Sentiment Has Reached Extreme Levels, A Bad Signal for Bulls

The market has been range-bound for the past few weeks, but should be close to declaring its intentions.  We've reached an important inflection point, and as most readers know, I expect that we're very close to beginning a significant decline.  While I'm not closed to more bullish options, I'm inclined to stick with February's projection for an important top forming in the 1700+ price zone, and the market has shown me nothing to make me any more bullish that that -- quite the contrary.  So the main question in my mind is how close we'll come to February's target of 1750 +/- before the anticipated decline begins.  As we'll discuss shortly, the possibility exists that decline may in fact have already begun.

After we run through a few price charts, I'd like to share an incredibly interesting Rydex fund chart which should give bulls cause for concern.

Starting off with a chart that shows why it's a bit too early to call the next move with conviction, we can see on the NYSE Composite (NYA) that the market has been noisy and range-bound for some time.  This could be a reversal pattern, or merely a consolidation before the rally continues toward the long-term price target from seven months ago.  We simply won't know until the market makes a sustained break.
 

 
The long-term chart shows that we're presently in the CE ("close enough") zone, but with the market range-bound in the recent past, it's just a bit too early to call whether we've seen all of red wave v yet.

On the S&P 500 (SPX) hourly chart, we're presented with a fairly clean sell trigger at 1684, and this roughly matches the technical theme of the NYA chart shown previously.  We can also see that SPX has formed enough waves that we could conceivably view this as a complete five-wave rally.

So far, the breakout over the May high hasn't been significant enough to signal any kind of all-clear for bulls.  Meanwhile, the decline to 1684 and subsequent bounce could simply be viewed as a back-test of the May high.  In other words, there's not much info being conveyed by the charts here, and the market needs to declare its intentions with a breakdown or breakout before we can feel more confident in the next sustainable directional move.

Short Update

Unfortunately, my personal life has necessitated a short update today, but there's probably not much required anyway.  We've reached a potential inflection point.  SPX has formed a five-wave decline, which suggests either a running flat (a variation on Tuesday's alternate count), or the start of a new leg down.  This provides us with a fairly reasonable bearish sell trigger at 1684, with the caveat that any decline below 1684 needs to show increasing momentum, since fourth waves are one place where triggers like that can fail spectacularly.  In any case, the pattern has the potential to turn into a head and shoulders, and that has to be respected as a possible topping pattern.

Without another break lower, though, and it's simply a back-test of the May high. 

In conclusion, the possibility does exist for a turn underway, but this could simply be a back-test of the May high -- so the next break should help point the way for the bigger picture.  Trade safe.

Dow Overbought and Approaching Long-term Resistance

Today we're going to look at the long-term in a bit more depth.  As most readers know by now, I believe we're in the fifth wave of this structure, meaning this is the final rally wave before a significant top.  The wave is still pointed upwards for the time being -- so we don't want to get too far ahead of the market -- but at the same time, I think risk to long positions is increasing.

The rally still seems like it's being driven by bots and algos, and according to Nanex Research, yesterday the SPDR S&P ETF Trust (SPY) recorded the lowest non-holiday volume since February 16, 2007.  One can read a lot of things into that fact, but I found it of interest.

The long-term monthly chart of the Dow Jones Industrial Average (INDU) also has some interesting features.  The two most noteworthy are the approach of long-term resistance (at the upper blue line), and the monthly MACD, which is now at the second highest reading in history.  The record reading occurred just prior to the top at the beginning of this century (sheesh, we're getting old!).
   

The long-term S&P 500 (SPX) chart is almost entirely unchanged since February, and appears to be putting the finishing touches on the structure.

The Russell 2000 (RUT -- aka: the least appealing acronym in the industry.  Who wants to own a bunch of "RUT"?) also appears to be wrapping up its five-wave structure.

Apple, Inc. Reaches Price Targets; while SPX Bears Ask: "Are We There Yet?"

Since my last update, the S&P 500 (SPX) reached the next target zone of 1704-1708, the Philadelphia Bank Index (BKX) reached its target of 67-71 and Apple reached its July 8 target and July 10 target of 462-468.  Today, we'll look at what may be next for all three.

