimately resolve higher, but it could chop around a bit first.  The wave has considerable overlap, which makes it quite difficult to determine the exact short-term structure, and thus the market's exact short-term intentions.  1503 has proven to be resistance for the time being, and that shouldn't go unnoticed.

I've outlined the preferred count for the rally from 1451 to 1502 on the 3-minute chart below.  Blue wave (iv) was assumed complete at 1491, but I've also noted the possibility that blue (iv) may be unfolding as a complex flat (shown in black).  The expectations of the black count would be for the market to revisit 1490 +/- zone, which corresponds nicely with the rising red trend line, followed by a continuation higher.  Note that there are more directly bullish possibilities, though, so a retest of 1490 isn't a foregone conclusion.  Trade below 1485 would open up more bearish potentials.

The market has struggled a bit with the 1503 level, but do note the potential of an ascending triangle formation.  A clean breakout through 1504 would suggest a move to 1511-1515.

On the SPX hourly, RSI has registered a bearish divergence, and MACD is on a slight bearish crossover.  Presently, this is expected to result in nothing worse than a sideways/down correction, but these are warning signs that traders should stay on their toes.  It's conceivable that red wave (iii) has completed in its entirety, but with the recent action, it's simply too early to tell.  Regardless of the exact short-term outcome, the wave still appears to need further upside for the bigger picture.  

In conclusion, there are a few signs that the rally may take a breather, though that isn't a given yet -- sometimes an overlapping wave is simply winding up to move higher.  Presently it's expected that any further chop will resolve higher.  The first more serious warning sign for bulls would be sustained trade beneath the rising red trend line shown on the 3-minute chart; the second would be trade beneath 1485.  Trade safe. 

Bulls Still Have the Ball, but Here's a Bearish Pattern that Can't Be Ignored

While I've been giving bulls most of the air time for the past few months, in this article, I'm going to touch briefly on an interesting pattern that "bears" watching.

Before I get into a bearish hypothetical though, the reality is that there's just no sign of a reversal yet.  Going back several weeks, my expectation was that this was to be a third wave rally.  The third wave of a move is typically the longest and strongest, and third waves are notoriously unrelenting.  R.N. Elliott (for whom Elliott Wave Theory is named) called third waves "a wonder to behold."  There's a psychology to third waves, and the essence of that can be summed up as "a point of recognition for the masses."  This awakening is what gives a third wave its strength.

Generally, the majority of traders are positioned wrong headed into a third wave, and the wave thus generates a strong feedback loop.  As prices rise, more traders are forced to cover shorts, which in turn drives prices higher, which then causes some traders to reverse long, which drives prices even higher, which causes some of the traders who sold early to chase back in long, which drives prices higher again, and so on.

The price action has matched my expectations, and presently momentum continues to remain strong.  Obviously, and without a doubt, the wave will certainly end at some point, and some top-hunter will seem like a genius when it does -- but if I've tried to impress anything on readers all month, it's that I would not try to front-run a turn during a third wave.  The market will let us know when it's ready, and while we might miss the exact turn by a few points, during third waves, the turns usually come from so much higher than expected that one ends up doing better with the more passive approach of riding the trend.

Below is the preferred wave count, which has evolved slightly to keep up with the action, but is little changed over the past month.  SPX has modestly broken out above the black base channel, and if this breakout holds, there is (amazingly) the potential for further upside acceleration, as unlikely as that sounds.  Keep a close eye on things here.

As tempting as it is to become complacent at times like this, it always bothers me to be too bullish when it seems "easy" to do so -- so let's talk a little bit about the bear hypotheticals.

The market still has some major price hurdles to overcome from an intermediate and long-term perspective, so I am remaining very cognizant of the proximity of critical long-term resistance.  One of the things markets love to do is get you incredibly bullish or bearish as they approach key levels, in order to make you forget all about those levels.  Ever gone long at resistance, right before the market started dropping?  How about going short at support, right before a huge bounce?  Yeah, I've done it too.  Then you back out your time frame (when I'm scalping, I trade off the 1-5 minute charts) and say, "Doh!  What the heck was I thinking?"

So in the midst of all the bull celebrations, let's not forget that the 2000 top was 1553 SPX, and the 2007 top was 1576 -- and these were major market tops.  If you draw a trend line connecting the two, you come up with a figure just north of 1590.  Now, that said, we're not there yet -- and it would be unusual for the market to top immediately here. I'm not "looking for a top" at the moment, given the present readings of several indicators, and the market seems reasonably intent on making a run at the levels just listed -- but there are a few hurdles along the way.

