SPX Update: The "Dojiest" Rally Ever; Apple, Inc. Still Looking Good

This continues to be an unusual market, with most of the heavy lifting being done in the overnight Globex futures session, and then the market trading range bound for most of the day.  The trade for the last couple weeks has been to buy the afternoon dip and sell the next morning's rip.

This has gone on for so long, that the rally has inspired me to invent a new word:  "dojiest."  This is the dojiest rally ever, as we can see on the SPY chart below:

   
The rally has now marginally exceeded my near-term projected target from July 2 of 1644-1652 (after failing to reach the downside corrective target of that same date by a few points, due to a rare running flat). I'm inclined to believe it's close to beginning a corrective sequence, however there is absolutely nothing in the charts yet to suggest this.  I'm going purely on my read of the waves, but this is unadulterated front-running in a vague market, so don't leverage the ranch on this.

Bigger picture, the market would leave maximum confusion if it began a correction now, which is sometimes a good argument in itself.

No Clear Answers Yet; Apple, Inc. Worth Consideration

I'm going to go a bit out on a limb with this article. In Elliott Wave analysis, one of the most difficult wave counts to unravel is a fifth wave extension.  Fifth wave extensions are difficult for a number of reasons: 

1.  They are extremely hard to anticipate -- and sometimes they're impossible to predict in advance (this is one reason I use other analysis alongside my Elliott Wave work).  Extended fifths work like this: just when you think the fifth wave is about to complete, it launches in a parabolic.  They are completely out-of-whack with the rest of the wave structure: often fifth wave extensions run a distance equal to 1.618 the length of waves 1-3 combined.  This convinces most Elliotticians that the wave count is something else (normally, we assume it's a third wave).  This then creates a situation where we're looking for fourth and fifth waves to unravel when actually there are none left to unravel.

2.  Further compounding that issue is fifth wave extensions often peak on high momentum, which leads classic technical analysts to continue looking for higher prices.  As a result of these issues, extended fifths often catch people looking the wrong way on the way up, then looking the wrong way again on the way down.

3.  The count has to be perfect, and I mean PERFECT to identify them.  If you're off by the slightest bit, then you're dealing with another wave form.  It becomes a game of micro-analytical-management, counting each wave at the finest level of detail, and then hoping you're not "a wave off" somewhere along the line.

So I'm treading in difficult waters while going out on a limb -- in both my analysis, and in my efforts to mix metaphors.  But, as they say, we can't break omelets without making a few legs.  Or something like that.

We'll cover the extended fifth wave count in more detail in a moment.

The charts aren't giving us much to be bearish about at the moment -- in fact, a number of indicators have flipped, or are about to flip, to buy signals.  BPINDU gave its first buy signal since November 2012.  Bears will need to reverse this directly if they want to keep hopes alive.

NYSE New Highs/New Lows (NYHL) isn't quite there yet, but is very close:

There is one off-beat potential wave count which does suggest the potential that an extended complex correction is still unfolding, and that this is a sucker rally.  This is a possibility I've been tracking personally, and honestly, it is the best-fit for this wave structure in the Russell 2000 (RUT).  The messy three-wave move in the middle really doesn't reconcile very well as anything besides the count shown below.  Accordingly, I think bulls should stay alert heading forward, as there may be an opportunity to buy back in at much lower prices.  Incidentally, if bulls cannot reclaim 1008.23, then this could actually be a much more bearish pattern.  I'm assuming they will reclaim that level, which would imply a corrective decline -- but it remains to be seen. 

The bullish option is that the wave labeled as red B was the bottom of an inscrutable fourth wave correction.  This wave count fits well when viewed on this chart in a vacuum, but I'm not certain how well it matches the indicators which are rolling bullish.  I think bears would need to reverse this rally early in the week to have a chance.

SPX Update: Happy Fifth of July

I hope everyone had a reasonably safe Fourth of July and enjoyed the fireworks displays in the dollar index and the E-mini S&P futures.

I'm just going to do a brief update today, because we're still in the zone where the waves are a bit unclear at several trend degrees, and I feel like most of what I can offer at this point (as far as wave counts go) largely amounts to speculation.  The hourly chart mainly highlights the next resistance areas.  There's important resistance in the 1630-35 zone.

Below is one possible wave count, though there are about 10 million options right now.  The bottom line with this chart is that bears don't want to see the market sustain trade above the upper blue trend line.  If this count is in the ballpark, then one more tag of that trend line would be ideal for a top in this wave.  We just have to be careful, because again, since the count is vague at another degree of trend, we don't want to fall into the "just one more wave up left!" trap for perpetuity. 

