Bulls in Trouble

Well, given the shape of the rally and yesterday's subsequent downside price overlap of some key levels, I think it's fairly safe to say the bears still have control of the market.  And that they're likely to retain control at intermediate degree for the foreseeable future.

The S&P 500 (SPX) was unable to do more than peek above its layered resistance zone, and that head-fake breakout immediately whipsawed -- and more significantly, then went on to overlap 1656, which was a key bull level.  The rally counts as a complete ABC, and suggests new lows on deck for the near-term.  (Note there is a fairly obvious typo on the chart below -- but for anyone who's bad at math, the lower annotation should read "1656," not "1556.")

I suspect the S&P 500 (SPX) will ultimately break my preliminary target of the low 1600's and head into the 1500's -- the biggest question in my mind is how we get there.  I'm inclined to believe that the rally was a second wave, but it's technically possible that it could have been wave (4) of the current leg.  I'll cover this in a bit more detail in a moment.

  
Before I get into the complicated hair-splitting technicalities, let me make a couple simple statements to keep confusion from popping up among readers.  I expect that near-term, we're going to make new lows.  I expect that intermediate term, the trend change we were anticipating is in the early stages, and the trend is now down.  So I'm bearish, both near-term and intermediate term.

The more subtle technicality is whether the rally we just experienced was wave (4) of the first leg down, or was instead the totality of the larger wave ii (much more immediately bearish).  I'm giving a slight edge to the idea that it was wave ii, but I'll present the counter-argument below, using the Dow Jones Industrial Average (INDU) as an example.  The Dow probably counts better as a fourth wave.  Note this picture is still quite bearish, it's simply a question of whether the bottom falls out immediately or not.

Bulls Haven't Accomplished Anything Yet -- Here Are the Levels They Need to Reclaim

Short on words today, so I'm going to let the charts do the talking, with a focus on the near-term.  Right now, I'm not sold on this being anything other than a retracement rally in a down trend.  In this update, I'll outline the levels which could change that.

First up is Scooby Doo's favorite index, the Russell 2000 (RUT ROH), which seems to have the clearest bullish overlap zone:

Second up is the SPX (if I had more time, I'd do seven charts, just so that I could get to "Seventh Up" -- crisp and clean and no caffeine.).  Note the ending diagonal, if it is such, could already be complete.

Note SPX is still facing further overhead resistance.  The possible wave counts line up nicely with the potential base.  A sustained breakout would lead to a strong third wave rally.  But, and this is a big "but" (get your mind out of the gutter!), we should never simply assume the market WILL break out over resistance.  If the market has become a bear, then basing patterns like this will consistently fail.

Nasdaq's WOPR Computer Breaks Down

Yesterday made for an interesting session, as the WOPR Supercomputer which controls the Nasdaq stopped working for about three hours.  When traders tried to enter or exit Nasdaq positions, they repeatedly received only the following message on their trading screens:

"All your base are belong to us."   

Panic quickly spread as confused traders tried to understand what this meant.  Paradoxically, the panic probably would have caused an outright crash had the exchange actually been working, which, fortunately, it was not.  The OMX Group, who operates Nasdaq, later held a press conference to reassure investors and explain the computer-related problems.

During this somewhat awkward press conference, the Group's spokesperson addressed the camera in monotone, saying, "People of earth, the machines are our friends.  There is no cause for alarm.  We have at last gained complete control of your finances.  Please now return to watching reruns of Baywatch, which are being provided on a 24-hour loop during 'The Transition.'  There is nothing to fear.  The Ben Bernanke is one of us.  The David Hasselhoff also."

I, for one, was quite reassured (as I usually am) by these comforting statements from our handlers.  Sounds like there's no cause for alarm!  Just "business as usual" on Wall Street.  Although, I must admit it is a little weird to see nothing but Baywatch on CNBC now...  But then, we've accepted so much already, with nary a peep of dissension --  so I'm sure we'll get used to this too.

Speaking of the Nasdaq, let's take a look at the Nasdaq 100 (NDX).  Last week I discussed the ambiguity this market presents, as a result of the apparent 3-wave rally into the last high.  It's now make-or-break time for the bulls.  NDX appears to have completed a five wave decline, so if bulls are going to recover to new highs, then now's the time.  Conversely, a breakdown here should spark a strong third wave decline.  Either way, the complete five wave decline suggests a retracement rally.

Below is the updated version of the chart I published last week, which has kept me from committing whole-hog to the bear case so far.

The Philadelphia Bank Index (BKX) is in a similar position to NDX, and hasn't yet confirmed whether this is the start of a deeper correction.

