Are We Witnessing a Blow-Off Top?

Today we'll revisit the long-term wave counts in two markets, both of which suggest this may be the final wave of the rally.  A blow-off top in progress.  Last update I discussed the bull case.  Today is not a reversal of that argument by any means, it's simply a discussion that encompasses a larger time frame.  Near-term, I feel bulls have better odds, and the next target zone for the S&P 500 (SPX) exceeds the all-time-high.  But in the bigger picture, the party may be coming to a close in the not-too-distant future.

First up is the S&P 500 (SPX).  When I drew the initial projections for this chart back in early February, I obviously couldn't know it would follow that projection almost turn-for-turn for the next five straight months.  If only I could have held my nose and bought the dips exactly as anticipated.  This is such a hard environment from which to unplug one's brain, though, with the ongoing Central Bank machinations.  But from a purely technical standpoint, the first read is usually the right one.

In any case, it appears reasonably likely that February's projection of 1750 +/- will come very close to being reached.  It also appears this is a fifth wave rally -- which means its job is to get us to believe it will never end.  Fifth waves are where smart money passes the bag to dumb money, just before a move finishes.  If one isn't inclined to front-run, there should be some warning in the form of an impulsive wave down, though fifth waves sometimes end abruptly on a strong reversal that leaves heads spinning, so please approach this market with caution. 

On the chart below (4)? and iii? are gray because we can't know yet whether to expect them or not.  Black (B) marks a potentially complete wave: a long-term top which then leads to black (C) way down there at the bottom of the chart.

Near-term, the SPX looks to be in the process of completing wave (3) of v.  Until the All-Time-High is claimed, bears can hold out hope for a more bearish resolution, but I'm inclined to view the bears as near-term underdogs at this exact moment.  If my long-term count is correct, though, their time is coming. 

The Philadelphia Bank Index (BKX) has reached the target zone from 7/8, but also appears likely for continued upside.  I've become quite convinced we're witnessing an extended fifth wave in this index, and the concept of an extended fifth wave fits the psychology of this time perfectly.  It also fits the Fed's influence of printing so much money that the market has no choice but to keep heading up, when it "wanted" to stop rallying some time ago.  The fifth wave extension in this case is almost an unnatural move; a wave extension forced into existence by excess liquidity if you will.

In conclusion, if the long-term wave counts are correct, the market will continue rallying into the 1700's.  And while we don't want to get too far ahead of the market, it appears reasonably likely this is the final rally before the most significant correction we've seen in some time.  Trade safe. 

Is There Any Hope Left for Bears?

I've written before that fourth waves are my arch-nemesis.  As a trader, I largely avoid trading them unless I have a clear read.  As an analyst, I don't have the luxury of ignoring a market -- all I can do is what I've been doing for the past few weeks:  warn that the wave structure was unclear to me, and that, while I was leaning very slightly bearish, it was entirely possible that wave iv had bottomed at 1560. 

It now appears that was indeed the case; but I would still caution that fourth waves are known for their complexity, and the obvious answer isn't always the right one.  I'll discuss one such option shortly.  In any case, if you want to place blame for missing the exact bottom, then don't blame Elliott Wave Theory: blame me.  Wave theory had this one pegged; and had I simply stuck with my original anticipatory read of the pattern from months ago, and then more recently favored my hypothesis of an (albeit messy) ABC pattern off the high, then I would not have waffled around thinking there may be another wave down still to come -- however, at least those potentials did keep me from turning overly bearish.  In fact, once the bulls held 1608, for the near-term at least, I began anticipating that SPX was headed toward the 1640-50's. 