I've detailed a number of rising support and resistance levels on the chart below, as well as one argument against a top forming yet.

The next chart is one for the bears, as promised in the title. (continued, next page)

SPX, HYG: HYG Signals Further Intermediate Upside for Equities

Yesterday, the S&P 500 (SPX) briefly reclaimed the important psychological level of 1500, a level it hasn't seen since Bob Barker quit hosting The Price is Right.  Apparently, back in 2007, Barker quit out of moral obligation, because he knew the SPX price was wrong (insert rim-shot and favorite Happy Gilmore quotes here).

The third wave rally has now fulfilled its prediction of an upside surprise, though I'm not sure we can qualify it as a "surprise" anymore, since we were largely expecting it, as noted on the chart below on January 10.

Anyway, the wave structure presently appears to support a reasonably direct trip into my third target zone of 1520-1530, and sustained trade beneath 1485 is now required to cast suspicion on that outcome.

There is some potential of a bit more backing and filling -- it's difficult to determine if the impulse wave downward (which began around noon yesterday) represents the end of a wave or the start of one.  I've noted a few keys to watch on the chart below.

I continue to feel that the Philadelphia Bank Index (BKX) offers helpful clues here:
(continued)

SPX and INDU: Are the Bulls Bored Yet?

Yesterday, the Dow Jones Industrial Average (INDU) effectively reached my target of January 3.  The preferred and alternate intermediate counts are still both bullish -- though there's one small bear hope still remaining (an ending diagonal, not shown) since the key long-term pivots haven't been crossed yet.  Bears would basically have to turn the market more or less immediately in order to pull out a stunning upset, but currently that appears to be low probability.

As it turns out, my observation on October 8 of a three-wave rally into the 2012 high, and subsequent expectation that the market would make new highs after the correction, proved to be accurate.

The long-term chart of INDU notes the next resistance levels.  If bulls can keep pushing a bit farther, they give themselves a shot to run toward the black dashed median line, and potentially as high as the top of the black channel.

 

Still no material change in the S&P 500 (SPX), though I presently have some slight concern about the rally from the 1470's being part of an extended fifth wave (black alt: 3 and 4), and INDU has now been added to the markets which have reached my targets, so I continue to feel it's prudent to protect profits.  Beyond that, the market is starting to lull all of us into a bullish stupor -- and when complacency sets in, the market becomes ripe for unexpected corrections.  The blue trend lines would be the first warnings.  (continued, next page)

SPX, BKX, RUT: Russell 2000 Approaches Key Long-Term Pivot

The rally has, so far, continued largely unabated, which is what I expected on January 2.  As I warned at the beginning of the year, this rally appeared to fall in the third wave position, which meant to watch for upside surprises and little in the way of downward corrections.  Third waves are powerful trending waves which, as obvious as it sounds, are simply "done when they're done."  The key to trading them is to accurately recognize their potential ahead of time (which we did) and trade accordingly -- and not fall into the trap of calling tops the whole way up (or bottoms on the way down).

So with this wave, I'll continue to look upwards until the wave structure actually turns and suggests we shouldn't (our first warnings will be a five-wave impulsive decline and some key trend line breaks).

The S&P 500 (SPX) is in an interesting position, as it's broken-out ever so slightly above the black trend channel.  This could indicate the current wave is close to exhausting its thrust -- or it could indicate renewed energy... time will tell.  The first key that would suggest at least a near-term correction would be breaks of the two lower blue trend lines.

The Russell 2000 (RUT) is in a very interesting position for the long term.  It's rallied to within a few points of the invalidation level of the most immediately bearish long-term count, and a break above 902.30 will suggest the bulls have at least several months-worth of firepower left, if not a great deal more.  The problem here for bears is that if 902.30 is exceeded, then that would make red wave iii the shortest wave -- and the third wave can never be the shortest, so that would invalidate the most bearish count.  A further breakout over the upper blue trend line could see the rally extend by 15% or more.

