SPX, HYG, NDX, BKX: SPX Adds 1000 Points, Courtesy of The Beard

With Friday's trade, the S&P 500 has now added a clean 1000 points to the March 2009 bottom, so the Fed can pat themselves on their collective back and declare "mission accomplished" at reflating the equities bubble.  Stocks have no doubt now reached a "permanently high plateau" in our "new paradigm" since, after all, "a new economic equilibrium is emerging."  Or something like that.  Ironically, one thing that never seems to change is the human expectation that "this time is different."

I think what's strange about this bubble is that most people actually seem to realize it's a bubble, probably because folks have seen enough of 'em over the past couple decades to recognize the hallmarks.  Sure, there's a handful of Fed apologists out there, plus the occasional person insisting that the economy is in good shape and getting better every minute -- but even the majority of retail investors seem to recognize the rally is being fed by the Fed.  Don't get me wrong, I'm still bullish as long as the charts point upwards and the Fed keeps feeding -- as I've said for months, there's no point fighting it -- but I don't believe the Fed has found the magical road to free money, or effected a fundamental change in the way the world works which will allow this to continue forever without consequences.   Obviously, there's no way I can know if my assumptions are right or wrong; but either way, I call it as I see it.

Later in this article, I'll update two long term-charts I haven't updated in quite some time: HYG and NDX, which I believe are both worth watching here.  But first: In the prior update, I noted the Philadelphia Bank Index (BKX) chart seemed to contain a critical clue, and if that index was able to break out over 61.06, then we should expect the rally to continue.  Of course, that doesn't necessarily mean the rally will continue immediately, and there will no doubt be corrections and pauses along the way, but presently it does appear likely SPX will ultimately find the 1680-90 target zone.

Let's take a look at BKX first.  As long as support holds, it's hard to find anything to be long-term bearish about in this chart.

The hourly BKX chart suggests at least one more fourth wave correction and new fifth high before a chance at any sort of meaningful top.  Of course, there are always bear potentials extant in even the most bullish-looking chart (and vice-versa), so statements like that are based on what presently appears most probable.  Trade below the "red 1" peak would cause us to more seriously examine the bear potentials.

I'd like to revisit HYG, which I haven't updated at all since January 25, 2013 (See:  SPX and HYG: HYG Signals Further Intermediate Upside for Equities).  On that date, I wrote:

Finally, a long-term chart of HYG, the i-Shares High-Yield Corporate Bond Fund.  Junk bonds tend to be an excellent barometer for equities, and this chart suggests that there is still more upside to come for equities over the intermediate term, because it's virtually impossible to count the rally as five complete waves.  Depending on what happens to prices here over the near-term, there could be signals suggesting a considerable amount of upside remaining.

HYG, which I've always facetiously imagined stands for "High Yield Garbage," has captured January's target zone.  Four months ago, I couldn't see any bear counts which I felt were high enough probability to merit attention, so at that time I only published two counts: "bullish" and "even more bullish."  However, the potential does now exist for the wave structure here to be complete or nearly so -- so we'll keep an eye on this going forward.

I'd also like to update the Nasdaq 100 (NDX), which I haven't updated since November 28, when I wrote:

Next is an attempt to decipher the Nasdaq 100 (INDEXNASDAQ:NDX) long-term chart.  Note that daily MACD has now crossed over onto a buy signal (this is true on several other indices as well, including SPX), and is rising from an oversold position. Also of note, it is difficult to count the rally since 2009 as a complete wave structure, which suggests at least one more wave up is due before a long-term top.

NDX is another one worth keeping an eye on.  It has made the new high I thought it would, and the "most obvious" count here is still pointed higher.  But this chart does have the potential for a series of 3-wave rallies into an ending diagonal, so I wouldn't suggest any level of complacency.  If the dashed red key overlap is crossed, then it will be time to get bearish on the bigger picture.

SPX and BKX: One Chart to Rule Them All

Before I even begin this article, I feel obliged to engage in a bit of a tangential rant which actually relates to my charts.  If you're on the hurry-up, or if you find my sense of humor to be confusing and mentally frustrating, then you can skip right to the section titled "Market Update."   

