SPX Update: Near-Term Starting to Clarify Again

The market has continued to grind within the noise zone -- but there is now the potential of a near-term problem developing for bears.  There have been several attempts at the 1561-1564 zone, and the more times support or resistance is tested, the weaker it becomes.  In the case of resistance, eventually the overhead supply of sell orders is exhausted -- and once the balance shifts to where there are more buyers than sellers, the law of supply and demand leaves the market no choice but to head higher... at least until it runs into a new layer of supply.

This is the reason there are no officially-recognized "quadruple" top or bottom patterns in classic technical analysis (to my knowledge, this pattern is only recognized in P&F charting). Shorting the first retest can work, shorting the second retest can work -- but shorting the third retest is usually a losing play for more than a quick trade, because odds are good that the market has already chewed through most of the sellers at that price level.

In other words, bears are basically facing their "final stand" at these levels.  Another thrust back up here, and the sellers will likely become overwhelmed, at least for the near-term.

In regards to the intermediate-term, there has been no change in my outlook and, unless there is a material change in the market's behavior going forward, I continue to feel this is the final leg of the rally before a larger correction.  The challenge of the past few sessions has been in trying to determine how we'd get there, and the market really hadn't been giving me too much to work with in terms of clarity.

Things are finally starting to clarify, though, and for this update I have a number of potential targets, as well as some key levels which would suggest progressively higher price targets if crossed. 

There's now one obvious pattern in the near-term charts, and this is the pattern many technicians seem to be watching; it's called an "ascending triangle."  In classic technical analysis, this is a continuation pattern, and suggests a target of 1588-1590 if the market breaks out above the upper boundary.

While I can't be certain, I suspect that pattern may not play out as most are expecting.  I'll explain the pattern first, then I'll explain what to watch for to determine if it's "working" or not.  Of course, the first thing that needs to happen for this pattern to have any validity at all is the market needs to break 1565 -- if that fails to happen, then it's a moot point.
 

While the triangle is more obvious, I'm still inclined to favor the idea that a top is closer than this pattern suggests.  There are two near-term options for bears here: the first is that the prior high holds and the market continues lower immediately.  The second is a pattern I mentioned a few days ago, called an ending diagonal.  If 1565 is broken, the diagonal will become my odds-on favorite, with the next target (for wave iii) being 1568-1571.  If the market then goes on to break 1573 during wave iii (on the chart below), I will then be sold on the ascending triangle pattern discussed above and be inclined to favor a trip to 1580-1600.  Unless that happens, though, I think the diagonal shown below (or the more immediately bearish count) is more probable.

SPX Update: The Market Just Raised Its Noise Level

Two words keep coming to mind as I study the charts right now: "inconclusive noise."  I think it's vitally important as a trader (and probably as a person, too) to "know when you don't know."  The near-term possibilities having suddenly spiraled into infinity, so it's going to be difficult to project the market's next move until it gives us a bit more info.  If you're a new trader (or a new reader), please don't be discouraged by this; the market alternates between moments of clarity and moments of ambiguity, and it will clarify again soon enough.

I studied a number of markets yesterday, and while I'm not going to publish charts on every one of them, there are lots of conflicting signals out there.  Some updates leave me feeling that I put in a whole lot of work for a very limited reward (for readers), and this is one of those.  I'm inclined to give the bears a near-term edge, but my confidence is low at the moment.

I'm going to start off with the Dow Jones Industrials (INDU), since the rectangle pattern here has some fairly clear implications using classic technical analysis. 

     

On the SPX 10-minute chart, I've outlined the two near-term bull and bear potentials which presently appear most reasonable, but I have not shown the most bullish of the near-term potentials.  I'll outline that potential briefly here in the body of the article (and on the Russell 2000 chart in a moment):  It is possible that the rally from 1538 to 1561 is wave i of 5, and the entire move since is a corrective second wave.  That count suggests a target in the 1580-1600 zone and becomes an option above 1565, while it would be invalidated below 1538.  The annotations explain the details of the other two counts.

 

 

 

On the hourly chart, I've moved a couple labels, but the conundrum remains the same as it's been.  I continue to believe that wave 5 has either completed or will complete with one final leg, at which point we should see a larger turn. 

SPX Update: Insert Witty Title Here

The market has remained within the trading range since last Thursday's update.  There was one new development since then, and that's the fact that on Friday, the decline overlapped itself in a fashion which indicates that it may have been a corrective ABC decline.  This puts the odds slightly back into the bulls' favor over the near-term, although things can get fuzzy around these types of inflection points -- technically, bulls still need to reclaim 1563.62 to put a stake in the very short-term bear count.

