The Pattern Nears Resolution as SPX Flirts with Its All-Time High

The preferred wave count continues to track extremely well and, as they say, "worked like a charm" again yesterday.  In this update I'll discuss the levels I'm watching for the short-term, and I'll also provide a bit more detail on my preferred intermediate outlook.

I remain bullish on the long-term, not because I feel the fundamentals support it, but because the central banks are still flooding the world with liquidity.  And as long as that continues, it will drive up asset prices.  The Fed seems to be trying with all its might to blow the biggest bubble it possibly can.  Somewhere down the road, I suspect this will all end badly (just as the last two bubbles have) and Bernanke will end up with a huge, unruly wad of US Mint-flavored bubble gum tangled up in his beard.  Then it will be time to break out the scissors.  In the meantime, though, the bubble is what it is -- and there seems to be no reason to try and fight it at the moment.

Let's start with the short-term charts and build from there.  The pattern I've been anticipating and tracking is called an ending diagonal, and so far it's done the "diagonal" part of the pattern perfectly.  Whether it will do the "ending" portion equally as well is likely to be revealed in the next session or two.

It is worth noting that yesterday's action did fulfill the minimum expectations for this pattern, complete with an overthrow of the upper trend line -- so while one more new high would look better, it is not required.  The key upside level to call this pattern into question remains 1582.82.  I have mentioned this next caveat in the past, but not recently:  when patterns such as this appear, if they turn out not to be ending patterns, then they are usually compression patterns which launch the market higher.  It's rare that they're anything in-between, so we should keep that in mind if the market sustains trade above 1583.  That's the caveat out of the way -- but because of the position of this wave within the larger structure, it is more likely that this is indeed an ending pattern.

To the downside, trade below 1558 would suggest wave v of 5 is complete -- or that the pattern was morphing into something entirely unexpected.

The hourly chart discusses the targets if 1582.82 is claimed.  Ironically, the only thing bothering me about the pattern is that it's tracked so incredibly well.  Whenever the market tracks this perfectly, I start suspecting that it's getting ready for a fake-out -- nevertheless, this pattern provides a clear trade setup that's hard to ignore. 

From an intermediate standpoint, the risk/reward is solid.  If the pattern completes cleanly, there's potential for a fair amount of downside.  Don't forget to keep the more bullish alternate count in mind when looking at the chart below, as I have not detailed it here.

Make-or-Break Day for the Near-Term Projections

Yesterday was a make-or-break session for the preferred S&P 500 (SPX) wave count of an ending diagonal, and today offers similar potential.  Heading into Monday's session, wave iii had a short-term invalidation level of 1572.56.  The market not only reversed about two points shy of the stop, but then moved down to perfectly break the trend line which "needed to be broken."  Thus this wave count gains a bit of confidence and continues forward.  The 10-minute chart below is almost unchanged since 3/28, as the market has tracked the projection exceptionally well since.  For short-term trades, this has provided a few excellent low-risk entries, with clear stop levels along the way.

It can be very tempting to get cocky after the market follows a projected path this well -- but these are exactly the times to be cautious as a trader.  I can't tell you how many nights I've scalped a string of eight or more consecutive wins, only to grow too big for my britches and give back half my night's profit on one bad trade.

Just as life does, the market has a way of quickly humbling the proud; so moderation and discipline become the keys to lasting success.  So often, after we achieve success, we become proud and careless -- but in so doing, we forsake the very qualities which brought us success in the first place.  Failure is bound to be the result.  At times we seem unable to recognize that we are rising and falling on our own endlessly repeating inner cycles:  We fail, so we decide to buckle down and work harder; then we work harder, which allows us to achieve success; then, after we achieve success, we become proud and careless again -- so we lose our hard-earned success only to find ourselves right back where we started.  Rinse and repeat.  I've known a lot of traders (and beyond), myself included, who have fallen into this trap at times.   

I believe one key to trading is to learn to act in accordance with the times, and to recognize that sometimes doing nothing is actually the most productive thing we can do.  Trying to plant crops in frozen ground only wastes precious resources -- so avoid the trap of needing to "constantly be part of the action."  We can gain a great deal of understanding by learning to recognize not only the cycles of the market, but also the cycles of our own tendencies.  And many days, the opponent we're trying to overcome isn't outside of us at all.  I've said it before: I believe our biggest opponent in trading, and the hardest one to beat, is ourselves. 

We currently have a pattern that appears reasonably clear -- and we also have some key levels to watch which will tell us where things become less clear.