My story begins like this:  A couple months ago, I purchased a new PC.  I'll pause here while we wait for the Mac users to stop laughing, since they already know there is now no possibility of a good ending to this story.  Anyway, like so many others who've bought new PC's recently, I had no choice but to "upgrade" to the latest mutant version of Windows, which is called simply Windows 8 (an inside joke at Microsoft, code for: "Windows ate my desktop!").  As every PC user knows, every so often Microsoft's Crack Team of Windows Engineers feels it's their God-given red-blooded patriotic American duty to cram some new version of Windows down our throats.  They refer to this as "progress," because that sounds better than "a way to continue justifying our expense accounts." 

For those of you fortunate enough to have avoided Windows Ate, basically the iconic "Start" button is gone, and the desktop has been replaced with a series of apps pinned to a home screen.   I was already familiar with the Windows Ate concept, since I've had a Windows phone for years -- and while I think the whole "app" concept is fine for phones, or tablets, or anything smaller than, say, a PC -- I think it stinks for PC's.  

I believe the majority of us who do not presently earn our livings by developing software for Microsoft were entirely satisfied with Windows 7 as a stable, user-friendly OS.  In fact, within two days of having Windows Ate inflicted upon me, I had already installed a program that forced it to emulate the Windows 7 navigation style.  Apparently Microsoft had forgotten that a handful of us still use our computers for something other than watching South Park's take on central bank policy on YouTube all day.    

But even with this productivity upgrade, Windows Ate still does not emulate Windows 7 in terms of reliability.  And the point I'm getting at (if I remember correctly) is that ever since "upgrading" to Windows Ate, my charts act screwy.  When I use Adobe Flash for annotations, the lines and numbers demonstrate all the orderliness of a preschool fire drill, and show no regard whatsoever for remaining in their assigned locations.  Numbers seem to move around of their own freewill, often vanishing from the charts entirely at random -- sometimes magically appearing later on a completely different chart, as if they'd traveled through an inter-cyberspace wormhole.  In fact, the numbers behave in such an incredibly random fashion that I'm fairly convinced I've secretly stumbled onto the exact same algorithm Bernanke is using to set Fed monetary policy.  

Interestingly, when I use Java instead of Flash, almost everything works exactly as it's supposed to, except for one "minor" detail:  with Java, I can only work on the charts at one-half normal size.  Attempting to annotate these diminutive charts requires me to practically press my face directly onto the computer screen, while at the same time squinting really hard -- which makes me feel like some kind of Peeping Tom technical analyst, and I keep expecting to hear tiny screams of "Cad!" emanating from my computer.  

These issues are a complete nightmare for someone who's as much of a perfectionist about charts as I am.  So if you've noticed lately that my charts aren't quite as pretty as they used to be, it's not because I've gotten lazy, it's because Windows Ate them.  I'm working to resolve this issue, with a hammer if necessary, and I'm sure eventually I'll get it all figured out... no doubt just in time for Microsoft to cram Windows? Nein! down our throats.

Market Update

Yesterday we discussed the possibilities for a whipsaw vs. a melt-up, and today I have a chart to share which should go a long way toward providing an early warning if the melt-up is underway.

One of the cardinal technical rules of Elliott Wave Theory is that wave three cannot be the shortest wave.  If the wave we find in the third wave position is the shortest, then that tells us the pattern isn't what we think it is.  The Philadelphia Bank Index (BKX) is currently providing us with an excellent tell in this regard.

The hourly chart of BKX below.  The nice thing with the BKX pattern is it's telling us "either the rally ends here, or it's got a lot farther to run."  There probably isn't much in-between.

SPX hourly below:

SPX and NYA: Whipsaw or Melt-Up Coming?

In the last update, I noted that the market looked poised to move higher into the May 6 target zone of SPX 1640-1650, and the market staged a strong rally right from the open, ultimately reaching the upper range of the target zone with ease.  I also discussed that the Philadelphia Bank Index (BKX) should tag 60 or beyond, and it experienced a blistering 2% rally and came within pennies of 60 during that very same session.

So what now?  Well, whenever targets are reached, some order of caution is called for, so let's take a look at the charts and see what's going on.

Let's start off with the big picture, and a weekly chart of the NYSE Composite (NYA).  For many years, I've been a fan of tracking this index, because it's a much better representation of the broad market than the indices which typically steal all the news coverage (like the SPX and INDU).  It's interesting to look back now and see how well NYA has been pointing the way for the past 8 months.