Let's discuss SPX first:  While further upside is still anticipated, if my preferred wave count is correct then this rally is the fifth wave of a fifth wave -- meaning a significant correction (or worse) should follow.  Market internals have been weakening as SPX makes new all-time-highs, which does fit the expectations of a fifth wave.  The X-factor as always remains the Fed's printing press, but even the Mighty Beard of Ben Bernanke can't remain forever immune to the natural cycles of the market, and I presently see no compelling reasons to doubt the preferred wave count.

All of my recent near-term upside targets have been reached; but in the bigger picture, the next target zone is 1720-1735 SPX.  There's still a shot at my February 7 target of 1750 +/-, but we'll have to take it day-by-day heading forward, since if this is indeed the fifth and final wave of the rally, then the odds for downside risk are increasing even as price heads upwards.  Personally, I've never been a big fan of fifth waves.  They're designed to catch everyone off-guard -- obviously that's how they need to work, since if everyone knew the market was going to reverse its established trend in the relatively near future, then no one would take the other side of the trade.  As a result, fifth waves tend to fall either a bit short of the final target (while everyone is still looking up) -- or they run right through the target and get everyone thinking all's well and the market will trend forever.  We'll see how close I can get to pinning this one down, but "expect the unexpected," as the saying goes.

SPX has followed the recent projections well, and presently appears pointed toward the next target zone.

There's an alternate near-term possibility, which would add a nice twist to the path SPX takes to reach the target.  The alternate count is for a pattern called an expanded flat, which would kick out the prior swing low before rallying back up to the target zone.  Expanded flats are great for creating confusion and maximum pain among market participants, since the break of the prior support zone get everyone looking the wrong way.  Presently, I'm discounting this alternate count at 35% odds, but the recent rally wave gives off an aura of "b-wave slop," which is why I'm discussing the potential.  I've noted a few levels to watch on the chart below.

The Philadelphia Bank Index (BKX) has now reached both upside target zones.  I haven't drawn a near-term chart for BKX, but it seems to suggest the same potentials as SPX.

Market Still Appears Pointed Higher after FOMC Announcement

Yesterday's FOMC statement was a non-event.  The Fed basically said that everything is great, except where it isn't, but there's no reason to begin tapering QE just yet.  The Fed also let us know that despite the rising costs of oil, housing, food, clothing, beard trimmers, and of course equities, that in fact inflation is incredibly low by anyone's standards -- especially the Fed's -- and in reality there is no such thing as inflation, it's all just a trick of the light; and even if inflation did exist, it certainly couldn't survive in this day and age, what with cell phones and iPads and such, so go back to sleep and we'll take care of everything. 

I'm sure we can trust these guys to make this all work out.  It's not like they're trying to control a massive and incredibly complicated system like a national economy or something.  And I mean, this is the same group of folks who assured us there was no housing bubble right before the housing bubble popped, so clearly they're better informed than we are. 

Meanwhile, the market still appears that it wants to continue rallying for at least a bit longer.  In my last update, I expected further upside for both the preferred and alternate count, and the S&P 500 (SPX) rallied into the alternate count target zone of 1695-1698.  Despite the strong reversal from that zone, I'm continuing to favor my view that the bulls will push up into the preferred count's next target of 1704-1708.  If the bulls can do that without whipsaw, then odds are good we're headed into the higher degree target zone of 1720-1735 (see hourly chart which follows).

   
On the hourly, I continue to feel the market needs another wave up to complete this five-wave structure.  This chart has tracked well for the past few weeks.

I haven't updated the long bond since the end of June, but after my last update, it subsequently found support within my very narrow target range of 132-132.10.  The rally out of that zone appears impulsive, and a breakout over the dashed black line has good odds to take wave (4) up toward the 137 zone -- with a shot at 140.  So the long bond could stabilize for a while here, but ultimately in the big picture, lower prices are expected.

 
In conclusion, equities still appear to be pointed toward the next upside target zone, and I'll adjust and refine those targets as this wave unfolds in real-time.  I continue to believe the market is entering the fifth wave of a fifth wave, which means a significant correction awaits upon completion.  Trade safe.

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Not Quite Yet, but Soon: Get Ready for a Major Correction

Let's face it, bull markets are boring.  At least, I think they are.  I miss having a market like we had in 2008 -- but then, I love volatility.  I think there's nothing more exciting than running both sides of the trade and picking up 50 ES points on a round-trip in one day.  You just can't do that type of thing in a bull market.

