Still Two Possible Paths to the Next Major Inflection Point

By now, everyone who has access to cable television, internet, or carrier pigeon knows that the Dow Jones Industrial Average (INDU) reached a new all-time-high earlier this week. 

I always enjoy anecdotal market sentiment indicators, so the following is presented as Case in Point #1:  yesterday, the mother of one of my daughter's school friends took time out from her busy schedule of watching her dog attack the postman (that's another story though) to send me a text message about the Dow reaching a new high.  Now, keep in mind this is not someone who would be lauded for her investment savvy -- in fact, the reason she texted me (I assume) was as follow-up to a conversation we'd had over the weekend, wherein she confided to me that she had sold all of her stock in 2009, almost-exactly at the bottom.  The gist of her message was:  She's thinking about getting back into the market now.

Uh oh...   

While INDU reached a new all-time high, and SPX has breached its February high, certain other indices are still flirting with their February highs.  The Russell 2000 (RUT) and NYSE Composite (NYA) come to mind. 

The NYA chart below is interesting to me, because classic technical analysis looks at this chart and sees the potential of a double-top.  I see that potential as well, but because I'm a practitioner of Elliott Wave Theory, I also look at some additional info here.  When I study the wave structure of the rally from 8700, it appears to me to be a three-wave form -- and that suggests to me that even if the double-top did play out, it is quite likely that the next decline will only be corrective, and ultimately be fully retraced to even higher highs.  Long-time readers will recall that a similar pattern in the INDU back in October 2012 largely kept me in expectation of new highs after the November lows.  The annotation on the chart explains the rest.

Building on that concept, I am still watching two near-term potentials in the S&P 500 (SPX).  While I've labeled them as "bull and bear" counts, they both project that the market will ultimately exceed current levels -- it's more a question of now or later.  In other words, in my current estimation, the next major inflection point appears to be lurking in the 1560-1580 zone and I expect that zone to be reached, but there are two likely paths the market may take to get there.

One possibility is the expanded flat referenced on the NYA chart above, and detailed in the SPX chart below.  One thing I like about that count, as it relates to the total market and some of the indices like NYA and RUT, is it allows for some singificant selling to come in as the other indices test their February highs.

However, something I do not like about this count is the momentum of the current move, which has been impressive, and may not turn on a dime.  I also have the impression that a lot of bears took their shot in the 1525 zone, and those shorts might not unwind as quickly as this count would require.  Fortunately, we should have our answer quite soon in terms of price -- the more immediately bullish count is shown on the second chart which follows, and the key upside level which divides the two wave counts is 1550.

In the event of a solid breach of 1550, the count shown below will become the favored outlook.  Note the potential of a larger corrective turn once the current rally wave is complete; we'll have to watch this structure closely as this leg unravels.

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)