SPX Update: Outlook Clarifying Again?

The picture again seems to have clarified a bit, though sometimes this sense of clarity is illusory during a fourth wave.  As I've mentioned previously, fourth waves are essentially impossible to predict -- we basically have to take this wave session by session.  Despite the difficulty inherent in the wave itself, Wednesday's best-guess blue path projection (shown on the hourly SPX chart that same day) now appears to have been suspiciously prescient.

Since the options are myriad, as opposed to overwhelming everyone by covering them all in detail, I will cover them in brief, and then we're going to zero in on the path I presently feel is most likely.  We'll cover the other potentials in more detail as it becomes appropriate.

The most common fourth wave options are outlined in broad strokes on the hourly chart below of the S&P 500 (SPX), but I'm continuing to favor the same projected path I depicted on Wednesday -- especially since it has played out perfectly to this point.  Of course, that doesn't guarantee it will do so going forward -- but as the old saying goes: "If it ain't broke, don't count your chickens until the cows come home to roost."  Or something like that. 

Assuming this projection continues to play out, the next decline is anticipated to be strong.

The five-minute chart notes an interesting confluence of targets at 1658.  1674 is the next key upside level where things get hazy again.  It goes without saying that 1608 is now an important downside level for the bulls.

In conclusion, it presently appears likely the market will rally back above 1648 -- and my perfect world target for that rally is 1658 +/-.  It should also be noted that the importance of 1598 on the downside cannot be overstated at the moment -- any reversal beneath that level would be quite bearish and could lead to a small waterfall decline.  Trade safe.

SPX and BKX: No Material Change

The market remains in the ambiguous zone.  I remain marginally in favor of the bears, but am limiting myself to low risk trades, given the ambiguity. 

Let's take a look at the Philadelphia Bank Index (BKX) first, as the pattern here seems a bit cleaner than the S&P 500 (SPX).   

On the daily chart, we can see BKX may be due a larger correction.

SPX is unchanged.  I've outlined one potential path in blue, but there's really nothing to give me much confidence in that path.  I've broken down the options in a bit more detail on the chart which follows this one.

This chart outlines the two basic counts, with one variation in green (the variation is what's depicted on the SPX chart above).

In conclusion, the market remains ambiguous, but I'm continuing to give bears the slight edge heading forward.  Trade safe.

Bears May Have the Slight Edge

Let me start off by saying:  I don't know.  The market did exactly what I expected in Wednesday's update, but it still hasn't answered the big question.  On Wednesday, at least I felt I knew where it was headed over the near-term -- but now it's not so clear.  As I wrote then:

...fourth waves rarely follow the "most obvious" pattern.  They usually turn infinitely frustrating at some point, and become all but impossible to predict.

And as I warned back on June 3:

If this is a fourth wave at minor degree, it will probably get ugly and confusing at some point, and leave bulls and bears alike scratching their heads trying to figure out what the market's going to do next.  The market tends to alternate between trending waves and cycling waves, and fourth wave corrections in a bull move usually cycle in a sideways-down fashion.  They trend near-term, but then stop and grind around just when you think they're going somewhere, chewing up accounts and driving all but the nimblest traders nuts. From my perspective, we haven't reached that point just yet, so enjoy the clarity while it lasts.

I've had a great run since May 6, when I switched footing and set my S&P 500 (SPX) targets at 1640-50 and 1680-90 -- then adjusted on the fly and called the 1680-90 zone "almost a given," for a total of  about 70 points of captured upside.  From there, I hit the turn off the big reaction rally on May 28 and captured 40+ points of downside into the first target zone of 1620-29; then hit the next turn at 1647 for another 40 points into the second target of 1600-1614.  That's about 150 points of profit in a (supposed) "buy and hold" market which, as of yesterday, closed only 28 points higher than it was on May 6 when this run started.

Since I simply can't see a way to top the performance of the past 30+ days, I was thinking maybe I should go out on a high note, and retire to Maui immediately.  Then I remembered: Wait a minute, I already live on Maui!  So instead, I considered retiring to some dank inner-city apartment with noisy plumbing in a high-crime area.  That didn't sound appealing at all, though... so in the end I decided I'd keep trading and writing updates.  I'll have to put off my dreams for another day! 

And I'd better, because as of right this minute: I don't know.  I've been staring at charts a lot over the last few days, and they haven't gotten much clearer.

I'm basically split roughly 55/45 in favor of the bears, but it's almost too close to call.  Let's start off with one of the charts that seems to be saying bears have a slight edge over the intermediate term:

 
The S&P 500 has all the required ingredients for a completed fourth wave, but I'm more inclined to believe it's incomplete.  Bulls must hold the 1598 low, since trade beneath that level would suggest a strong third wave decline.

Charlie Sheen is Winning... but are the Bulls or the Bears?

I'm going to do an update short on words today, because I'm pretty equally split on whether the bottom of wave iv is in place, or if there is more down still to come.  BKX may be the clearest index at the moment.

NYA performed almost too perfectly for the bull option shown on Wednesday.

SPX appears to have put in an extended fifth wave decline, which either marks ALL OF wave C, or wave (1) of C -- it's simply unclear at this stage.  One thing I don't like for the bull case is the fact that RSI confirmed the lows on several different charts.  I originally published this chart in the forum only, several hours before the open on Friday.

In conclusion, there is nothing presently giving me high confidence in either the bull or the bear case here; and we'll simply have to see how the market responds over the next few sessions to gain a bit more clarity.  At times like this, I buy and sell the edges and largely avoid the middle of the range.  Trade safe.

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.