Bulls and Bears Squaring Off at a Major Battle Line

Yesterday's outlook gave 55% odds to the idea of a wave (2) top for the S&P 500 (SPX), marked on the chart as either 1643 or 1647, and the market reversed strongly off the 1647 level, then declined all the way back to retest Monday's low.  For the near and intermediate term, this is now a potentially dangerous setup for the market.  I'm continuing to favor the bears for the foreseeable future, but since I'm not a perma-bear, I'm also looking for signals which could indicate a bottom.  In this update, we'll discuss both arguments in detail.

There's an upward market bias inherent with the QE-Infinity program, and the market has rallied virtually nonstop since that cash started hitting the Primary Dealer accounts in November.  The notable exception to this endless rally was the weeks leading into the fiscal cliff dilemma (late last year).  As it turned out, during the end of 2012 the Primary Dealers were withholding that cash from the market, due to their discomfort with the entire situation.  Keep in mind that a similar thing could happen at any point, so QE-Infinity in itself does not guarantee a market without corrections.  Further, if liquidity is being destroyed (somewhere down the chain) faster than the central banks are creating it, then the market environment becomes deflationary. 

All that said, I still don't favor the idea of 1687 being a long-term top, but as I wrote on May 23:

In conclusion, the long-term presently remains pointed higher, but that may be irrelevant at the moment.  We can't see around every bend in the market, but most times we don't need to: the near-term appears to be pointed downwards, and the intermediate-term, while too early to confirm, also looks likely for further downside.  This is not a bad time to behave defensively.

Though I've been bearish since 1687, my long-term bias remains bullish, and this leads to an interesting cognitive situation.  I'm not sure how to put it into words exactly, but I'll try:  I "want" to find a reason for this market to bottom, but I'm not seeing it yet.  In fact, my work suggests that if the 1622 level fails, we could actually see a significant sell-off.  Right now, the bull patterns I'm finding (from an Elliott Wave perspective) are obscure patterns that are generally low-odds, while the high-odds patterns continue to favor the bears, as they have ever since the reversal at the all-time high.

Long-time readers know that I attempt a feat many believe is "impossible" with these updates:  I try to predict the market across virtually every time frame (short, intermediate, and long), three to four times each and every week.  I'm bound to get some calls wrong, and I absolutely do -- but since early May, I haven't missed many and that puts me in a good psychological position right now as an analyst.  I'm not talking about ego in this sense, although this may be something that only another public analyst can probably really understand.  Basically, when you hit a top as well as I hit this one (my May target-2 for SPX was 1680-1690), then you have a lot of psychological wiggle room to really see what's going on afterwards, because you're not trapped by your prior bias/analysis.  When you get caught looking the wrong way, you tend to try and find ways for the market to prove you right in the end (in order to justify the fact that you were screaming to buy at much higher prices, or to sell at lower prices). 

It can be a pretty tough gig actually, and analysts don't get enough credit for the painful crises of conscience that (I assume) we all endure at times after a missed call.  If you've ever wondered why analysts love to toot their own horns when they get a call right, it's not because they want everyone to think they "get every call right," it's because they're trying to compensate for the incredible guilt they feel over the calls they blew.  A small handful of readers love to remind analysts of their bad calls -- but believe me, nobody needs to.  We know our bad calls better than anyone, because those mistakes take up residence in our memories, especially late at night when the house is quiet and still.  In fact, many of us remember our bad calls much better than we remember our good ones.

Moving from independent trader to public analyst over the past couple years wasn't an easy adjustment for me -- the challenges of each role are actually quite different.  But I digress.    

I think the market's in an interesting position here, from a number of different standpoints.  In terms of sentiment, bearishness has increased recently, but the BTFD ("buy the friggin' dip!") mentality is still reflexively strong, and we've been hearing a lot of "buy the dip" talk the whole way down so far.  This in itself bothers me, because I feel like the long trade has become almost too reflexive and easy at this point.  I know that during last week, I was one of the few lone nuts suggesting we sell the bounces, and many were suggesting the opposite.  Anecdotally, that tells me there are probably a lot of bulls now trapped north of 1650.  What's most interesting is that even many bears seem afraid to sell into this rally.  And why wouldn't they be, after being beaten to death since January?  Maybe a better question is:  could they, even if they wanted to?  I know there are several popular bear subscription services who've recommended heavy short positions all the way up (some with stops I consider outrageous), and I can only imagine that many of their subscribers are dead broke by now.

So, my question is:  are there even any bears left to sell short this market?  Because if the only sellers remaining are bulls, there could be a problem.  Short-selling gets a bad rap from some folks, but the reality is shorts provide an important layer of support for the market, because at some point down the line, shorts have to buy back whatever they sold.  Additionally, shorts tend to trip all over each other trying to cover their positions en masse, which is why bottoms usually have the classic V-shape -- and shorts are generally the ones who kick-start the momentum for the next rally leg.