To help with anticipation of the short-term, I've prepared a chart of the Philadelphia Bank Index (BKX), which is either still forming a complex fourth wave correction, to be followed by another fifth wave up (black alternate count), or is about to extend the rally directly by another 2% or more (blue).  The two counts appear to pivot on 53.05. (continued, next page)

SPX Finally Captures Long-Standing Target of 1480-1490

Wednesday's update noted that SPX 1467.56 should serve as a dividing line between a deeper correction and a trip directly into my long-standing target zone of 1480-1490.  Amazingly, the market found a bottom at 1467.60 , then proceeded to rally up to 1485 (somebody out there nailed a perfect risk/reward trade entry!).

Note the 32 point trade trigger of December 20 was also finally captured in the process (1448 to 1480).  Going back to November's updates, there was one big scare along the way (when 1411 broke) which switched my public stance to neutral, but all the blue target boxes since November have now been reached.  Even before the fiscal cliff scare, my "safe" target of 1445-1455 had already been captured; so all told we've captured a bit over 100 points of the rally since November 19, 2012.

Which brings me to a thought I'd like to share with readers:  My biggest complaint with myself from the recent past is that I didn't stick to my bullish guns in the updates during the fiscal cliff scare... and I'll tell ya' exactly why I didn't, too: simply because I'm not so arrogant as to think I'm never wrong. With the market in that position, with a big third wave decline as a very real potential, I worried about "convincing" anyone to go long and possibly having my readers get caught on the wrong side (if I was wrong). So I switched myself to neutral publicly, because that was a dangerous position for the market, and especially dangerous for cash traders. Privately, I remained bullish.  In retrospect, obviously, I wish I had stayed more publicly bullish.

It's a tough gig. Losing your own money is one thing, and I view that as part of the game... but feeling like you "lost" someone else money is almost unbearable at times. I've lost sleep on many nights over this -- and not just when I'm wrong. Sometimes just when I'm bold and worried about being wrong and misdirecting someone. 

Respect to the brokers in our audience -- you know who you are!

In any case, the question now, of course, is: what next?  Well, I don't get 'em all right, so I can't promise anything, but it does appear that SPX still needs a higher-degree fourth wave correction and fifth wave up, at the minimum.

As always, once a target zone is reached, reversals become a bit higher probability.  There are some indications that the rally could be nearing a turn, but as I've been noting all month, this is a third wave rally, and third waves love to blow up everyone's favorite indicators (this is actually why I haven't been publishing much lately about divergent sell signals and such -- those types of technical indicators rarely work during third waves). 

The traditional count is outlined in red, but the alternate count is not at all unreasonable and would be suggested with trade beneath the red wave (i) high.

The Philadelphia Bank Index (BKX) is also hinting at more upside after the next correction.  Note the pattern here, and an upside breakout over the dashed blue line should lead to 54.80-55.

In conclusion, as I've mentioned since the beginning of the year, I have no intention of trying to call a top in this wave until I see the first impulsive decline.  That said, a long-standing target zone has been reached, so it's time for traders to decide whether to take profits or chase the move higher with stops.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.

Euro Update: Yesterday's Call Blown, Targets Postponed or Negated

I was going to take today off, but I felt obligated to update Euro.  In yesterday's update, I discussed the fact that Euro appeared ready for a deeper correction; however the wave I was anticipating fell well short of my expectations, and Euro found strong support right where it needed to.  It's now formed an incredibly symmetrical reversal pattern, and is almost certainly headed to retest or (more likely) best the previous high.

In real-time, this pattern became apparent as it unfolded, but that doesn't do readers any good, and I apologize for blowing this one.

Note the bear hope that still remains is depicted by the alternate count.  If this is the alternate count unfolding, that count is quite bearish, but I'm not going to pretend it's what I was expecting yesterday.  The alternate count is, in fact, considerably more bearish than the count I had posted.   

The white ABC forms a complete fractal, and that suggests the alternate count is lower probability -- but because these are fractals, a complete fractal sometimes only marks the first wave of an even larger fractal.  A triangle would also not be entirely out of the question here, so be on alert for that pattern if the rally falls short of the previous highs and embarks on a deep correction.

It pays to be aware that if the Wave C low is broken in the near future, an extremely sharp decline is almost certain to ensue, and yesterday's targets will become active once again -- so if one is bullishly inclined, the stop-and-reverse (SAR) level is clear.  On the other side of that coin, a break of the wave B high should lock-in the corrective nature of the decline. 

My apologies again for reading this one wrong yesterday and I'll return with the equities updates tomorrow.  Trade safe.