On September 20, 2012, I wrote:

Moving on to equities, and starting with the New York Composite Index (NYA) weekly chart, there are two things that jump out from a price perspective:

1. The recent breakout above a 5-year resistance zone (bullish).
2. 8718 is still intact (not bullish -- not really bearish either, but important).

If you just take a "trade what you see" approach here, then this breakout can't be viewed as anything but bullish.

I tackled this exact same chart again in January 31, 2013, and my observations were as follows:

Finally, I'd like to revisit the long-term NYSE Composite  (NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012.  Note that weekly RSI is again overbought, and again has confirmed the rally to this point.  This behavior typically implies a correction, followed by new highs.

The correction and new highs have both since happened, which brings us to the present.  NYA's weekly RSI has reached the overbought zone again, and although in and of itself this doesn't guarantee a correction, it is something to be cautious of as one precursor.  It is worth noting that the last two times I mentioned this indicator (same dates as above, see chart), the market corrected almost immediately thereafter.  Doesn't mean that's going to happen this time, but we should stay alert for any signs of said correction (there are none so far). 

In either case, there's still no reason to be anything but bullish about this chart from a longer-term perspective.

The Dow Jones Industrials (INDU) have broken out slightly over the upper boundary of the intermediate channel.  In a moment, we'll see that the S&P 500 (SPX) has done the same.

The SPX hourly chart shows a similar breakout.  This is an inflection point, and if bulls can hold the breakout, they have melt-up potential. Bears will need to whipsaw this breakout if they are to get anything going -- and I do think they have a shot at doing exactly that, based on the 5-minute chart which follows (after this chart; SPX hourly below).

SPX, RUT, BKX: Market Ignores Fed's Doublespeak

The big news over the weekend came from the Wall Street Journal's report that the Fed is mapping out an exit strategy from their $85 billion per month bond buying programs.  However, it seems concrete details on such a strategy are a bit vague or nonexistent at this point.  This got a lot of play over the past few days -- but in reality, I sincerely doubt anyone was expecting massive Fed stimulus would continue completely unabated for the rest of eternity, so this news was hardly a huge surprise.  And given the vagueness of the details, it seems to be the Fed simply trying to remind us of something we already knew -- undoubtedly at least partially in an effort to forestall inflation.  The Fed is fully aware that inflation has a strong psychological component, and can be compounded or decreased by managing the public's future price expectations. 

And, if the Fed wants to continue printing money with abandon, the one thing it can ill-afford is high inflation showing up within the metrics they track.  So, counter-intuitively, I am of the opinion that these types of statements from the Fed are actually efforts to continue their programs as long as possible. This Fed seems well aware of the PR game involved in monetary policy, and has engaged in misdirection before.

Along the lines of mass psychology, I actually found yesterday's headline on MarketWatch somewhat comical: 

U.S. stocks start week in red as investors consider Fed policy shift

If you just looked at this headline, you could be forgiven for thinking the market reacted in panic to the weekend news.  Instead, the S&P 500 (SPX) actually closed marginally green yesterday, notching a new all-time record closing high; and the Nasdaq Composite (COMPQ) also closed green.  Hmm, where did this "stocks start week in red" thing come from, anyway?  Oh, here we go: The Dow Jones Industrial Average (INDU) closed down a whopping 26.81 points (-0.18%), which, these days, practically qualifies as an outright crash.  I can only imagine the sheer confusion experienced by retail bulls across the country last night, when they turned on the evening news and saw this strange "-" symbol in front of 26.81.  No doubt Google was soon swamped with search queries as bulls sought to determine the meaning of  "-" and whether it was a good thing.  Maybe "-" meant the market went up even more than they expected!

Kidding aside, I've made it no secret that I think the Fed is a huge driver of this rally, so obviously we're going to need to keep an eye on this going forward.  But I think some type of more immediately "negative-sounding" information will be needed before the market reacts overly significantly -- after all, right now the money is still flowing freely.  It's not exactly "last call" from the Fed yet -- it's more like: "Hey bulls, the bar's eventually gonna have to close at some point, so... have another drink on us!"

