1540 Target Reached, Can Bulls Keep Pushing?

In Monday's update, both the preferred outlook and the first alternate count projected that the S&P 500 (SPX) would rally to 1540 +/-, which happened with blinding speed on Tuesday.  The main bull and bear outlooks from Monday remain materially unchanged, though of course with the added information provided by the price movement since then, I have been able to refine some of the key levels.

Before we get into the near-term outlook, let's center ourselves with the long-term.  As I've mentioned several times before (and as most every other technician on the planet has no doubt noticed), the market is in a very long-term resistance zone. 

Of note, the Dow Jones Industrial Average (INDU, not shown), did make a new all-time high yesterday (and in the process finally reached my 14,200+ target zone from January 24).

I always find it interesting when wave counts target potentially important confluence zones (almost as if the market knew exactly where it was headed from the beginning of the move), and in this case, the more bullish interpretation of the wave structure (below) seems to be pointing right at the blue confluence highlighted on the monthly chart above.

The wave count below suggests a fifth wave rally is now pushing into this long-term resistance zone, to be followed by a sizeable correction (typically about 50% of the preceding rally).

On Monday, the preferred and first alternate count were both in agreement on higher prices to the 1540 zone, but now we reach an inflection point where they begin to diverge.  The expanded flat, shown below, is hard to invalidate, but we should probably scrap that count above 1550 and favor the more bullish option at that point.

In the previous update, I was quite tempted to favor the more immediately bullish interpretation shown above, and I'm now even more tempted to do so -- but we'll wait and see how this plays out with the 1550 zone.  If nothing else, we should have an answer fairly soon.  Do note that this count is only bearish for a short time, but ultimately suggestive of higher prices to follow.

I'm still watching the Philadelphia Bank Index (BKX) for clues, as noted on the chart:

No Material Change

I combed the charts for a while tonight, and there's effectively no change at all to yesterday's update.  Bull/bear counts are both still in agreement until the 1540 +/- zone, so I'm still looking for higher prices over the near-term.  Good luck out there!  And of course:  Trade safe (NYSE symbol: OMGWTFSTOPLOSS).

And totally off the subject of the market, since there's really nothing to add to yesterday -- I shared this next quote with the good folks in the forums last night, and feel it's worth reposting here (I'm simply cutting and pasting my forum post):

Okay, this has absolutely nothing to do with anything on this thread, but I stumbled across a quote tonight which I found it so deeply profound that I just had to share it. This is from Rainer Maria Rilke's Letters to a Young Poet, and it's about "loving the questions" (about ourselves or the world) which we have yet to answer:

Have patience with everything that remains unsolved in your heart. Try to love the questions themselves, like locked rooms and like books written in a foreign language. Do not now look for the answers. They cannot now be given to you because you could not live them. It is a question of experiencing everything. At present you need to live the question. Perhaps you will gradually, without even noticing it, find yourself experiencing the answer, some distant day.

Bulls and Bears Locked in an All-Out War

Bulls and bears have been locked in an impressive battle for the past several weeks, as we can see on the weekly chart below:

Four straight weeks of indecision from the market makes it unwise to become overconfident about what's coming next here (since we are not, after all, smarter than the market).  So for this update, I've prepared both bull and bear charts, along with some guide levels to help determine which side is claiming victory going forward. 

I'm also going to go out on a technical limb with my preferred projections, which I'll cover in a moment.  As always, I could very well be wrong -- so I want to note that the blue trend line on the chart above is clearly important to the market, and sustained trade above that trend line would favor the more immediately bullish options.

With that warning out of the way, let's cover the options and the levels which will help sort one from the next.  The main chart which is influencing my preferred outlook is the Philadelphia Bank Index (BKX).  I'm convinced that the recent decline in BKX was a five-wave impulse, and that means it was either the first wave of corrective move, or the last wave of one.  I realize that sounds confusing, but that info will actually help us sort things out going forward.  There are two counts shown here, and there's been no change since 2/28 -- in fact, while red wave a exceeded my expectations minimally, wave b found support exactly where projected on the chart in last Thursday's update.

