Publication Note

Unfortunately, I am dealing with a major family emergency right now, which has temporarily impacted the publication schedule.  I'm hoping this crisis will be resolved by Wednesday, but I'm uncertain if that will actually be the case.

Thanks for your understanding... and thanks again to those of you who show your support openly and generously -- I can't tell you how much that means to me at times like this.  You are surely the best group readers on the planet!  <3 

Good luck out there, and trade safe. 

Why Do Some in the TV Media Still Insist "You Can't Time the Market"?

The ending diagonal we started tracking in late March completed at 1573.66, about one-third of a point shy of the target zone.  On April 3, I wrote:

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.

I was leaning toward the idea that there could still be one final thrust up still in the cards, but it never came.  It's rare that the market follows a projection that tightly, which is why most traders scale in and out of positions, as opposed to trying to time every move to the exact penny.  Considering that many of the TV talking heads will tell you that "you can't time the market" at all, I think hitting a turn within a third of a point on a 7-point target zone probably argues otherwise -- especially considering that we hit the two prior turns leading into that within a couple of points as well.

Before we get overly excited about the bearish prospects, we do have to recognize the reality that, presently anyway, only the short-term trend is pointed downward.  The intermediate and long-term trends are still pointed upwards -- for the moment.

In the last update, I outlined my expectations for the intermediate-term, so I won't repeat that here.  For the moment, we'll focus on the more near-term and see how things develop.  The first chart is the S&P 500 (SPX) 2-minute chart, and details my preferred interpretation of the wave structure, along with my first two targets.  Keep in mind that if my wave count is correct, we're now entering the small third wave within a larger third wave -- which often means a relentless down-trend for the near-term.  1549 will become key short-term resistance if this plays out. (Incidentally, I ran out of space on this chart...)

The hourly chart notes an intermediate bullish alternate count, which still expects lower prices for the short-term.  It also highlights the first target zone, and notes the second target zone in passing.  If it becomes appropriate, we'll discuss those options in more detail sometime over the next few updates, after the market reveals a bit more of the near-term wave structure.

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.