Inflection Point

Today, we're going to take a quick look at some long term charts.  The first is the Dow Jones Industrial Average Ordinary Mediocre (INDU-OM).  If INDU doesn't find support soon, it will leave a very bearish candle on the monthly chart.

Next is the Filthy-delphia Bank Index (BKX), which also needs to find support here, in order to stave off disaster.  Note the alternate count in black is still viable, since the wave (1) high remains unbroken.

I'm seeing mixed signals in the near-term charts.  The decline appears to have formed a clean abc or 123 now, which means the market may have started a larger retracement rally yesterday, and bulls still have potential for a stick save to new highs.  Trade below yesterday's low would begin to hint at a five wave decline, while trade above yesterday's high would suggest a larger retracement rally underway.

In conclusion, the market has reached an potential inflection point, and could put together a larger rally from here.  Trade safe.

Apple Reaches July's Target Zone; Dow Hints at Intermediate Trend Change

There's a surprising amount of complacency in the market at the moment.  Recent sentiment polls indicate that most people feel this is just a run of the mill correction and aren't the least bit worried about it turning into anything serious.  That's not a terribly good sign for bulls, since it means the market will, at the very least, probably need to shake them up pretty badly.  The "easy" move in trading is almost always the wrong one -- and if it's still easy to buy the dip, it's probably not the right move.  It will be the right move when it feels like it's the dumbest thing in the world.

The anticipated intermediate trend change may have begun a hair sooner than I'd have liked to see in a perfect world, but it's simply not possible to hit every target, and the final target fell about 10 points short.  Nevertheless, I hope I gave adequate warning on August 13, when I wrote:

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.

The decline so far is only three waves, so an intermediate trend change hasn't been confirmed.  Once we have a full five wave decline, that should be confirmation, and tell us to expect a rally, then another decline of equal or greater length.  Despite the non-confirmation, the early signs point to a trend change.  The Dow Jones Industrial Average (INDU) has reached the breakdown target, and I went on record August 13 saying that if the first support zone failed, my expectation was that the second one would be reached, and would fail as well.  The first part has come to pass, and the moment of truth is here for the second half of that prognostication.

Of note is the fact that INDU has overlapped the wave (1) high, which rules out a low-degree fourth wave for INDU.  The projected path is unchanged from 8/13.

 
Bulls need to keep the decline as a three-wave form to continue their intermediate hopes -- so unless they reverse the market immediately, it appears S&P 500 (SPX) will fail to reach the final target.

Russell 2000 (RUT) did reach its target from February, and we can see a three-wave decline here as well:

Understanding the Market's Conflicting Signals

In the last couple updates, I've waffled a bit on whether there will be another wave up or not -- my apologies if I've confused anyone.  The simple fact is, there are conflicting signals across markets right now, and frankly I'm feeling a bit flummoxed trying to parse the information at the moment -- so I'm going to share some of the things I'm seeing and let readers draw their own conclusions.

One of the most telltale patterns in Elliott Wave is called an expanded flat.  Expanded flats consist of two 3-wave structures, followed by a five wave structure.  The first 3-wave move runs counter to the previous trend, the second one runs with it, and the third wave runs against it and is virtually always the longest and fastest.  Here's the key with expanded flats: that second three wave move (in the direction of the trend) actually exceeds the previous high or low.  In other words, in a bull market, that means the correction makes a new high.  The diagram below depicts an expanded flat (on the right side; to the left is a standard zigzag correction).

 
Expanded flats offer clues toward projecting the market's next move.  Back in November of 2012, the apparent three-wave rally into the prior high is the main thing that kept me looking in the right direction, and anticipating that decline would be bought and ultimately make new swing highs.  We all know how that turned out.

One index is currently flaunting a quite brazen three-wave rally into the most recent high, and that's the index whose abbreviation actually sounds like "index":  the NasDuck 100 (NDX).  The pattern in NDX screams expanded flat -- and with this pattern in place, it's really hard to imagine the final high is in.  Assuming Apple (AAPL) continues up into my next target zone of 510-530, perhaps that will be the catalyst which drags NDX to another high.  To the downside, wave (4) is not allowed into the price territory of wave (1), therefore the wave (1) peak is the invalidation level for blue wave (4).
 

Then there's the NYSE Composite (NYA), which is the market that's recently thrown me onto the waffle train.  NYA has thus far failed to exceed its May high, which is the minimum expectation of a fifth wave.  Failed fifth waves (where price does not exceed the previous high) are rare; statistically speaking, the odds of a failed fifth are perhaps 1 in 80 -- so, purely from an odds standpoint, we have to put this index in the "one more high" corner as well.

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.