Shortest. Update. Ever.

Just a very quick update today -- I was working on an article detailing the long-term counts, but my own trade management simply got in the way of finishing the article.  So, here's the hourly SPX chart, and tomorrow (Good Lord willing!) I will finish the article I wanted to write.  Trade safe!

SPX Update: The Rally Has Now Completed Minimum Expectations

The short-term wave counts have performed about as well as they can for the past five weeks. Thursday's update noted that the market may be approaching an intermediate chop zone, but also expected that SPX was likely forming a very small fourth wave, so the short-term was still anticipated to resolve higher.  In that session, the SPX tested the 1500 +/- support zone; then on Friday the market gapped up and came within roughly 5 points of the intermediate target zone of 1520-1530.

There is a chance that's all she wrote for this leg of the rally, and I would urge caution here (note this is different than urging front-running a turn).  As I noted on Thursday, the market is now well-within the "margin of error" for the intermediate projections.  While the market has not yet formed an impulse wave down -- and thus has not given solid indication of a looming correction -- it pays to be aware that if we are indeed about to enter a higher degree fourth wave, then we're in for some chop.  Fourth waves can be very hard on accounts, since they love to knock players out of both sides of the trade.  They're fantastic at stop grabs, and often reverse at the exact moment when you become convinced that they're breaking out or breaking down "for real."  On many a night while trading Forex or Globex, I've given back profits trying to scalp a fourth wave.  Fourth waves are my arch-nemesis.      

We can see on the 3-minute SPX chart that the rally has now completed the minimum expectations of a five-wave structure, but the trend lines and bearish overlap levels on the 3-minute chart will help provide early warnings.  It is also still possible that the market will form an extended fifth wave here, in which case we're only in wave i of (5) (not shown); I simply can't predict that in advance, so we'll have to see how things unfold in the next couple sessions.

The hourly chart remains largely unchanged from previous updates, and also depicts a rally leg that now features enough squiggles to be counted as a complete structure.  Note that while the market always reserves the right to do something I've failed to foresee, this is currently not anticipated to mark "the final end of the rally," only a consolidation/retrace phase.

In conclusion, the market has completed the minimum expectations for this leg, and we can count five clear advancing waves on the short-term charts.  This tells us to start watching for a potential turn, and when we see our first small five-wave form in the downward direction, we'll have early confirmation of a larger correction.  In the next update, we're going to discuss the long-term outlook in detail, and examine some multi-year charts of SPX and other indices.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media, Inc.

Is the Rally Nearing a Peak?

Yesterday's preferred wave count outlined a small fourth wave correction as the most likely outcome for the session, and the market performed very much in line with that expectation.  Odds are reasonably good that there's still a small degree fifth wave-up left to come, ideally peaking into my 1520-1530 target zone -- however, we're now within the margin of error for that wave count.

On the chart below, note that the market may have completed all of red wave (iv), but fourth waves are notoriously ugly and unpredictable, and quite frankly, I hate trading them.  In a perfect world, red wave (iv) is roughly complete as a simple ABC and would move more or less directly into wave (v) to complete blue 3, but there are no guarantees of this and there's no rule that says this fourth wave can't chop around for another session or five.

Blue 3 is expected to be followed by blue 4 (I know: duh) -- in other words, a high degree fourth wave, which could chop around in a sideways/down manner for several weeks.

The 3-minute SPX chart contains additional detail:

I'd also like to dust off the trusty Philadelphia Bank Index (BKX) chart once again.  On January 15, I noted that BKX still needed a fourth wave decline and fifth wave rally, and it has since fulfilled the minimum expectations of that.  This opens the possibility that the entire wave at higher degree is now complete, which would suggest a deeper correction is in the wings.

While both SPX and BKX suggest another small wave up is reasonably likely, at higher degree, SPX suggests a fourth wave correction (blue 4 on the hourly), while BKX suggests a second wave correction (red wave ii on the chart below).  Second waves are typically deeper, sharper, and more frightening than fourth waves.  Second waves are likely to turn everyone bearish again, while fourth waves are likely to be more "ho-hum, just a consolidation."  Presently, I am uncertain how to reconcile the wave counts of SPX and BKX with one another.

Warning: SPX May Be Approaching a Chop Zone

Monday's update noted: "Odds favor a continued run higher, with 1510 as the next near-term target."  On Tuesday, the SPX came within pennies of 1510, and is now within spitting distance of my next target zone of 1520-1530.

Wednesday should be an interesting session, since it's FOMC rate announcement day, which sometimes makes for a volatile market, though the trend of the past 4 years has been for an up-day.  Of the past 33 rate announcement days, SPX has closed higher on exactly two-thirds (22) of those days.  Bespoke Investment Group reports that since the beginning of ZIRP (12/16/08, the last rate cut), the S&P 500 has averaged gains of .66% on FOMC announcement days.

1500 is now the first meaningful support zone to watch.  The last wave, which chopped around beneath the 1503 level, could be a running triangle fourth wave, but the structure was ambiguous enough to leave more bullish options on the table.  The count shown in blue on the 3-minute chart below represents the conservative running triangle option; the alternate count in black notes the more bullish option.

Note we may be entering a near-term chop zone, represented by blue wave (4). 

 
The SPX hourly chart continues to show a trending market.  We're currently sitting on 50+ points of profit for January, which has been fairly "easy money" (virtually no draw-down) so far, so be sure to continue protecting it -- especially since we've reached the 1510 target and are now approaching my third intermediate target zone.  If that zone represents all of blue wave 3, then we will soon enter a higher-degree and longer-duration chop zone in blue wave 4. 
 

In conclusion, this remains the type of market for which the phrase "the trend is your friend" was coined.  There are no signs of a turn yet, but the preferred wave count suggests that we may be approaching an intermediate chop zone -- once blue wave 3 completes, the market can be expected to enter a fourth wave chop zone of several weeks duration.

I've also been working on some long-term charts to help locate the market's "you are here" position within the much bigger picture, so keep an eye out for those charts to be released over the next few updates.  In the meantime: trade safe.

Reprinted by Permission; Copyright 2012, Minyanville Media, Inc.

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)