On the other hand, bulls all by themselves make "bad sellers" because they are simply trying to get out, often in a rush, and they have no requirement to buy back in; bulls can sit in cash or government Trashuries for as long as they want.  As a result, a decline without short covering can be fast and brutal.  Remember the last time the U.S. banned short selling (of 799 financials), in 2008?  How did that work out?  (Hint: not well; prices fell more than 12% over the next 14 days.)

So my bottom line point here is:  While I've stayed bearish since the 1680-90 target was hit, I still "want" to find a reason for the market to bottom.  I think a lot of people are feeling the same way -- and that tells me we have to be extremely cautious, because when everyone's looking the same direction, the market has a tendency to do the exact opposite.  Let's take a look at the arguments for both cases.

Starting off with the bear case, we have a few patterns that aren't terribly encouraging for bulls, and which I first called attention to on May 30.  The SPX chart below should be examined in conjunction with the NYSE Composite (NYA) chart shown later.

If we look at this purely from the "trade what you see" perspective, we find the cleanest wave count is the bearish nest of first and second waves shown below.  I remain marginally in favor of this count, but I am quite alert to the fact that this is (suspected to be) a fourth wave decline, and fourth waves rarely follow the "most obvious" pattern.  They usually turn infinitely frustrating at some point, and become all but impossible to predict.

Note the black "alt: (2)" as the current wave could become more complex.  In either case, if the count shown in blue and red is correct, there should be downwards acceleration coming when 1622 is claimed.  If there is no downwards acceleration on a breakdown, then we have to give weight to the "less obvious" wave counts.  Again, I'll discuss this in a bit more detail on the NYA chart.

The hourly chart has now been updated with target 3 potential -- beyond that, there's been no change in a while.

SPX and Apple: Time for Caution

While yesterday's market found support in a zone I expected would provide it (1624 +/-), the strength of the resultant bounce has already exceeded the near-term expectations I published yesterday.  This creates a bit of murkiness in the charts for the time being, largely because I've been viewing this drop as a wave C decline, and a common target for wave C is to travel a distance equal to wave A.  Wave C equaled wave A at SPX 1622.56, which is within pennies of the recent low.  In this update, we'll look at the market's options from here, and see if we can find any additional clues to its next move.   

On a bright note: exactly one week ago, I noted my first target for the decline was 50 points from the wave ii/B high (not yet known), and all 50 points have now been captured.  At this point, it's okay to have a few questions about the market's next move -- it's simply not possible to know what it will do every day of the week (in fact, many people believe it's not possible to ever know what the market will do, though needless to say, I'm not among them).

I'm inclined to favor the idea that this is a subdividing decline, meaning that the recent five-wave declines are fractal puzzle pieces of a larger, still developing, five-wave decline.  This is shown in a bit more detail on the chart below.  The chart also discusses the potential of an expanded flat (shown in black), since right now the decline from black A to black B looks like a three-wave decline (an abc).  Another push down to new lows would change that three-wave form, but since the market is the final arbiter, it would be arrogant to simply assume that's going to happen with no consideration of an alternative. 

Zooming out a bit, we can see the market found support at the red line I highlighted on May 30, and this does create the potential of either a bottom or its opposite (a much larger topping pattern).  I'm still inclined to favor lower prices after this rally, but this wave may not be straightforward or easy to predict.  This chart discusses some of the key levels.

One index keeping me in favor of additional downside is the Philadelphia Bank Index (BKX), shown below.  The recent decline from the swing high appears to be impulsive (meaning it's a five-wave structure -- and five-wave structures point to the direction of the next-larger wave).

SPX Update: There's the Breakdown, What Next?

May was an interesting month, as the S&P 500 (SPX) reached my 1680-90 target zone and promptly reversed in an apparently impulsive decline.  That impulsive pattern led me to believe the market would continue to correct lower, so last Tuesday, I outlined the reasons I believed we should sell the bounce; and on Wednesday, I upped my odds on a breakdown from 65% to 70%.

On Friday, the S&P 500 (SPX) actually broke down, so now we can take a look at targets with additional detail, as well as revisit the bull and bear long-term wave counts.

My first target from last week was 1620-1629, and that target zone was almost reached on Friday (1630).  However, given the charts at this exact moment, it presently appears unlikely that the decline will end there.  There is a cluster of targets in the 1600-1614 zone, so with Friday's strong thrust lower, that's the target zone to which we're going to give the most weight for the moment. 

The chart below shows the most obvious counts of the near-term. Sustained trade above 1659 would invalidate many bear options, and suggest new highs.

The hourly SPX chart remains largely unchanged since May 28, but I have adjusted target 2 to reflect the discussion above.  We'll reexamine this as the wave unfolds, as the potential for a deeper decline is quite valid.

