Bulls Throw a Wrench in the Mix

As traders, our toughest opponent, and the hardest one to beat, is ourselves.  We all know that humans have a rational side (or like to think we do) and an emotional side.  And most of us like to think that we're rational beings, and that we make well-reasoned decisions.  But the reality is different.   

I was a pretty successful sales manager and trainer in a prior life, and one of the things I used to teach my reps was that people justify their actions with logic/rational thinking -- but what actually motivates people to take action in the first place is emotion.  When a person makes a purchase, be it a house or a car or a new watch, they usually have a list of the "reasons" they're doing it ("It's a good value; it will save us money in the long run; it's safer; it's better for the environment; it gets good gas mileage..." etc.), and some people actually believe that's why they're buying something.  But the reality is that -- outside of the basic necessities -- people buy things for only one reason: because they want them.

Don't believe it?  Ask yourself how many times you've walked away from a purchase that you knew made perfect sense on every level, including financially -- and then ask yourself how many times you've bought things that made no sense at all.  If we were truly rational beings, neither situation would ever happen.  Our purchases would be logical and consistent, and we'd own a house full of useful and practical items that Mr. Spock would buy (Vulcan Q-Tips and such), not the bunch of useless junk we actually own, much of which was purchased on a whim (are you ever going to actually WEAR that shirt?  Why?). 

As humans in our "natural state," what drives us to take action, or to remain paralyzed, is emotion.  If we don't actually want something, a salesperson can make all the logical and practical arguments they can imagine -- and those can be good arguments; arguments which make all the sense in the world -- but in the end, we ain't breaking out the credit card unless we feel the product fills an emotional need (security, safety, pride, whatever).

The point is:  Despite what many of us like to believe about ourselves, the vast majority of our actions are driven, first and foremost, by emotion.  And this is one of the factors that makes trading so difficult.  Money controls almost every aspect of our lives, so decisions that involves fair sums of money are almost always laced with heavy emotion.  This is why discipline is such an important part of successful trading -- left to our own natural devices, we'd jump in and out of the market almost at random, based on how we felt on the spur of the moment. 

These same emotions are hurdles faced by analysts as well.  Reading a chart is as much an art-form as it is a formula, and there are times it's hard to sort out the legitimate gut instinct/subconscious-warnings (that something is amiss) from the typical fear and greed-type thoughts.  That's essentially what happened to me yesterday, and I actually wrote about the fact that I felt the market had behaved "too well" and it bothered me -- but in the end, I chalked this concern up to normal worry... instead of listening to my gut.

Meanwhile, the market promptly broke above Tuesday's high, which keeps the bulls, and the alternate count that i/A is complete at 1627, alive.  There's nothing new to add for this chart, except to note that the S&P 500 (SPX) has reached the upper red down-trend line.  Bears can tolerate a quick trip outside of that line, but sustained trade above it would strengthen the bull case.

At this point, the pattern could be a number of different things, and there's simply nothing obvious that jumps out as "oh yeah, this is what's happening."  I'm somewhat inclined to favor the near-term pattern shown in blue below, but I wouldn't get married to that expectation.  At times like this, I'll  take quick stabs at a play if the market gives me a good low-risk entry -- if not, I'll sit on the sidelines until things clarify.

On the Dow Jones Industrials (INDU), I've detailed the bearish and bullish resolutions to the pattern.  As noted, I'm somewhat inclined to favor the blue path, but I'm not married to it -- if bulls can reclaim noted resistance, then that would open up the game for them considerably. 

Bears Still Have the Ball

So this is where I always get nervous -- I figure I have no right calling a double-whipsaw that accurately (hitting both sides within three-point target ranges) two days in advance.  I always assume the market must have something else up its sleeve.  It's like when you're going to ask your spouse something they normally wouldn't agree to, so you head in expecting an argument -- but instead of arguing, they cheerfully say, "Okay, hon, sounds great!"  You're immediately suspicious.  "Why on earth did she agree to that?  She must be up to something!"

That's exactly how I always feel about the market at times like this.

Be that as it may, we should probably stick with the plan until the market proves otherwise.  The key level for bulls is yesterday's spike high; as long as bears can hold that level, they're cleared for a solid decline.  A bit more backing and filling first would be normal.  In the event the market's up to something, though, and breaks above that level, I've roughly outlined one alternate count on the chart below.

I've used the Philadelphia Bank Index (BKX) to illustrate one way the market could throw a curve-ball here, to shake more bears out and draw more bulls in.  Again, unless the market can break yesterday's high, there's no reason to expect these other outcomes -- but we always have to try and see both sides of the trade. 

