SPX and BKX: Market Ready to Clear the Chop Zone?

On January 30, I warned that the market was likely approaching a chop zone, and that's been a pretty accurate description of the action since.  It now appears that a sustained break of the levels noted below will lead the market out of the chop zone.  Right now I'd have to give odds to an upside break fairly directly -- but since this is a fourth wave, and fourth waves are known to mutate into overly-complex corrective waves, I hesitate to convey too much confidence (readers will recall that fourth waves are my arch-nemesis!).  

The S&P 500 (SPX) chart illustrates some levels to watch.  I'm inclined to believe that either the black count is in play, or the rally from 1495 to 1514 was only wave i of 3.  However, in the event I'm wrong, a sustained break of 1495 would indicate that a deeper correction was most likely underway.  Note the potential ascending triangle pattern, which is generally bullish.  The dashed red trend line should be of value if black wave (4) is in play.

 
The Philadelphia Bank Index has now captured the 54.90 target of January 23.  I've outlined the black count as the alternate simply to differentiate the two counts, but I'm actually somewhat partial to the black count.  In either case, I'm content to wait for the price action to point the way.

In conclusion, while the chop zone has indeed been in full effect, there's still nothing that indicates a larger correction is underway.  The market presently appears coiled, and I'm favoring an upside breakout here -- but given the nature of fourth waves, I hesitate to get too married to that outcome.  Trade safe.

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Charts Detailing the Long-term Bull vs. Bear Outlooks

It goes without saying that the market is a dynamic environment.  In order to keep up, we have to recognize when outlooks are changing, and then actively change with the changes.

Along those lines, Minyanville's founder, Todd Harrison, has put together an excellent list of 10 Trading Commandments.  The second item on the list is "discipline trumps conviction."  To paraphrase, he espouses that no matter how strongly we feel about a given position, we must defer to the principles of discipline and realize we are not "smarter than the market."

I wholeheartedly agree with that philosophy.  Humans tend to cling vehemently to their belief systems, and while this can be an admirable trait in everyday life, it can make for difficulties when trading.  Sometimes our beliefs lead us to condemn or praise the market's movements, as we assign judgments of right and wrong to the price action using our own arbitrary versions of "market morality" (i.e.- "It's just wrong for the market to keep going up here!").

The market has no morality (much like some of its big players!), and ultimately it's going to do whatever it's going to do, regardless of how strongly we believe in what it "should" do.  It's somewhat like a wild animal -- if you get attacked by a wolf, the wolf isn't morally wrong for trying to eat you, it's just doing its thing.   

With that in mind, in this article, I'm going to outline my interpretation of both the bull and bear cases, as defined through Elliott Wave analysis of the long-term charts.

I've mentioned this next subject a few times over the past couple months: the market is still in a long-term inflection zone, due to the fact that we're quite close to the price highs of two very important long-term tops (2000 and 2007).  Most interestingly, the pattern which has now formed could be interpreted in two fashions, and those interpretations are essentially diametrically opposed.  Sometimes, the highest-probability interpretations will point the same direction, but in this instance, they do not.  Thus the pattern is either a wind-up to another sustained launch, or an ending pattern, and I will explain this dichotomy in more detail below.

One sees this type of pattern with some frequency across all time frames, and the good news about this setup is that it will be reasonably clear to interpret as it begins breaking.

If I forget everything I think I know about the world's problems and just study the charts, the most obvious wave count is the bullish one.  During 2008, I formed the opinion that we would experience a two-stage crash.  I anticipated a cyclical bull market would follow the bottom of 2009, but I also expected an "eye of the hurricane" effect.  That bias stuck with me and colored my interpretation of the charts through roughly mid-2012, at which point the market's price patterns began challenging my view.

And now, at this point, the pattern has evolved into one that suggests the "second stage" of any pending crisis could be forestalled for many years.  It all hinges on the current inflection point.

The first chart is the long-term bull case for the S&P 500 (SPX), along with two potential targets.  The bullish interpretation of the pattern is that a series of high-degree first-wave advances and second-wave corrections has formed.  This would put the market within the belly of a third wave at Minor degree, and third waves are extremely powerful -- the rally we've experienced since the beginning of the year has undoubtedly been a third wave advance (though there remains some question on where to locate that rally within the long-term count, hence today's discussion).

The chart below outlines, in broad strokes, the expected result if this is indeed the middle of a high degree third wave rally.  There are two ways to view the current structure bullishly, and they are noted in the middle breakout box (blue), and the lower black box.  Either of these interpretations has a minimum expected target in the 1700's.

Note the series of 1's and 2's leading into the present wave.  This count probably has to be given the edge, unless and until the market begins to indicate otherwise -- but, going back to our earlier discussion, I would avoid too much "conviction" here, as we won't know with high certainty until the market clears this inflection zone.

(NOTE:  To bring the charts up at full-size, right click and select "Open in New Window")

The bear interpretation outlines an ending diagonal C-wave, which would complete the larger (B) wave at Cycle degree.  Due to the scale of these waves, we wouldn't know this count was playing out immediately, but relative to the big picture, we would have a great deal of advanced warning.  Key overlap of the last swing low would be a huge red flag to the bulls -- in fact, at this point, we probably don't want to see the market sustain trade beneath the 1450 area. 

This wave count is exceedingly bearish from a long-term perspective, as it suggests the entire rally since 2009 will be retraced.

Finally, a quick update to the SPX hourly chart.  On January 30, I warned that SPX was due to enter a chop zone, and the market has since lived up to that expectation.  We're still within the chop zone, and it's simply unclear to me at the moment if blue wave 3 has completed a few points shy of the target zone, or if it still has farther to run.  The wave count has gotten us this far and performed quite admirable for the entire year, but every system reaches pivot moments when things become a bit fuzzy until the market clarifies its next move.  This is one of those pivotal moments and at times like this, trend lines become high value. (continued, next page)

Son of a...

Apparently, I'm never going to finish the article with the long-term charts.  I keep thinking I'm close to being done, then three hours later, I'm still not happy with it.  Tomorrow then, I swear.

The hourly chart is updated below.

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.

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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.

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