Almost Everything Is Lined Up for the Bears

For the past couple weeks, I've done my best to avoid trying to make a firm prognostication of the near-term as long as the market remained range-bound.  As of this morning, it appears the market is ready to break down from the apparent head and shoulders top.  I've made my intermediate bearish stance pretty clear, but we're presented with a lingering conundrum regarding the short term.  The NYSE Composite (NYA), which is a fantastic representation of the market as a whole, has thus far failed to best its May high.  

The purpose of a fifth wave rally is to break the high of the previous wave; and the vast majority of the time, that's exactly what it does.  In rare instances, the market will experience something called a "fifth wave failure" -- which, as the name implies, is when the fifth wave fails to exceed the high of the prior wave.  Fifth wave failures are impossible to predict in advance -- in fact, their very nature is to be the exception to the rule.

Outside of NYA's failure to make a new high, the patterns in most other markets look bearish.  After several weeks of top-building, it's difficult to image we'll see a short-lived breakdown.  Everything seems to be lined up for a sustained intermediate breakdown -- except for the lingering doubt created by NYA's failure to make a new high.  I obviously can't be certain what will happen here, but because of NYA, I'm going to at least keep an open mind to the possibility that we'll see a relatively short-lived breakdown, then a new high to complete the expectations of wave v -- and then the more serious intermediate bear move.  If it weren't for NYA, I'd say fuggedaboutit, bears will run straight to the end zone. 

Despite NYA, the preponderance of evidence seems to favor the bears for the time being, so that's the direction I"m going to lean.  It's entirely possible that NYA did indeed form a failed fifth, which would suggest a very strong bearish market to come.  I'll track both options heading forward.

The S&P 500 (SPX) notes the apparent near-term count, and some preliminary targets.

In the big picture view, I continue to feel that no matter how the near-term resolves, the bears are about to take control of the intermediate picture.

SPX and Apple Update: Icahn Joins Us on the Apple, Inc. Long Play

Lately, charting the S&P 500 (SPX) has been about as enthralling as reading a washing machine instruction manual.  It's continued to trade inside a seemingly endless, whippy range, leaving us free to imagine whatever patterns we want.  Thankfully, all is not lost for those of us who write about these things: Apple (AAPL) has been a big hit since I recommended it as a long play on July 8, and continues to please those of us who are invested in the high-tech fruit.  Apple made a convincing breakout over resistance yesterday on impressive volume.

Apple's now bumping against resistance from the (assumed) A-wave low.  This is an important resistance zone, since overlap of that price zone would suggest a three-wave decline -- and that would mean the decline was corrective, which would then suggest Apple is ultimately headed back into the 700's.

Some folks believe that technical analysis is a bunch of silly mumbo jumbo -- I would point at my Apple charts of the past few months as a strong hint to those folks that they're missing out on a powerful trading tool.  I first called attention to Apple back in May, and it rallied briefly thereafter, at which point I told readers I would not want to remain long if it traded below 442.  It did so, and then proceeded to drop 50 points.  From there, I projected the the dip on July 8, which I recommended as a buy, with a first target of 460-480 -- and the rest is history.  All of this has been done simply by reading the charts.

Obviously, I didn't have insider information allowing me to project that Apple would jump 5% on its earning announcement, and another 5% on Icahn's buy recommendation.  There was no way I could know these things -- but someone was buying (and we now know at least one of those big players by name), and that buying left patterns in the charts which pointed to higher prices.  As I've asserted for many years:  the charts lead the news.  If you're lacking technical analysis in your trading arsenal, you're missing a fantastic tool.

As noted, bulls aren't entirely out of the woods just yet, but given yesterday's solid breakout, the picture continues to look promising.

In reviewing my chartbook tonight, I realized a minor oversight on the NYSE Composite (NYA).  NYA hasn't broken the May high yet.  I've been leaning toward the idea that there would be another wave up to wrap up the pattern for the near-term, and this realization puts me more strongly in that camp.

Intermediate term, I continue to believe this is will mark the final wave before a solid correction.  The Dow Jones Transportation Average (TRAN) looks to be in the process of forming a topping pattern.

Market to Bulls: "Pay Me Now, or Pay Me Later"

The market has continued to trade within the noise zone, and the question remains whether all of wave v is in or not.  For a bit of perspective and clarity, I'll break down my view on what each time frame holds for bulls and bears heading forward:

1)  Near-term, I'm not certain if the rally has put in the final thrust or not.

2)  Intermediate-term, I believe the market will see a significant correction or worse.  The question is whether that correction begins directly, or begins from slightly higher prices.  My February target of the mid-1700's hasn't been negated yet.  Whether that target is reached or not, I presently expect the market will ultimately end up trading below current prices over the intermediate term.

3)  Long-term, we may or may not have another  fourth wave decline and fifth wave rally to unravel, and we'll have to unravel that question at some point in the future.  The potential exists for a major long-term top in this zone, and I'm presently a bit more inclined to favor that view. 

In any case, I believe the downside potential exceeds the upside potential relative to current price levels.  While the near-term still allows for another wave up to new highs, I would be quite surprised if bears don't win this battle at intermediate degree.  Hopefully that helps clarify my current stance, and it represents a material shift of my long-term stance in January.  I'm no longer long-term bullish, but am now in "sell the rallies" mode until proven otherwise.

I've chosen the NYSE Composite (NYA) to help illustrate why I feel this way.  As I see it, the best-case scenario for bulls right now is a running triangle, which leads to a final rally wave.  Worst case for bulls is the top is in already.  Bears win both those battles at intermediate degree, but may want to await a breakdown in order to maximize probability.  In other words, I'd be inclined to sell either at higher prices or at lower prices.  Taking action directly in the middle of the noise range amounts to a coin flip.

 The S&P 500 (SPX) near-term chart illustrates essentially the same conundrum, from a near-term perspective.  No clear break has left myriad near-term potentials.

From higher elevation, the big picture seems more clear.  The question remains whether red wave v is complete or not, but I would presently expect the downside targets should be realized either way.  The first target of the most bullish count at intermediate degree is the low 1600's (shown by gray wave (4)).  The most bearish count has a final target near the 2009 lows.

No Title for You! One Year!

I spent some time studying charts this weekend, but ultimately there's really very little to add from last update, since the market remained within the noise zone on Friday.  So I've created a chart which will hopefully help readers better understand the big picture outlook.  The chart annotations pretty well explain my thinking at this point.  I've used the INDU for illustration, but SPX would be expected to follow a similar path.

On SPX, there's been no change, and we're still watching to see if the pending bearish sell trigger is tripped.  Despite the fact that ES is about 6 points in the red right now, I wouldn't be surprised to see SPX rally back toward 1700 at the open.  If it instead heads down directly from here, watch for a solid sell off. 

In conclusion, we're still in the noise zone, so there's been no change from last update, and I still feel a breakdown here would likely suggest the beginning of a much larger correction.  Trade safe.

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.