Bulls Need to Hold it Here

An interesting situation has developed during the holiday weekend.  In the last update, I discussed that my preferred count for the S&P 500 (SPX) was an expanded flat, which would decline to 1627-1630, then rally to 1649-1652.  On Friday the market declined directly into that three-point zone -- then on Monday, while the cash market was closed, the E-mini S&P futures (symbol: ES) rallied straight up into the (cash-equivalent) target zone, and promptly reversed.  The chart below shows the futures action:

This means the futures may have done the "work" and completed the pattern while the cash market took a holiday.  This has left me a bit uncertain about whether to expect the cash market to also complete the pattern or not.  On the chart below, the more bearish option is shown in blue.

It should be noted that the potential does exist for this to be a more meaningful bottom.  The charts suggest a market that's teetering on the edge, and sustained trade below 1627 is likely to precipitate a strong sell off -- however, as I noted on Friday, as long as bulls hold that zone, they could conceivably begin the larger wave B/ii rally from here.

SPX Update: Short and Sweet

I'm going to keep this update as simple as possible.  The S&P 500 (SPX) is hinting at the potential for a base to form in this zone.  There are several options for the near-term, and I've done my best to detail and outline their paths and what to watch for, as well as their first target zones.

We have a three-day weekend approaching, and the session prior to three-day weekends is often light volume, which gives those sessions a bullish bias.  Fund managers know they can't put big sell orders into a light-volume market without causing major havoc.  As a result, approximately 70% of the time, the session prior to a three-day weekend closes green.

The chart below covers the most likely possibilities for the short-term.  I'm slightly partial to the expanded flat (shown in black), since it would burn the greatest number of participants -- it allows for a retest of the 1627 low, while whipsawing the 1630 low. 

On the hourly chart, the market has so far found support at the noted black trend line, which is the red ii/iv trend line -- an important intermediate support zone.  This allows the possibility that the wave ii/B bounce will develop from here.   

In conclusion, I remain bearish on the intermediate term, but the market is hinting at the possibility of at least a short-term sideways-up phase.  Depending on how that develops, there's potential for the larger wave ii/B bounce to develop from here.  Ultimately, though, I expect the next bounce will be sold to new lows.  Trade safe, and have a great weekend!

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Bears Holding Most of the Cards

(NOTE:  I've had major technical difficulties this morning, which is why this is being posted after the open (if you missed the last post), and Blogger is acting awful funky -- so if this update posts in a strange format, blame Google! (GOOG))

In yesterday's update, we talked about the fact that a new low would give the decline off the all-time-high a pretty solid five-wave structure, which would go a long way toward confirming a trend change at intermediate degree.  This is because one of the key tenets of Elliott Wave Theory is that the market moves in five waves when it's traveling in the direction of the next highest degree of trend, and in three waves when it's moving against the larger trend.  The five-wave decline therefore suggests that the larger trend is down.

There are only a few exceptions to this rule, and one such exception is a pattern called an expanded flat.  I talked about that pattern in some detail last week, so I won't rehash it here.  Suffice to say this is a game of probabilities, never certainties; so there are always potentials which are more bullish or bearish than whatever presently appears most likely.  Presently it appears most likely that the trend has shifted.  The market reserves the right to blow that up, of course, and if that starts to appear probable, I'll certainly discuss it in more detail when the time is right.

For the moment, though, there's not much to give me a warm-and-fuzzy feeling toward the intermediate bull prospects.

Let's start off with the Philadelphia Bank Index (BKX), which has been an excellent bellwether of the market for quite some time.  BKX has overlapped the prior peak and completed a head and shoulders top.  We'll start off with the daily chart, then zoom in a bit on the second chart, with some additional detail on the alternate count.

Unlike the Dow Jones Industrial Average (INDU), for example, BKX has not yet formed a large five wave decline, and has still left open the option for an ABC.  However, on the 30-minute chart below, we can see that even this more bullish alternate ABC count still suggests lower prices for the near term.

Speaking of INDU, the Dow has a very clear five wave decline.  Yesterday I talked about the potential that the current decline (which hadn’t technically happened yet) could be wave five of the larger structure.  When we look at INDU’s chart, that leg probably “looks” best as a fifth wave.  If yesterday’s drop was the fifth wave, it could complete this first leg relatively soon.  From a near-term perspective, it appears the current leg has at least a bit further to run -- but we should stay alert to any pending noteworthy bounces as a signal that the larger wave B/ii relief rally may be beginning.

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.