Will the Fed Kick-off an Equities Correction Next Week?

While it seems like this rally leg will never end, it is, of course, guaranteed that it will end at some point.  I have an interesting theory about where that point may be.

Something that's always fascinated me over the years is the way the price charts often lead the news.  I can't tell you how many times I've looked at a chart and projected a strong move would follow, only to have a news announcement hit later that day and seemingly "drive" price right to my targets.  So my theory starts with a question:  What could possibly slow this wave down? 

Well, the obvious event on the horizon is the FOMC announcement that hits on March 20.  When the most recent Fed minutes were released, there was a big show made of head-scratching about whether or not to continue QE-Infinity.  I opined at the time that I felt it was reasonably likely the Fed was simply trying to scare speculators:

The big question in my mind is whether this is "real" dissention, or simply the flip side of a coin we've seen from this Fed before.  For the past several years, when we've been in-between QE programs, the public-relations strategy was clearly to "keep hope alive" for new QE programs.  Of course we don't need to talk hope anymore, because now we have QE-Infinity.

As a result, the present problem faced by the Fed is no longer "how do we keep hope alive?"  Instead, the problem they face is how to gain control of the monster they've created, and how to put the brakes on rampant speculation.  We've travelled 180 degrees, from "Let's talk up QE and keep the market hopeful," to: "Let's talk down QE and keep the market grounded."   

I wonder if this isn't simply the Fed playing the game of "verbal monetary policy tightening" the way they used to play the same game in reverse, when Bernanke would run around making statements such as, "My finger is on the QE button!"

The Fed knows they're playing a dangerous game by pumping this much liquidity into the market.  While they're getting the best of both worlds right now (a stock rally and some economic growth, without rampant speculation in commodities), it's a delicate equation, and they cannot afford for it to flip the other direction.  If speculators begin driving up commodity prices again, that will raise the costs of doing business and further harm consumers.  This would dampen (and possibly crush) the little bit of economic benefit we're currently getting from Bernanke's tireless printing press.

So I suspect that at the March 20 press conference, the Fed will put on their Frowny Faces and make another show of heartfelt-moral-conscience-brow-furrowing about QE3, as if they were lying awake at night wracked with guilt and tears.  In the end, though, they will "reluctantly" continue it... "for now."  But I think they're going to have to keep scaring us along the way, to keep commodity traders from getting too bold and killing their manufactured recovery.

Of course, I can't guarantee anything, as this is simply raw speculation -- but when we look at the hourly chart (below), we can see that the week of the FOMC meeting coincides nicely with the wave structure and the potential peak in blue wave 5.

For the past couple weeks, my expectation has been that we are now in the fifth (and final) wave of this particular wave sequence, and yesterday the market reached the first of my target zones for this wave (1558-1565).  When targets are reached, it's not necessary that the market reverse immediately (or even that it reverse at all), but it does become a zone of higher probability for a reversal.  With that, I must note that this first zone is not the "final" target for the entire wave, but only the target for red wave 3 of blue wave 5 -- the final target is 1570-1580.  The market is only a few points away from that zone now, and though it has shown no signs of reversal yet, I would keep a very close watch on this rally heading forward.  Note the black alternate count, because there are enough squiggles for wave 5 to be entirely complete.

(If you're new to Elliott Wave Theory and all those numbers on the chart make little sense, I have written a primer article on the subject which will aid in understanding what these types of charts actually mean.)

In conclusion, there's no sign of a turn yet, and the trend lines are all intact, which means the trend at every level is still pointed upwards.  Ideally, I would still like to see a bit more in the way of higher prices from blue wave 5.  Nevertheless, given that the wave structure seems nearly complete, and there is the possibility of more negative jawboning from the Fed next week, it's hard to recommend anything other than a high degree of caution here.  I think I'm probably a bit early with these warnings, but I remain on high alert for a pending turn.  I should add (for new readers) that at this point, I am not expecting this will be the final end of this central-bank manufactured bull market -- but I am on the lookout for a good scary correction starting in the near future.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media Inc.