I'm never certain if the preferred counts are correct; this is always a game of probabilities -- but we have to start somewhere and build a thesis from there, so I'm presently sticking with the idea that the BKX preferred count is correct.  That leads me to look at the S&P 500 (SPX) in a way that allows the two markets to reconcile.  The preferred SPX count, shown in blue below, projects an expanded flat.  The expanded flat does require another leg up, and the preliminary target is the 1540 zone.  Sustained trade above 1541 would suggest the more bullish count (shown later). 

There's an interesting struggle pending if bulls reclaim 1525:  the struggle between the short-term pattern and the intermediate-term resistance trend line (refer back to the first chart, upper blue line). The preferred count shown below gives the intermediate resistance level the benefit of the doubt, and suggests the market needs a bit more coiling and confusion before it can build up the potential energy to clear these levels. 

There is also a more immediately bearish alternate count shown in green; unless/until the bulls push through here, the three-time rejection in the 1525-1530 zone can't be ignored.

SPX, INDU, BKX: Can We Draw a Conclusion from Three Fractured Markets?

Long-time readers will recall that I've written about fourth waves as my arch-nemesis, and the current market hasn't disappointed me in that sense.  The market has been whipsaw city for the past few sessions, and this is typical behavior for a fourth wave -- which is one of the reasons I despise them, and generally simply avoid trading them except for very low-risk entries that I'm often quick to exit. 

While it's tempting to look at yesterday's rally as the "all clear" for the bulls to proceed into a fifth wave rally, I would simply caution that price is still within the fourth wave trading range, and fourth waves are almost never as straightforward as they appear at first (or second... or third...) glance.  Further, we are presently seeing some fracturing across markets. 

Yesterday, I called attention to the Philadelphia Bank Index (BKX), which appears to have formed an impulsive five-wave decline.  This is a tricky one, though, because the preceding move was a mess, and so the impulsive decline could conceivably be the c-wave of an expanded flat correction ("alt: (4)" label).  However, I presently do not believe that's the case; I'm more inclined to view that decline as a first wave down ("(1)/A" label), and am not yet convinced the correction there is over. 

That leads me to a more complex count in the S&P 500 (SPX), which I'll share momentarily.  Further, note how much BKX is lagging SPX in price, and that's often not a good sign for SPX.  As long as this fracture between markets continues, it's more likely that BKX will ultimately win that battle and drag SPX lower, as opposed to vice-versa.

The bottom line here is that I'm inclined to believe that BKX will see lower prices before it sees new highs, and that suggests SPX will be struggling uphill for the time being.  We'll watch this carefully going forward for signals which either validate the rally in BKX as corrective, or which suggest that rally is becoming impulsive in nature.

The impulsive decline in BKX leads me to believe that one of two outcomes awaits SPX.  The first option is that the current correction will become more complex in nature (blue 4 below).  The second option is that SPX will make a new high for wave 5, but that it won't be significant (red "alt: 5").  I would like to caveat that I'm front-running the market with this conjecture, and the intermediate trend is still clearly up -- so play along at your own risk. 

Another market which has now gone its own way is the Dow Jones Industrial Average (INDU).  INDU made a new high yesterday, and SPX often follows suit.  So we have BKX, SPX, and INDU each doing their own thing.  SPX presently seems to fall right in the middle of the two, so hence my conjecture that a retest or marginal new high followed by a decent reversal is in the cards.  This proposal actually matches the INDU count quite well, as the present rally leg does appear to be the final fifth wave in INDU's series.

INDU's rally is presently corrective (an ABC), and has not yet formed five waves at micro degree. 

SPX Update: Will the Market Break this Pattern?