In conclusion, I'm still inclined to think the odds favor new lows after this rally -- at the minimum, I'd really like to see a retest of the 1570-80 zone.  But there's no guarantee that will happen -- we are still in a Fed-driven market, and it doesn't always behave the way you'd expect.  I would continue to recommend only the lowest risk entries as a result -- so far, this isn't the type of wave one can afford to chase and/or jump into a position with abandon.  1630-1635 is next important resistance.  Hopefully, Friday's session will offer a bit more info for the weekend outlook.  Trade safe.

SPX Update: Let's Simplify the Picture

Yesterday I focused on technicals; today I'm going to refocus on wave counts.  I think many of us have been making this wave more complicated that it actually is.  There's a big mess in the middle of the chart, and I think we've let it occupy too much of our focus.  I know I have, anyway.  I've simplified things for today's update. 

The count below shows the market is likely in one of two waveforms.  Either an ABC corrective decline, which will head to new highs, or a very bearish nest of first and second waves lower.  A nest of first and second waves is considered quite bearish because the third wave of a move is usually the longest and strongest -- so if this decline hasn't seen the third wave yet, then things could get awfully ugly.  1560 should be considered critical support -- and really, bulls don't want to see the market sustain trade beneath the black trend line shown below.  Notice how the market was magnetized right into the confluence I mentioned on June 27; this is a logical spot for bears to mount a defense if they're going to do so.

I've been reiterating for several days that I remain marginally in favor of the bears as still having slightly better odds than the bulls here, though the market reserves the right to alter my opinion.  In any case, the next chart shows one of the reasons for my thinking.  I mentioned last week that almost all of the rally was being carried by the overnight futures.  Cash traders really hadn't joined in, and they still haven't -- the chart below emphasizes that point.  I can't recall that I've ever seen a rally off an important intermediate low in the form of dojis every single day for a week.  This reeks of distribution to me -- run up the futures, then sell out your longs to shorts who are covering...

As a result of this bizarre rally, I've had a really difficult time nailing down a short-term wave count on the S&P 500 (SPX).  The cash charts are a mess, in my opinion.  I've tried counting ES (E-mini S&P futures), but unfortunately they're not a whole lot cleaner.  Below is my best-guess of the near-term options.

SPX Update: Still a Mixed Bag

This is a tricky market.  Most indicators I watch rolled bearish a while back, but are now on the cusp of rolling back to bullish -- yet they're not quite there yet.  At times like this, I can often find the answer, or at least a good hint, in the wave counts.  But right now, we're stuck in the middle of a wave that's vague at multiple degrees of trend.  Which means: I'm not certain what type of waveform to anticipate next.  As an example of what I'm talking about: the impulsive decline off the all-time-high, during the third week of May, suggested we should expect at least one more similar wave.  Sometimes things are clear that way.

But other times the pattern is vague -- and still other times it's downright indecipherable.  In my opinion, these are the times where it can be dangerous for a technician to overstep his or her bounds.  With any type of analysis, it's easy to let subjectivity creep in and pollute your work.  And all of us are sometimes prone to "seeing what we want to see."  

I try to be as honest as I can when I feel things are uncertain.  One has to remember that the market will always "be here tomorrow" -- but if one loses one's capital chasing long-shots and random speculation, there will be no way to take advantage of the good opportunities which will most certainly arise again in the future.

The reality is, the rally has extended into territory where things become fuzzy again, and there is no clear-cut answer right now.  The market is well within its rights to do just about whatever it wants from here without violating any of the technical rules of the wave structure.  I believe anyone who's stating that "a long term top is definitely in place" or that an intermediate low is "definitely" in place is stating that from conviction and bias, not from the technical perspective.  Technically, either could be true.  

So I think we have to keep an open mind to both the bullish and the bearish potentials right now.  In this update, I'll try to outline some signals to watch going forward.

Let's start off with a ratio chart which helps illustrate the bull/bear conundrum.  The chart below is a ratio of HDGE to the S&P 500 (SPX).  HDGE is an actively managed short fund ETF, so it's popular as a "risk off" trade.  A falling ratio is thus bullish for stocks, while a rising ratio is bearish.  For example, we can see how near the 2012 peak, this ratio broke out of a falling wedge pattern, thus signalling a correction in equities.  The current market has similar falling wedge potential, but the ratio broke out just enough to leave everything vague.  We can see the breakout stopped right where it needed to if the falling wedge pattern is a fake.  The chart notes explain what to watch.

Next, one of the indicators I watch is an exponential moving average trend system developed by Gerald Appel (who also developed the ubiquitous MACD indicator).  This system remains on a sell signal, but is often a bit late to the party.  We probably have to give bears the edge on this one, but it's a very slight edge, because the moving averages are presently turning back up.  Bears will need to put together some down days fairly soon to keep this indicator on a sell signal.