Thursday's chart is updated below, with a slight bit of fine-tuning.  An option mentioned but not shown is the possibility that Friday's drop was wave (1) of C, thrusting out of a triangle, but that's a very tough call. 

SPX Update: Topping Patterns Worth Watching

Since there's no material change in the outlook since I suggested selling the bounce on Tuesday, in this update we'll examine a few developing patterns and let the charts do the talking. 

I've detailed the 10-minute chart with support and resistance lines, and notes on the potential topping patterns.  Also note there is theoretical support crossing the first target zone.

The hourly chart is unchanged:

 

 



On the five-minute chart, there are some notes regarding possible near-term pivots.  Yesterday's "best guess" projected path played out quite well for the day, but that in itself doesn't guarantee another wave down immediately -- one of the things which never ceases to amuse me is how often "The They" manage to close the market at gray-levels.

SPX Update: A Fractal Comparison to May 2012

In yesterday's update (See: SPX Update: Time to Sell the Bounce?), I outlined why I believed the rally was a snap-back correction to the prior decline, and the corrective wave appears to have peaked 1 point past my target.  As a result of now knowing the (assumed) peak, today I'm able to provide some additional detail on targets. 

There's also a fractal I've had in mind since last Thursday's close, and I'd like to share it now because it's played out very well so far.  Maybe not coincidentally, this fractal is from roughly a year ago in April/May of 2012.

Compare that with the current market below.  Note the near-term wave count I've detailed is very aggressive and may or may not come to pass -- there really isn't enough info in the chart yet to have a good handle on the short-term structure.  Whether the near-term play out as shown or not doesn't alter my intermediate projection for a first target of 1620-1629 (see hourly chart).

I'd also like to add an indicator chart to my arguments for new lows, mostly for readers to benefit from in the sense of future reference.

The hourly wave count is unchanged.  I'm giving the leading alternate count 30% odds and have shown it in detail on the Dow Jones Industrials (INDU) chart which follows afterwards.  Bears should probably get out of the way if SPX can reclaim 1674 in the near future.

SPX Update: Time to Sell the Bounce?

The program for this evening is not new

you've seen this entertainment through and through,

You've seen your birth, your life and death,

you might recall all of the rest.

Did you have a good world when you died?

Enough to base a movie on?

 

-- Jim Morrison, The Movie

It feels like we've been here before.  And I think bull are expecting that we have -- and thus expecting new highs immediately.  But this time, I suspect that won't be happening just yet.  The recent decline is the cleanest downward impulse this market has seen in a long time, and that means we "should" have another leg down of at least equal length. 

There are two things keeping me from being overly confident, and which dictate the "?" behind "time to sell the bounce": 

1) This market has defied all gravity repeatedly and
2) As Madonna would say: "We're still livin' in a QE-world, and Ben is a QE-girl."

The last time we had a nice downward impulse, it turned out to be the c-wave of an expanded flat, and the market went straight on to new highs -- but I have a hard time seeing that pattern in this current wave.  Doesn't mean I'm right, of course.  The Fed and the Bank of Japan are both flooding the market with liquidity, so maybe I'm nuts to even expect a correction under these conditions.  Right or wrong, I simply have to follow what I see in the charts.

Speaking of, the first thing the charts suggest, for the short-term at least, is higher prices.  Note the market can travel all the way up to 1687 and still maintain this wave count.  I would expect 1664-1673 -- so there's about 14 points of no-man's land above the target zone where things become fuzzy.

A bit more detail on the one minute chart, and a look at an alternate near-term count.  I like the preferred count better (obviously), but I try to note the alternates mainly for the benefit of readers to be able to quickly figure out what's happening in the event my preferred count is wrong.

The hourly chart roughly outlines my expectations across three time frames.  And it's worth noting that the intermediate and long-term trends can both give a lot of ground to the downside without creating too many issues for bulls yet.  In the last update, I outlined a potential long-term bear count because we should always see both sides of the trade, but presently I expect this is simply a correction which will ultimately be followed by new highs. 

The first target for blue iii/C is 50 points against the prevailing ii/B high.  We'll refine that target if and when we get closer.

SPX Update: Short and Sweet...

There's not much to add to yesterday's update.  For the near-term, I've attempted to break down SPX -- but quite frankly, it's impossible to say for sure what we're looking at.  The chart below shows the conundrum: the rally from the 1635 looks like a correction, but can actually be counted impulsively.

Further complicating the matter is the fact that it's not entirely clear whether we're looking at wave ii/B, or wave (4). The rally retraced almost exactly 38% of the decline, which is more typical of a fourth wave than a second wave.  My advice here:  keep it simple.  Trade the trend lines and the noted support/resistance levels.  The wave counts will work themselves out soon enough.

The hourly chart is unchanged from earlier in the week.

In conclusion, there's no material change in the outlook, and I still feel there's more downside coming.  With a little luck, the near-term will clarify during this session.  Have a great long weekend!  And trade safe.