If the S&P 500 (SPX) does clear 1563.62, then it is presently still assumed that this is wave 5 of 5, the final wave before a more prolonged correction.  Note the now-striking similarity between the current market and the fractal I called attention to on March 13.  I have also added a much more bullish alternate count, but this is just a foreshadowing, and I'm not paying much attention to it just yet.

The rally has now gone on so long that I had to increase the time frame on the hourly chart to accommodate the entire channel.  This is characteristic of a third wave rally, and this type of strongly-trending wave is rarely seen immediately before a long-term top, which is one reason I remain bullish on the longer time frames.  Usually there are several deceleration waves before a long-term top is reached (this is what I am anticipating will occur soon). 

It will be interesting to see if the cash market can clear the prior high and then push into the final target zone.  Note that, up to this point, three of the four target zones have generated reversals.  This next target zone is expected to precede a decent-sized correction, if the alternate count is invalidated.  Of course, now that I've mentioned this, I have all but guaranteed that the market will either fall short of that final target zone, or will slice right through it like a hot helicopter blade through a credit crisis. 

The daily chart shows the market continuing to flirt with long-term resistance levels.  There are some divergences beginning to show up in RSI and MACD, which is typical of fifth waves.

There is only one "small" detail that's bothering me about the anticipation of a correction starting soon.  If the rally from 1266 to 1474 was indeed a first wave, then a typical target for the third wave would be a 1.618 extension of that wave -- which would put the target for this wave all the way up around 1680.  Thus my caveat here is if one is inclined to take stabs at short positions along the way, I would suggest staying nimble and not getting too married to those positions.  It's always entirely possible that my preferred interpretation of a pending intermediate correction is premature.

Nevertheless, I currently remain in favor of the interpretation that the fifth wave is nearing completion.  The last two waves fit the characteristics of fourth waves quite well, and that lends credence to the preferred wave count.

In conclusion, the near-term bear count remains alive until 1563.62 is reclaimed, so it's up to the market to declare its next intentions.  At the intermediate level, I still believe we are approaching a turn.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media Inc.

Sentiment Reaches Extreme Levels as the Charts Reach an Inflection Point

Well, the FOMC meeting yesterday turned out to be a complete dud.  In keeping with the spirit of the recent St. Patrick's Day holiday, Bernanke simply reaffirmed that the green wine of liquidity would continue to flow unimpeded by the possible cork of inflation, and apparently gave no thought to the severe hangover which will be experienced when the country wakes up in a strange place, with a "QE" tattoo, and buried under mountains of debt.  The message of the press conference seemed to be that the Fed will keep printing gobs of money until either the unemployment rate reaches 6.5%, or until the earth crashes into the sun, whichever comes first (I'm taking bets!).

Before I move on to the charts, it goes without saying that I'm generally discussing several time frames at once in the updates.  At times this can get confusing, so here's a quick review of where I stand on the different time frames: 

Long-term, I remain bullish for the time being.
Intermediate-term, I believe we have reached (or have nearly reached) a turning point.
Short-term, I am slightly favoring a bearish resolution to the current wave.

I should note that the trend itself, at all degrees, is presently pointed upwards.  One law of physics that the market usually seems to obey fairly well is the law of inertia -- so, all things being equal, the odds are always slightly against us when we're betting against the prevailing trend.

We'll cover the short-term first, and then move on to the intermediate term.  The S&P 500 (SPX) performed largely as anticipated yesterday, and has continued to leave all near-term options on the table.  It did exceed the 1559 level I expected, while at the same time it failed to reclaim the prior 1563 swing high, which leaves the more bearish near-term count wholly viable.  While I can't say exactly what the market will do next in this position, I have listed a few signals to watch, and what their likely resolutions would be, on the chart below.

Near-term, I remain slightly in favor of the bear count shown above, partially because of the pattern in the E-mini S&P futures, shown below.  This pattern looks like an impulsive decline off the 3/15 high, followed by an ABC rally.  If this pattern is not an ABC, then it is a very bullish nest of first and second waves, which projects significantly higher.  I have trouble seeing the market sustain a rally that strong from this position -- and though stranger things have happened, I believe this lends credence to the near-term bear thesis on the chart above.

On the 10-minute chart below, I have simply extended the existing trend lines and added a few new ones.