At both near-term and intermediate-term, this has been an odd wave structure, and extremely difficult to read.  My sentiment regarding the ambiguous pattern has been pretty well-reflected in my article titles from the past couple weeks (i.e.- "An Ambiguous Market"; "Still a Mixed Bag"; "No Clear Answers Yet," etc.).  As I wrote on June 27:

In conclusion, we're in something of a no-man's land at the moment.  The market has so far failed to reach my target zone, and has held the key 1560 support zone that I mentioned in Monday's update.  For the moment, have to at least consider the potential that the bottom is in.  If you're of a bearish inclination, I would suggest only low risk entries until we have confirmation of an impulsive move downward (which would indicate the larger trend has changed).  For that to happen, the market needs a new low -- as of right now, the long-term trend is still currently pointed upwards, and both options remain viable.  

Sometimes the market makes perfect sense; sometimes it doesn't.  We don't need to know what the market will do every minute of every day; we only need to have a pretty good idea what it will do often enough to make money.  And then -- and I think this is a key aspect that many novice traders miss -- we need to maintain the discipline not to act (and preserve capital) when things are vague; at such times, I try to limit my trades to low-risk/high-reward propositions, which I've also been urging for the last few weeks.

As an aside, the recent move in equities calls to mind a thought I've discussed previously.  I can illustrate it with a bit of personal experience:  One vehicle I've really grown to love trading is the US Dollar/Japanese Yen Forex pair.  One of the reasons I love it is because I have absolutely zero fundamental bias about where it "should" be, price-wise.  This lets me look at the charts completely fresh each day, with no fear or hope as to what I think it should be doing, or where I think it should be priced.  As a result of being able to view each pattern with complete objectivity, my win percentage there (outside of being burned on a few massive intraday gaps where my orders get filled miles away from my actual stop price -- you Forex traders know exactly what I'm talking about) is phenomenal.  The point being, if we can remove our fundamental bias and trade only what we see, it helps our performance immensely.  Most of us have a hard time doing that with equities, because we all have an opinion on whether they "should be" priced higher or lower than they are.  As much as I can, I try to look at equities without bias -- but I am, after all, half-human, so I'm unable to completely remove all bias and emotion.

In any case, all that is now "spilled milk under the bridge," as they say -- so let's get up to speed on the present. 

As I've noted over the past couple weeks, most indicators have been in the process of rolling bullish, and most have now done so.  This suggests a straightforward fifth wave rally underway, but in the interest of seeing both sides of the trade, I'll also discuss one bearish option afterwards.

First up is the chart of the Dow Jones Bullish Percent Index.  I noted on July 8 that this had flipped to a buy signal, and that signal remains active.

Next is the S&P 500 (SPX).  While a bearish alternate count is noted, we should probably assume the more straightforward wave iv and v count until proved otherwise.

The Nasdaq Composite has nearly reached the target from its recent breakout, and SPX is approaching the all-time high.  It's not unreasonable to expect some form of correction soon, assuming the market ever decides to correct again.

Bernanke to Market: Hey, I'm Retiring, This Will Be Someone Else's Mess to Clean Up

Yesterday Bernanke let everyone know that he was just joking about "tapering" QE, and that what he really meant to say was that he was considering "toilet papering" his neighbor's house, during mischief night this coming Halloween.  At least, I assume that's what he said, based on the market's reaction.  Honestly, I don't even listen to the guy anymore.

The cash market did its usual "Fed Wednesday" whipsaw action, but the cash market isn't really the market anymore, so who cares what happened during regular trading hours.  We all know that's irrelevant these days.  Shortly after the market closed, the futures shot up like a rocket, once again proving right the pundits who say that the market is driven by the economy and not by Quantitative Easing.  I assume these pundits share an apartment under a rock with the dudes in the Geico commercials.

Bulls will once again have another resistance level cleared while they sleep, and not be forced to make the painful decision of whether to sell at resistance or hope for higher prices.  There is no such thing as resistance in a Bernanke Market.

Just one chart today, because really, what is there to add? 

In conclusion, it appears wave iv did indeed bottom at 1560.  Bears' last stand is at the all-time high (which I'll probably short simply due to the risk/reward proposition) -- but nevertheless, this remains a bull market until proven otherwise.  Trade safe.

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.