For the past few weeks, I've been trying to balance how to discuss this market at different time frames, so as not to be too premature in discussing the bearish potential and scare people off from playing the long side.  The bottom line is that the bearish potential is something I'm anticipating not too far down the road -- but as I discussed yesterday, I'm still not seeing any real signals in the price action about which to become bearish.  Nevertheless, I would be remiss not to highlight the fact that I believe we're in the fifth and final wave of the rally -- so today, we'll look at that in a bit more depth.  

While I don't see anything to be immediately bearish about, the "good" news is:  I think the bears' turn to shine is coming soon.  Back in the beginning of February, I published my preferred long-term wave count, with a target of 1750 (+/-) SPX -- and we're finally almost there.  I'm still inclined to believe there's another wave up to come here, but I'm also inclined to believe that we're going to see a big correction (or much worse) follow that wave.

One of the fascinating things about Elliott Wave Theory is the psychological component.  Each wave has its own character, and sometimes we can use sentiment to help locate where we are in a wave structure.  For example, second waves (in bull markets) tend to be the moment at which everyone is most fearful.  Third waves are the "point of recognition," where the majority finally get on board with the right side of the trade.  Fifth waves tend to be times of either "irrational exuberance" or utter complacency -- or both.  I believe we're in a fifth wave now.

Accordingly, I believe we should prepare for some sort of major news event approaching on the horizon -- quite possibly as soon as August -- which will start to shift sentiment away from the Invincible Fed Money Machine to "Hmm, maybe things aren't as solid as we think."  Ultimately, much further down the road, sentiment will come full circle to "Arrgh, get me out of this market at any price!"

I think we're getting close to beginning that bear cycle.

The long-term chart shows my preferred wave count, and while I can't rule out the more bullish count, I'm still inclined to favor the black (B) wave rally, which will reverse (ideally sometime in August), and ultimately head back to retest the 2009 lows.  Of course, that sounds impossible right now... about as impossible as SPX 1700 did, back in 2009.

On the hourly chart, we can see that the structure still appears to need another wave up, to yet another new all-time-high.

The five-minute chart is my best-guess on the near-term wave structure. The recent action is a bit messy, which is usually suggestive of a fourth wave correction.

In conclusion, I don't think it's time to get uber-bearish just yet, as I believe the structure is still pointing to higher prices.  But I think we're getting close, and traders with an eye toward the intermediate and long term may want to consider beginning to position for a fundamental change in the market's character.  Trade safe.

Reprinted by permission, Copyright 2013 Minyanville Media Inc.

Any Reasons to Get Bearish Yet?

In this update, we'll revisit Apple (AAPL) and see how the wave count is progressing, and also take a look at the broader market.  Before I get too far, though, I should mention that since I reside in Maui, I may end up "off the grid" in the near future.  We're awaiting the arrival of Tropical Storm Flossie, which is due to hit Monday morning and projected to pass directly between Maui and the Big Island of Hawai'i (this is a relatively narrow space, which means it's going to hit us pretty hard).  In preparation, I spent yesterday braving the long lines at Costco in order to stock up on necessities like Doritos and Kit Kats, in case the storm wreaks havoc on Maui's infrastructure and leaves us without power and chocolate.  Honestly, though, it's tough to take a storm named "Flossie" too seriously.  To me, "Flossie" sounds like the name of a cheerful licensed cartoon character who promotes the virtues of good dental hygiene ("Remember kids, Flossie says to clean between your teeth after every meal!  Especially after eating Kit Kats and Doritos!").   

Anyway, last update noted that the S&P 500 (SPX) had reached the 1695-1705 target and was probably due a fourth wave correction.  It appears that correction has unfolded, and is likely complete, suggesting the market is beginning wave (5) up to the 1700's.  The decline appears corrective so far.

The Dow Jones Industrial Average (INDU) put in a bullish reversal on Friday, and this type of candlestick suggests a lot of buyers were/are waiting just under current price levels -- which suggests solid price support for the near-term.

The Dow Jones Transportation Average (TRAN) presents an interesting picture.  It's formed enough squiggles for Minor Wave v to count as complete, but wave v would appear disproportionately small if it is indeed finished.  One of the guideline of Elliott Wave Theory is two waves in an impulse tend toward equality -- usually wave i and v.  If we've only seen wave (1) of v, then there's quite a bit more rally still to come.