It's now anticipated that SPX will form another thrust up, to a new high.  Ideally, I would like to see this rally break the upper red channel boundary (but this is not required), then reverse back into it and rapidly retrace toward 1540.  We are again presented with a very clear stop level for near-term trades, since the diagonal as labeled is invalidated above 1582.82.

The hourly chart notes the targets of the more bullish alternate count if 1582.82 is broken.  This level is key because wave v in a contracting diagonal cannot exceed the length of wave iii.  Every now and then, diagonals are transposed slightly from the most obvious count -- in other words, the wave which currently appears to be wave iii could conceivably be an extension of wave i (a diagonal is "allowed" to have a wave which is a double zigzag; a double zigzag is two connected ABC's).  That presently appears markedly less likely, but it is not entirely outside the realm of possibilities.

In conclusion, the ending diagonal pattern has tracked quite well so far, now it remains to be seen if it will conclude with equal ease, or morph into something more bullish.  Trade safe.

Reprinted by permission, Copyright 2013, Minyanville Media, Inc.

Intermediate Indicator on the Cusp of a Sell Signal

In my opinion, for the last couple weeks, this market has been less about clinging doggedly to set-in-stone predictions, and more about figuring out the correct "if/then" equations and then trading accordingly.  I believe it remains that way heading into this week. 

Early in Thursday's session, the S&P 500 (SPX) edged up over the prior high, which invalidated the most immediately bearish short-term wave count (the "if" part of the equation), and moved into the next target zone of 1568-1571 (the "then" portion).  This places the next if/then equation on the table, which I'll discuss momentarily.  The near-term ending diagonal wave count has gained favor, while the intermediate wave count remains unchanged.

The intermediate wave count continues to believe the market is finally approaching a more meaningful correction, though I presently believe this correction will be a buy opportunity, and I remain bullish on the longer time frames.  I still find this market environment unusual, however, so while I think it's important to remain cognizant of the long-term potentials, I don't necessarily think it's wise to get too far ahead of the market -- so we're just going to focus on the near-term and intermediate term right now. 

Before examining the wave counts, I'd first like to offer the chart below as additional supporting evidence for the intermediate wave count, and my corresponding thesis that a larger correction is drawing near.  This indicator has not yet given a complete sell signal -- however, we can see the full sell signals usually come after a correction has begun, so it's worth paying attention when the indicator is close to triggering, as it is now.

Looking at the intermediate-term, the preferred outlook is still that the rally is completing the fifth and final wave for this leg, and that a larger correction will follow.  If you're new to Elliott Wave Theory, the underlying concept is that the market is fractal in nature, and when a five wave structure has completed, a correction is then due.  (I've written a more detailed primer article on the subject, which can be found here.) 

Something I like about the current charts is that the market has declared some key levels for us to watch, and those levels are providing our if/then equations.  When I interpret the market using Elliott Wave, I take a detailed look at the current pattern and try to anticipate the fractal that's forming.  If I can correctly anticipate the fractal, then I can correctly anticipate the market's next move.  It's never cut-and-dried, though, because some fractals look identical in the early stages, which is one reason I often bring other forms of analysis to bear.  However, the advantage I feel Elliott Wave provides during such times is that there are clear rules which allow us to invalidate certain fractals.  While this doesn't always tell us exactly what the fractal is, it still gives us probabilities to work with -- and an invalidation level can most certainly tell us what the fractal is not, which can be very valuable information.

Based on the price action of the last few weeks, I'm inclined to believe the fractal forming in the chart below is a pattern called an "ending diagonal."  In an ending diagonal, the market forms five waves (labeled i-ii-iii-iv-v below) -- and each of those five waves breaks down into three wave structures.  There are two rules for contracting ending diagonals which would allow us to invalidate this pattern and favor the alternate count.  In a contracting diagonal, wave iii must be shorter than wave i, but must be longer than wave v.  This is why 1572.56 can invalidate this pattern -- crossing that price point immediately would make wave iii longer than i.

Ending diagonals make great topping patterns, because they are brutally choppy and keep breaking out just a little bit, only to reverse lower each time, and then reverse again to head back up.  Short-term traders become conditioned to believing the market will come back up each time -- and then, finally, it doesn't come back.

Let's start with the more detailed 10-minute chart, and then examine the hourly for context.

On the hourly chart, we can see the rally appears close to completing the fifth wave of the fractal.  Once this fractal completes, the minimum expectation for a correction would be a trip back into the 1485-1525 zone.  That's a very broad target range, but we'll be able to narrow it considerably if and when the correction actually begins.

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.