An Alternate Bearish Potential for the Intermediate Term

Today, we’re going to start off with a long-term chart, because I finally feel the time is right to call attention to this particular potential.  I often begin tracking potential patterns many months in advance, but don’t mention them in the articles, because I feel it would only confuse people if I discussed these patterns too early.  The chart below is one that's been on my watch list for a long time, but the pattern has only now reached a position where I feel I can talk about it without confusing readers. 

As we all know, bullish sentiment has been extreme, and many major indices have broken, or are probing, their all-time highs.  More often than not, this is where the general public finally decides it's time to "put some of our savings into stocks."  Usually not long after that happens, the Big Boyz figure out a way to fleece retail investors of most of that money so they can go buy themselves a new Congressperson or two.

Accordingly, the chart below notes that the wave since June 2012 reconciles quite well as a fifth wave extension (shown in blue), which would actually lead to a significant retracement.  Of course, this is way ahead of the game here and should presently be considered as an alternate count -- but I do want readers to be aware that there are indeed more bearish potentials than the ones I've been focusing on recently (shown in black).  So as always, it's important to avoid getting too complacent if you are bullishly inclined.

 

The hourly chart below shows the more bearish count as the alternate, but I am still giving it equal odds at the moment.

There are literally infinite possibilities at any given moment, particularly in a structure like this.  Nevertheless, I've narrowed the chart below to the two I feel are most probable.  When I look at this chart, I am actually somewhat inclined to favor the bears. 

There's a 7-point window where the bear count and bull count split -- in fact, if my interpretation is correct, then the SPX should actually get back above 1559, which makes it a 4-point window.  Even though the bull and bear counts are roughly equal in odds, as a trader, I almost have no choice but to position short if that window is reached, because the risk/reward is exceptional.  Some trades are almost automatic for me -- and I'll take most any trade if I can get an entry that offers high potential profit with only a few points risk.  (This is, of course, not trading advice and you should consult your broker, your banker, and your priest before doing anything, etc.)

Bears Want to Know: Are We There Yet?

Yesterday saw a solid gap down after the weekend Cyprus news, but buyers appeared immediately, and the market rallied strongly into the afternoon, before running into some selling again into the close.  The question everyone wants answered now is whether this is merely a low-degree fourth wave correction (a deceleration of the uptrend) or the beginning of a larger shift in trend.  Let's discuss a few factors relating to both.

The first salient point is the fact that the ensuing rally was able to overlap 1555.74, which is the potential bottom of a first wave down.  In the Elliott Wave model, this is significant because it eliminates certain possibilities -- specifically, it eliminates the possibility that the ensuing rally was a fourth wave correction to the decline.  That gives the decline the appearance of being three waves (an ABC decline), which is typically the sign of a correction to an ongoing trend.  It's not entirely clear-cut in this case, though, because a series of first and second waves could overlap the 1555 price territory without violating the rules.

Yesterday I suggested we give equal weight to both counts, and I still think it's too close to call.  However, given the overlap at 1555, the position of the decline within the larger waveform, and the fact that the trend should generally be given the benefit of the doubt, one might consider giving very slight odds to the black count shown on the chart below.  Trade below 1545 would start to open things up for the bears, while trade above 1563.62 would confirm the black count.

I've also added a series of if/then target equations to the annotation box, along with my interpretation of the relative probabilities for each target.  Those probabilities are read given what's in the charts right at this exact moment, and thus could increase or decrease as more information becomes available from the market.
 

The hourly chart is unchanged from yesterday, and the alternate count still remains a very real potential.  In the event of the alternate count, minimum preliminary targets with the market in its current position range from 1485-1525, but could extend lower and would have to be adjusted in real time.

The long-term chart of the S&P 500 (SPY) shows that the market continues to push against the prior long-term peaks.  While I haven't annotated the chart with a wave count, I have noted on the chart that there are two pivotal price points to the downside.  As we just discussed, the peaks and troughs of potential first waves are important in Elliott Wave -- so I've noted the last two prior assumed first wave peaks.

Is Cyprus the Bad News We Were Watching For?

In Friday's update, I noted the charts were suggesting a turn was approaching, and I speculated that there would be some type of "bad news" event hitting the press this week; I went a step further and speculated that the source of the news event might be the FOMC meeting on March 20.  Score one for my interpretation of the charts -- but score zero for my speculation as to the source of the pending bad news (though, to be fair, it remains to be seen how my speculation regarding the Fed will pan out – though, I suspect the events of this weekend may alter their game plan).