Some nights I study so many charts that I have no idea how I get the update finished -- and this is one of those nights (I know for most people, the sun is up already -- but for me, since I live in Hawai'i, the market opens at 4:30 a.m.).  I've been studying chart after chart, because there's something bothering me about this market, but I can't quite put my finger on it.  Sometimes when I look at enough charts, I can figure out what my gut is trying to tell me -- and sometimes it's nothing.  Maybe my feeling of nagging discomfort is just normal bull market "wall of worry" stuff.  I ran out of time tonight, and couldn't quite pin it down, but may have come close with a ratio I watch.

Since this is a currency-driven rally in the form of the QE printing press, I often try to view things through a dollar-lens, so to speak.  The chart below is a ratio of the S&P 500 (SPX) to US Dollar.  This is a bit inconclusive at present, but the chart explains the reason for caution:  what's bothering me right now is that every rally prior to this (in the QE era, anyway) has begun a deep correction right where we'd normally expect a fourth wave decline and a fifth wave rally.  Maybe this rally will break that pattern -- but given the precedent, it seems unwise to simply assume it will.

The Philadelphia Bank Index (BKX) is also warning that a larger turn may be in the works.

The NYSE Composite (NYA) shows that bulls probably need to hold the black dashed trend line, or risk bigger problems:

The preferred count for the SPX still has the active downside target of 1470-1473.  I went over the one-minute SPX chart in detail tonight, and it is possible that the market has completed an ABC fourth wave correction in its entirety (hence the alt: 4), but I presently view that as the underdog.  And, as I just noted, I'm having trouble simply assuming we'll even have a fifth wave up.  The annotation from yesterday still sums up my approach right now.

Finally, a short-term chart of the Dow Jones Industrial Average (INDU) which staged a pretty solid snap-back yesterday.  The chart is simply for aid in identifying potential support and resistance areas throughout today's trading session.

In conclusion, if it weren't for the market's behavior over the past few years, I would normally be reasonably confident in the idea of a fourth wave decline now underway, and a fifth wave rally still to come.  But given the three-wave nature of most rallies since 2009, I am continuing in my cautious stance until I see more signs of an "all clear" from the market.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

SPX and INDU: Ambiguity Remains the Order of the Day

In yesterday's outlook, I outlined the fact that I felt the S&P 500 (SPX) was quite ambiguous, and as a result, choose to focus on the Dow Jones Industrials (INDU) as a waypoint -- hopefully one which would help in unlocking the wave count in SPX.  I expected INDU needed to make a new high, which it did -- however, SPX did not follow suit and stalled right at the key 1525 resistance level.

We are now within potentially dangerous territory for traders.  I can tell you from experience that this is where many traders do great damage to their accounts, as they attempt to anticipate the market's next move based solely on prior expectations.  My advice in this market would be to "live in the moment," as the saying goes, and trade only what you see.  We booked a nice profit for January/February, and it's now critically important not to give that profit back trying to call the next turn.  Please avoid the temptation to think that any system is so flawless that it can see several months and "three turns" down the road.  As I wrote about at length yesterday, the climate has shifted, and this is now a market that we need to take one day at a time. 

The bearish engulfing bar yesterday has to be respected over the near-term.

INDU fell short of the upside target, but did fulfil the minimum expectation of a new high and reversal.  This topping pattern should be respected unless INDU can whipsaw solidly back into the trading range.

SPX also presents a topping pattern.  Both indices haven't yet moved far enough below the pattern to preclude bullish whipsaws, but "what we see" here presently appears bearish. (continued, next page)

Market Wants to Take Things "One Day at a Time"

It goes without saying that nobody wants to get caught looking up when it's time to look down, and vice-versa.  This is especially challenging in a market such as this one, where the long-term picture is, quite frankly, ambiguous at best.  While the market's bullish intentions seemed fairly clear to me over the past couple months, the market has now reached a zone where (for the moment, anyway) we have to unravel the outlook on a day-by-day basis. 

I analyze charts first and fundamentals second -- but usually we have some type of fundamental backdrop from which to draw, which creates a reasonble overarching framework for the technical analysis.  Either things are getting worse or they're getting better; either the economy is growing or it's dying (as any good entrepreneur will tell you, these are the only two real options in business: there is no status quo), and we can use that information as a waypoint for what then seems reasonable and likely within the charts. 