Nine Straight Advances, Can Bulls Make It Ten?

"We cannot put off living until we are ready. The most salient characteristic of life is its coerciveness: it is always urgent, 'here and now,' without any possible postponement. Life is fired at us point-blank."  --  Jose Ortega y Gasset

Yesterday, the Dow beat the odds and posted its ninth straight advance, the first time this has happened in nearly 17 years.  Although that makes for a great headline, the raw statistic by itself is slightly misleading, because yesterday the Dow did not actually beat the intraday high of March 12 -- it simply closed higher than it opened.  In any case, November 1996 was the last occurrence of nine consecutive green closes (that particular streak then extended to ten advances).

Since 1973, the Dow has only put together nine or more straight advances on six prior occasions, so this is an extremely rare event. The record is thirteen straight advances, back in January, 1987 (an interesting year for equities!).

Before I begin presenting the charts: if you're new to technical analysis (and to Elliott Wave Theory in particular) and thus don't believe it could possibly have any relevance for projecting the market's future, then please take a moment to read this primer article wherein I briefly outline a few of the tangible ways it relates to the markets.  And while I'm discussing other articles worth reading: if you've not yet read Todd Harrison's 12 Cognitive Biases That Endanger Investors, I highly recommend it not only for trading, but for life in general.  It's one of the best trading articles I've read in years.

Let's move on to the charts, since, as they say, a picture is worth a thousand words (I've always wondered though: if you were to take a photograph of one word, is it still worth a thousand words?).  Below is the monthly chart of the Dow, which is loaded with annotations and notes, and discusses several relevant levels and patterns.

The main thing I wanted to again call attention to on this chart is the pattern which completed in 1995.  At the time, that pattern looked pretty convincing as a possible end to the bull market.  But as I've warned previously, these types of patterns can either be ending patterns, or compression patterns which lead to a sustained bull move.  My impression for the last several months has been that we're seeing the latter unfold. More and more, the current market is reinforcing that view, particularly on the Dow.
 

The 10-minute chart of the S&P 500 (SPX) contains some new details regarding the near-term.  I've studied the short-term structure on the one-minute charts, and frankly, the pattern is a complete mess and very hard to decipher.  While this is a market that has paid the trend-followers, it's also the type of market that can lull bulls into a deeply-complacent slumber.  My suggestion is to stay very alert at times like this, since the wave structure appears to be closing in on completion -- but at the same time, avoid the temptation to get too far ahead of the market.  In other words, respect the wave counts as potential warnings, but honor the basics like trend lines and support/resistance levels. 

Every system runs into limitations, so when the wave structure gets this fuzzy, it's important not to give back profits chasing low-probability plays.  Sometimes doing nothing is the most productive thing we can do.  If one feels they can get a good risk/reward proposition even when things are unclear, then one must limit their risk accordingly for the equation to work.  For example, sometimes when I'm trading euro/usd, I'll play a breakout to see if momentum will carry the market up and away from a very tight stop -- but I won't let that play turn into a long-term position.  If I get stopped for a small loss, then I accept that and wait for the next opportunity. 

If the market makes a new high directly, it's a bit more probable that we're still in red wave 3, but this is where I would tighten my stops on longs, since the potential exists that the market is moving to wrap up the larger blue wave 5.

Dow Reaches Eight Straight Up Days: Here's What History Suggests Will Follow

On Tuesday, the Dow Jones Industrial Average (INDU) managed its eighth consecutive advancing session (though just barely), which is a fairly rare event.  In fact, since 2000, there have only been eleven prior instances when the Dow advanced for at least seven consecutive days.  Of those, it made it to an eighth day on only five occasions.  If my historical data feed is correct, it has not managed nine consecutive advances even once since 2000.