As it turns out, the source of bad news seems to have been a tiny country known as Cyprus, which is apparently part of the European Union, and in need of a bailout (act surprised!).  I'm not going to berate myself for failing to include "bad news from Cyprus" in my speculations -- prior to this weekend, if someone had asked me to relay the totality of my personal knowledge regarding Cyprus, I would have said it was "probably some kind of tree."  If pressed, I'd have added, "Or maybe a rap singer and/or the newest car from Hyundai."  

What's unique and frightening about the goings-on here is that the EU has asked Cyprus to levy a tax on the bank accounts of private citizens to help fund the bailout.  Todd Harrison has written an excellent piece discussing all this in more detail (See: Cyprus: Has the Next Phase of the Global Crisis Arrived?). 

There are legitimate concerns this will set off bank runs across the Eurozone.  One thought I would add to this discussion is that it's my belief that -- short of systemic failure, anyway -- European instability is actually bullish for U.S. markets.  This may be counter-intuitive, but if the EU experiences bank runs, it's not as if European investors are going to withdraw all that cash and simply bury it in their backyards.  The cash has to go somewhere.  Ask yourself:  If you were a European investor who felt your money was unsafe in Europe, where would you put it? 

Right or wrong, bubble or not, the U.S. treasury market and blue chip equities are still perceived as "safe havens," especially when seen in contrast with Europe.  So some portion of any massive capital flight out of Europe is almost guaranteed to find its way into U.S. markets.  That means even more liquidity flowing in, on top of the Fed's existing support.  More fuel for the fire would help drive down treasury yields and help drive up equities.  

It's all relative, after all -- and basically, we're still the prettiest ugly kid on the block. 

If you are truly aware of the challenges facing the world, it's logical to have a tendency to be bearish these days.  The danger for bears is it's tempting to view events like this as "confirmation" of a pre-existing bias, which can lead to over-trading one's convictions.  Believe me, my "inner bear" wants to pounce all over these types of events, too. 

Could this be the watershed event that leads to a prolonged bear market?  Sure, anything's possible -- but given how much liquidity is still flowing from the Fed, I think this event is probably simply yet another warning signal of an approaching storm.  I suspect the storm hasn't actually reached us yet... in fact, based on the most probable interpretation of the charts (in my opinion, anyway), it's still some ways away. 

If you're prone toward a bearish bias, just remember to consider both sides of the equation.  Bears tend to look at events like this and think: "Storm coming!  And nobody wants to be the last guy standing on the beach when that hurricane rolls ashore!"  But bulls think differently.  A bull would say, "Sure.  But then, nobody wants to cut short their vacation for a false alarm, either!" 

I covered my views on this psychology fairly well in an article in January -- one of my personal favorites of the articles I’ve written this year.  It's titled A Survival Guide for Bears in a Bull's World.  If you're aware of all the trouble in the world and are thus prone toward an intelligent fundamental bearish bias, I'd highly recommend giving it a quick read.

Let's move on to the charts.  The charts have been hinting that a correction was looming, which led to my speculation on Friday that bad news was forthcoming this week.  To be fair, I was expecting about 6 or 7 more points out of this rally, but it remains to be seen if the market will achieve that or not.  For a wave as large as this rally, a peak that falls 6-7 points shy of targets would be well within the margin of error.  So on the chart below, I have kept Friday's alternate count (of wave 5 complete at 1563.62) unchanged in the labeling, but the odds on that count must be considered at 50% after the overnight futures sell-off.

 

Since the two counts are being viewed as equals, the chart below shows how the wave could be viewed as entirely complete.  We'll simply have to see how the cash market responds today.  In any case, hopefully my warnings of the past several days have helped readers protect themselves and lock-in profits.

In conclusion, I wrote on Friday that I was on “high alert” for a turn, so the bad news out of Cyprus isn't entirely unexpected.  The news fits the charts, which continue to suggest bears may get a solid, scary correction here.  It's still too early to determine much in the way of probable targets, or even to sort out if this is the smaller degree fourth wave -- but if we've indeed seen the completion of the fifth wave in its entirely, then the high 1400's would be entirely reasonable.  Ultimately, however, I presently do not believe this will mark a long-term peak, though the market always reserves the right to change my mind.  In any case, after we see how the cash market responds, I may be able to generate some preliminary near-term targets for the next update.  Trade safe. 

Reprinted by permission, Copyright 2013, Minyanville Media Inc.