On a long-term level, SPX is trading back above the breakout of long-term resistance.  One of the key concepts in technical analysis is observing whether prior resistance becomes support, and vice-versa.  The first test has held so far -- so unless the market reverses back through support, we have to respect this breakout.  We probably have to give this one to the bulls as long as 1560 support holds.

Is Liquidity Drying Up for World Markets?

There's an interesting fundamental change that's been taking shape in the financial landscape recently.  In the U.S., QE-Infinity is still flowing strong, despite talk of tapering.  The Bank of Japan is also still fueling the liquidity picture.  However, there are some other major players working at cross-currents to the Fed and BoJ's liquidity.

Many investors are probably convinced that the recent market shake-up was simply the result of Bernanke's talk of "tapering" the QE program -- after all, that's what the media largely reported.  But the reality runs far deeper than that, and is an order of magnitude more serious.  For better or for worse, the U.S. financial system no longer exists in a vacuum, and world markets have reached the point where virtually everything is interconnected.  And what's going on overseas is starting to shake things up here.

The world's four largest central banks are: (of course, our very own, let's have a big Las Vegas welcome for) the Federal Reserve, the European Central Bank (ECB), the Bank of Japan (BoJ), and the People's Bank of China (PBoC).  The first three (Fed, ECB, and BoJ), as well as the BoE (Bank of England), are all deeply intertwined in the sense of liquidity, since they all deal with the same institutions and dealers, if not always directly, then through counterparty.  In fact, fourteen of the Fed's twenty-one primary dealers are located in other countries, with only seven being US-based.  It's become one great big happy Universal Liquidity Pool party, and the actions of one nation's central bank no longer simply impact that particular nation. 

The PBoC isn't fully integrated into the world financial machine yet, but their actions still impact the world financial system because many of the institutions they service are big players on the world stage.  So while they're not quite swimming in this pool and playing "Marco Polo" with Bernanke, the way Western central banks are, they're still very much a presence at the pool party.

And they're not following the script. 

While Bernanke keeps dumping fresh water into the pool, and the BoJ is doing the same, the PBoC has tightened policy and aims to force institutions to deleverage, thereby draining the pool.  And while the Fed and ECB bail/bailed out every bank they can get their hands on, the PBoC has decided it's had enough.  This means the institutions it services are faced with trillions in bad debt, which requires them to sell whatever liquid assets they can in order to raise cash.  Much of these liquid assets are in the form of U.S. Treasuries, equities, precious metals, etc..  

Many have speculated, myself included, that the final endgame to the massive bubble unwind would be forced liquidation, and it seems we're now beginning to see some cracks appearing in the foundation.  The problem in a massively leveraged financial system, such as ours, is that when enough selling occurs and drives down prices, that action creates margin calls for other leveraged players, which then requires them to sell assets as well.  This creates more margin calls for still other players, which then requires more selling -- etc. ad infinitum.  It can snowball and feed on itself rapidly, ultimately becoming an unruly beast which consumes everything in its path, not unlike John Goodman.

A week ago, the PBoC flat out refused to do reverse repos, thus stopping the flow of cash.  Traders and institutions in China panicked, and we saw the results of that action almost immediately, as forced deleveraging hit the marketplace and spread to US stocks and treasuries.  Below is quoted from a piece published by Reuters on June 19:

 

  "The central bank appears to be determined to force banks and other financial institutions, such as funds, brokerages and asset managers, to de-leverage," said a trader at a major Chinese state-owned bank in Shanghai. "That hardline stance suits the recent government policy of clamping down on non-essential businesses by financial institutions, such as shadow banking, wealth management, trust
operations and even arbitrage."

Panic prevails in some parts of the money markets, in particular among some small financial institutions, which have conducted lots of leverage businesses, traders said.

According to some reports, the PBoC later relented somewhat and began providing targeted liquidity.  Markets stabilized. 

Compounding the liquidity situation is what's going in Europe.  When the ECB gave out loans via LTRO, it also forced loans on institutions which didn't need or want those loans.  The theory was that forcing everyone to take LTRO loans created a "cover up" so that no one could figure out which banks were in truly bad shape, and which banks were just in bad shape.  Many of those institutions put a portion of the LTRO money into US Treasuries, which drove yields to record lows in the summer of 2012. 

While LTRO was a three-year loan plan, it provided an option for banks to repay those loans after a year, and many of the banks who didn't originally want those loans are now paying them back -- by selling the Treasuries they purchased a year ago.  And as that carry trade unwinds, the Treasury market is coming under pressure. 

Below is a chart of the 30 year bond, which looks to be in bad shape:

The LTRO situation is deflationary, since that money is now being pulled away the market and vanishing back into the ether from whence it came.  And of course, falling treasury prices also have the potential to create further margin calls and leveraging issues. 