There is another interesting fact that goes with this:  not one of these win streaks marked "the end," and a major top.  Some of them were followed by steep corrections, but in every single instance, the corrections were bought and ultimately resulted in a new high.  In a few instances, seven consecutive advances did occur in close price proximity to an intermediate top -- the most recent example being almost exactly a year ago.  The INDU rallied seven straight days into mid-March of 2012, then sold off briefly before finally reaching a new high a month and a half later.  From there, it embarked on a steep 10% correction. 

However, on the chart below we can also see that some of these win streaks were followed by shallow corrections which were extremely short-lived.

The bottom line is that a near-term correction would be quite reasonable, but odds are very good that correction will be bought.  On the S&P 500 (SPX) chart which follows, I'll outline some of the next key levels to watch.

For the near-term, I'm watching a couple favored possibilities.  My interpretation is that yesterday's decline was impulsive, which leads me to believe the market is now in a corrective wave.  Presently, I'm inclined to believe this won't be a huge correction, and that new highs will follow -- however, there are now enough waves visible that we have to at least consider the possibility that this structure is already a completed five-wave form (black alternate count below).  1525 is the first important bearish overlap level, so there's about 10 points of no-man's land, wherein the market's intentions would be vague.  That no-man's land lies south of 1535, which is the lower edge of the probable target zone, and reaches down to 1525, which is where we'll begin suspecting an even deeper correction is underway. 

Conversely, sustained trade above 1557 would suggest that red wave 3 is still unfolding. 

 



The hourly chart notes that  red 3 may have come up a little short of the target zone -- though if looked at from a bullish devil's advocate perspective, there is really nothing for bulls to get too concerned about until the red trend line breaks.  Please continue to keep the caveat of March 11 in mind, especially since there may be five waves completing at multiple wave degrees. 

Updates to the Long-term Market Outlook

(Sorry for the late update, had an important phone call as I was wrapping things up.  Incidentally, if you right-click on the charts and select "open in new window," you can bring them up at full-size.)

Well, it's that time of the month again, where I get really cranky and a bit bloated and... wait!  I'm thinking of something else.  Also, I'm a guy.  What I meant to say was it's been about a month since I updated the long-term charts, and there has been at least one significant development since then. Last time we looked at the long-term, there was still potential for two versions of the bearish count.  Since then, the alternate version of that count has been eliminated, so that allows me to narrow the long-term outlook down to two high probability potentials.

Let's look at the bear version first, since a lot of folks are wondering if the potential exists for a meaningful turn in the near future.  Indeed that potential does exist, as green wave iv would need to retrace back into the price territory of green wave i for this pattern to remain valid.  Ultimately this wave count would still see one more new high before a long-term turn.  Given the deteriorating situation in Europe, this count does not seem at all unreasonable from a fundamental perspective.

If the rally continues unabated, to the point where the two red trend lines which bound the diagonal no longer can be drawn as converging, we'll have our first real clue that the more bullish count (shown next) is gaining real favor.  At present, however, both counts remain viable -- so this bearish possibility does suggest that bulls should exercise real caution at current price levels.

 

 

 

Next is the long-term bullish interpretation of the wave structure.  Note that this count also suggests that price is nearing a peak, however this interpretation suggests a much smaller peak and turn in red wave 4.  If this is the market's intention, we normally would not expect to see red wave 4 break below the 1485 zone.  This count would suggest an ongoing bull leg, with only corrections along the way.

 

 

 

 

While both options presently remain viable, the next few weeks may allow us to eliminate one or the other.  Stay tuned...

 

Moving on to the more near-term, on Friday the S&P 500 (SPX) cleared the 1550 level, and has thus declared that it is more likely to be in the midst of forming a five-wave impulsive move to the upside.  As I noted on Thursday, there is no "true" invalidation level for the proposed expanded flat, so it remains an outside possibility -- but odds are against that pattern now, so it has lost the weight required to continue justifying its own separate chart, and is instead merely noted with the black "alt: (a)/(b)/(c)" labels on the chart below.  The market may be in the throes of a smaller degree fourth wave consolidation (not labeled), so may move sideways a bit before wrapping up red 3.  Do please note the caveat on the chart annotation.

 

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.