Moving on to the charts -- one of the things I sometimes ask myself when I'm trading is, "Which side of the trade is harder to take right now?"  I mention this because sometimes the market pulls a bit of reverse psychology on us.  On the one hand, usually right about the time everyone figures the market will go up forever, it reverses.  But there's another type of market, and that's the one that has everyone thinking exactly what I just mentioned, and thus looking for that "it can't go up forever!" reversal.  That type of market does the exact opposite: it just keeps going up, because everyone is watching for a reversal and afraid to position long.   It's entirely possible this is that type of market, and until we start seeing some form of sustained reversal, I would advise bears to stay very nimble.

I haven't updated the Russell 2000 (RUT) in a while.  Since before Christmas, I've opined that this chart has been pointed upwards, and once it claimed 902.30, it activated an even higher target of 1000 +/-, which it's now finally approaching.

The Philadelphia Bank Index (BKX) can be counted as five complete waves, but normally we'd still expect to see it run higher before it finishes off the current wave:

SPX now looks poised to capture the preferred near-term targets from May 6.  I am not ruling out the possibility that this count is too conservative, and may be more bullish than shown.

Two Recent Indications that Long-Term Strength for Equities Should Continue

I had planned a lengthy commentary for today, but then my personal life stepped to the fore and cut short not only my trading session, but also just about everything else.  So, I have a number of charts to share, but with less words than I originally intended (some readers actually prefer the pictures anyway).  Also, there are a fair number of words on the charts themselves, which provides an ongoing cover for those who tell their spouses that they read my work "for the articles," and not just to drool over the pretty pictures. 

First up, there is some recent noteworthy behavior in the Dow Jones Bullish Percent Index (BPINDU).  I can't recall updating this chart since November 2012 (See: SPX Update: Intermediate Buy Signal Triggered), because there's really been nothing to say about it since -- at least, until now.  While the current reading is characterized as "overbought," this type of overbought reading also typically suggests a strong trending move in price which will ultimately continue higher.




Next of note is the Philadelphia Bank Index (BKX), which briefly exceeded the 2010 print high.  Earlier in the month I opined that if BKX cleared 57.6 then it was likely headed to the high 58's in fairly short order.  This event now breaks some of the potential bear waves, which further limits the bears' long-term options.  It also made for a quick easy-money trade if you played the breakout.

This is a brand-new signal that the long-term remains bullish:

The hourly BKX chart below:

SPX and US Dollar: A Great Time for "Value" Investing. (Bwahahaha!)

The S&P 500 (SPX) has continued to drift higher over the past couple sessions, as expected on Monday.  Now that the market has broken out to decisive new highs, there's nothing in the way of horizontal resistance for the market to struggle with, there's simply channel resistance and Fibonacci zones.  If bears can't reverse this fairly directly, then there's no reason to believe the market won't reach my longer-term targets from January (the mid-to-high 1600's -- and ultimately the mid-1700's).  To be fair, I didn't anticipate we'd get there this directly; I thought we'd see more backing and filling first. 

This is a strange market environment, and if you haven't been trading for a long time, you may not realize exactly how strange it really is.  Due to the Fed's bubble pumping, the market technicals are now deeply detached from the economic fundamentals.  And while the Fed points to things like the "good" jobs number last week as signs that they're doing something helpful for the fundamentals, the reality is that the growth rate in jobs has held steady at the same level it was before the QE-Infinity days.  As I wrote when QE-Infinity was first announced, there's been no statistical link to the QE programs and job creation.

Beyond that, the jobs we're actually creating in this economy are the types of jobs you might have thought were pretty cool back when you were 16 years old because of their "awesome" benefits, such as the benefit of being able to take home an unsold pizza from work, after a grueling night of delivering them.  But if you're an adult these days, you may not be as excited as the Fed is about this "new job growth" -- especially if you have to feed a family, or a particularly large dog.  But the government doesn't differentiate all that in the jobs numbers:  There's no category for "Number of new jobs created which would still leave you eating a ton of Ramen Noodles."

What I (and many other traders) find particularly flummoxing about this market is the fact that the Fed has managed to completely obfuscate the value of everything.  What are equities actually "worth" these days?  How about the dollar, or metals, or oil?  With $85 billion of Nuevo Dinero being pumped into the markets out of the raw ether each month, how on earth can anyone have the faintest clue what anything is actually worth?  It's an auction where the fat cats are playing with Monopoly money -- so the players who actually move this market don't need to be bothered with petty details like "value" anymore.  Maybe that's what the Fed wanted all along.

As long as this money flood goes on, without at least a larger crisis of confidence, bears are probably going to continue having a hard time getting anything to stick.