However, this is an unusually challenging market environment because equity rallies have been driven, in large part, by the world's central banks.  On a fundamental level, the long-term outlook for this market seems to hinge almost solely on the outcome of inflation vs. deflation.  If the central banks can maintain an inflationary environment, then equities will continue to rise; if they can't, or they choose not to, then equities will fall. 

And now we must add a technical ambiguity to the fundamental ambiguity, created by the very-long-term resistance zones which are being reached in most major indices, including the S&P 500 (SPX) and the Dow Jones Industrial Average (INDU).  The mid-to-high 1500's have held SPX in check for more than a decade, and have rejected two prior rallies -- and both rejections then led to protracted bear markets.  Accordingly, we have to view this area as strong resistance, and realize that any long-term decline which begins in this zone will, in retrospect, appear to have been blatantly obvious. 

I don't think we're quite "there" yet, and my preferred outlook does still expect higher prices.  From a long-term perspective, I'm still slightly favoring the bulls as long as the Fed keeps the printing presses running at full throttle -- nevertheless, my confidence in the long-term is marginal at best, for the reasons outlined above, and I remain on alert for the bears to show up in force at any time.

Last update's preferred count expected the market was closing in on completing a fourth wave correction, and after the SPX broke below 1510, it found support directly in the middle of the highlighted support zone on my 10-minute chart (1492-1503).

Let's take a look at INDU first, because I feel the near-term pattern is a bit less ambiguous than SPX.  INDU appears to have completed a complex fourth wave flat correction, and if this is correct, it should be ready to move higher and into the next target zone of 14,200 +/- (not coincidentally, this lines up well with the all time historic high).  Unless the bears used up all their firepower on the recent drop, it's quite possible there will be a fair number of sell orders awaiting in this zone, and the wave counts are suggesting INDU is moving into a fifth wave rally (the final wave before a larger correction), so there's every reason for caution heading forward.

We'll start with the long-term chart.  Note the target zone from January lines up with the all-time high, which lines up well with the upper boundary of the red channel -- and thus bulls should be quite cautious as this zone is approached (assuming we get there, of course).  It goes without saying that any sustained breakout through this zone would be bullish and suggest that my wave counts are too conservative, but normally I would expect to see a correction begin after this next thrust higher.

On the shorter time-frames, both my preferred count and first alternate are viewing the recent low at 13,834 as the bottom of a fourth wave, though there is some question in my mind as to which degree that fourth wave is.  Thus, both the preferred and alternate counts are near-term bullish, but suggest a correction is looming after the next thrust up.  This remains a market where we have to unravel the intermediate term from the short-term, and the long-term still remains veiled -- but it pays to be aware that my bearish long-term count presently suggests the very real possibility that the market is approaching a long-term top.  I would currently give that count better than 35% odds.

The red trend line should provide early warning that something more immediately bearish may be afoot, while trade beneath the 13,834 low (prior to a new high) would invalidate both fourth wave counts.  I'm going a little bit out on a limb here and not labeling an alternate count that shows the high as being in, but that is, of course, always a possibility.

I started this article with INDU charts because I'm building the SPX count from the INDU pattern.  SPX is much more ambiguous and difficult to interpret, and reminds me of the scene in the movie Airplane when Lloyd Bridges hands a radar printout to his partner and asks: 

"Johnny, what can you make out of this?"
And Johnny replies: "This?  Well, I can make a hat, or a broach, or a pterodactyl..."

Assuming my interpretation of INDU has any merit, then SPX has also likely completed its fourth wave correction and should be headed higher.  The same warnings and caveats apply, and it is expected that the market is entering a fifth wave rally, which will then be followed by a more significant correction, or worse.  Assuming 1530 is reclaimed (invalidating the alternate count), then the preliminary target for wave 5 is 1548-1565 -- I'll attempt to narrow this down further as the wave develops.  I would currently place the odds that wave 5 is underway at roughly 60%. (continued, next page)