Precious metals are continuing to come under pressure as well -- in fact, in the overnight Comex session last night, gold reached the upper edge of my long-standing target from April 17 (1080-1180).  This may also lead to further forced liquidations.

So now we have a situation where the Fed and BoJ are furiously pumping liquidity, and the PBoC and ECB (as well as the BoE) are effectively draining it.  The machine is complicated and there are a lot of moving parts these days, and the impact is global.  As the old saying goes:  This is not your father's market.

Unless the ECB and PBoC loosen up again, the easy money bull leg is almost certainly over.  What's always amazing to me is how this move was (yet again) telegraphed by the charts in advance, and it became instantly apparent that there was some type of trouble on the horizon.  I'm still not certain if the entire bull market is over, though.  I've been long-term bullish since the first trading day of the year, but recently I've moved the odds of a long-term top up to 50%, and I'm now equally split on the idea of one more leg up, or the top being in.  Given the indicator readings at the peak, we'd normally expect to see another leg up.  But both the long-term charts and the current decline are fuzzy enough to allow either option.  That question is simply going to have to be worked out heading forward.

On the hourly chart, I'm inclined to believe that the current rally either peaked in yesterday's session, or will do so after a marginal new high.  I also believe the market will feel obligated to test the noted rising trend line, which currently crosses the 1565-70 zone (and rising). 

The hourly trend line chart may help provide clues.  It would seem a shame for the market to have come this far without filling the gap in the mid 1620's.

SPX Update: An Ambiguous Market

The market has moved into something of a no-man's-land for the moment. Because there’s ambiguity at multiple degrees of trend, it becomes extremely challenging to interpret exactly what the market's next move is -- and there isn't much in the way of key levels to tell us what's coming next.

The S&P 500 (SPX) has reclaimed 1598, which really isn't what the bears wanted to see.  The fact that it failed to act as any kind of resistance this time around indicates sellers may be exhausted, and bears need to reclaim it directly.  Next resistance is 1608 +/-.  Above that, and probably the next key informational level is the rising intermediate uptrend line.  If bears can't mount a defense there, they may be in trouble; but first things first. 

There's a really off-the-wall wave count which has us forming the bottom of wave C (or iii) at the recent 1560 low.  So as we examine the potentials, keep in mind that it's entirely possible that wave iv is over and the market will rally to new highs directly.  I'm not favoring that view, however, for reasons I'll cover in a moment.

Strangely, the index which has kept me from becoming super-bearish previously is now the same index that suggests to me that there's more selling ahead.  The Philadelphia Bank Index (BKX) appears to be forming an expanded flat, which is one of the potential patterns I've noted over the past few updates.  An expanded flat is a waveform that's brutal on traders, because it whipsaws buyers out at the bottom, then whipsaws sellers out at the top.  I've suspected this waveform for a while, because the decline lacked any clear structure or acceleration, but there was no way to really verify it.  As I have it labeled, the expanded flat could even exceed 62 before reversing.  I'm uncertain if it will do so (though I suspect it will) and BKX is in the potential topping zone now. 

If this pattern is correct, then the decline should resume fairly soon.  Of course, the bullish possibility is that the decline to this point was a double zigzag correction, which has found a bottom at 58.73.  Above 62.92, and the market is cleared to rally toward the mid-65's.  I think the pattern fits better as an expanded flat, but I've been wrong before.

On June 24, I noted that the Dow Jones Industrials was approaching a support zone, and it found support after a near-perfect tag of the noted trend line.  Bears are going to need to break that support level to get anything going.

There are two main potentials I'm watching on SPX, and the one I'm favoring is a bit unorthodox.  In fact, I suspect most Elliotticians would take issue with my preferred wave count, but then they often do.  Nevertheless, the count I'm favoring is that wave iii or C has bottomed with a massive fifth wave extension -- which also opens up the possibility that there is no fourth wave up and fifth wave down coming, and wave C of red iv may be complete.  It all depends on whether the market is going to form an impulsive decline or not, and since we have no downward impulse waves on the chart at this degree yet, we genuinely can't know which outcome to expect. 

Based on my read of BKX, I think there's probably another wave down still in store for SPX.  What would be most interesting here is if we see another fifth wave extension -- but this time for blue v.  That would place the target well below my blue box -- but I simply can't predict that in advance.  If my BKX count is correct, then it's a good possibility, since BKX would need to move considerably to "get 'er done."  Of course, there's no law that says my BKX count is correct at all -- so I have to at least stay open to the option that all of wave C is complete and the bottom of wave iv may be in place, especially given the fake-out breakdown of the red base channel.  That's often what you see at the end of a C-wave.