Speaking of value, I haven't updated the US dollar chart in a long time.  I was consistently bullish on the dollar from September 2011 until July of 2012, at which point I shifted to neutral with a slight bearish bias.  That's where I remain today.  Since July 2012, the dollar has spent those 10 months trading in a very large range.  It's an interesting pattern now -- note the similarity of the moves highlighted by the red boxes.

Last week I noted the Philadelphia Bank Index (BKX) might serve as a warning to bears, and it has now broken out to new highs.  It's now approaching 58.83, the peak of 2010; this is the first time this market has challenged that high since.  Unlike SPX, the BKX has not recovered anything approaching its nosebleed levels of 2007, when it traded at more than double its current price (the peak was 121.16).  As a result, also unlike SPX, BXK does still have lots of horizontal resistance left to contend with, and will continue to be important to keep an eye on.

No change in the SPX count at the hourly level:

SPX Update: Fed Cash Trumps the Prior Sell Signals

On Friday, the intermediate thesis I've been building for a couple weeks (of a larger fourth wave correction) was at best forestalled, or at worst completely blown up.  The signals I noted in April constituted the first serious batch of sell signals I've seen since the Fed started feeding QE-Infinity money into the Primary Dealer accounts back in 2012, and I apparently made a mistake in thinking those signals might work anyway.  Lesson learned.

There's an outside possibility Friday may have been the exhaustion gap of an unpredictable extended fifth wave -- however, there's danger at times like this for an analyst and a trader, because there's always a temptation to latch on to whatever might "prove you right in the end."  So I'm going to override my own slight hesitation and stick to the discipline of the equation: This breakout must be respected as bullish as long as it sticks.  Accordingly, I'm going to publish the "most obvious" bullish wave count until proven otherwise -- but to be fair, we won't really know one way or the other for a session or two.  In this update, I'll outline a few of the signals and key levels to watch.

Even though I've written extensively about the potential for upside surprises during third wave rallies, and about the bullishness of the unprecedented liquidity the Fed is pouring into the market, I myself sometimes forget to "expect the unexpected."  The mini-crash in precious metals during the second week of April got my attention and suggested there might be some underlying cracks in the foundation, but apparently if there were (or are), the Fed has so far been able to print over them.

One of the challenges in Elliott Wave is the fractal nature of sub-dividing waves.  Though I wasn't favoring this view, I mentioned last week that the market had formed five waves up, but it was possible those five waves only marked wave i of a larger five wave structure.  That now appears to be the case, but the even bigger surprise for bears was the extremely shallow nature of the second wave.  Normally second waves will retrace 50% or more of the previous wave -- this one barely corrected at all.

There were numerous indicators suggesting a correction was due, but as I've discussed many times previously, we must at least consider the possibility that this market may simply not behave in line with historical sell indicators until QE-Infinity begins tapering off, or until there is a larger crisis of confidence.  Speaking of, now that May is upon us, there's the historical seasonality factor for bears to ponder (the old "sell in May and go away").  Whether that type of seasonality will work in a Fed-driven market where bulls are endlessly backstopped, and "risk" is a four-letter word, is another question entirely, though.

Things always become a bit tricky this far into a strongly-trending wave, because the smaller waves we'd normally use to triangulate the pattern are compressed and harder to locate.  This is my least favorite portion of any pattern for a number of reasons.  In any case, I made it no secret that I expected more from the recent fourth wave correction, and I won't pretend I wasn't surprised by Friday's action.  But in the bigger picture, the long-term preferred wave count is materially unchanged since January/February (back when everyone thought I was complete loon for favoring it).  This will remain preferred unless the price action gives us some reason to stop favoring it, or until the Fed files for bankruptcy.

(Note: Updated the numbers, but forgot to update the annotation, which should read "BLUE wave 4.")

The near-term count I published on Thursday was invalided before the session closed, which was the only warning cash traders had before the S&P 500 (SPX) gapped open on Friday's job number.  As promised, I'm now showing the most bullish wave count as the preferred interpretation until proven otherwise.  Keep an eye on that blue trend line -- it's one of those "stealth" trend lines that the market's reacted to every time it's touched it.

Note the extreme momentum in RSI on the chart below: normally, that type of reading suggests the next dip will be bought.

No additional comments for the hourly chart: