Intermediate Market Prospects Remain Open

So it's "that time" again, when the bears start getting loud -- how the market environment can change in a week!  The bottom line, though, is that nothing's cut-and-dried yet from an intermediate perspective. 

The market hasn't done anything to prove itself one way or the other here, and the long-term counts are simply going to require a bit more clarification from the market.  While many Elliotticians are viewing S&P 500 (SPX) 1426 as the "end-all" to ruin all future bull prospects, 1426 is simply the first warning level, and trade beneath that level would not guarantee a bearish long-term outcome.  The chart below shows why.

Something that remains bothersome to the immediate bear prospects is the fact that RSI and MACD both confirmed the 1474 high, and it's rare for the market to form a long-term peak without some type of divergence forming first -- not impossible of course, but unusual.

While we're at it, let's look at the count which has the bears claiming victory.  The pattern below is called an ending diagonal, and to my knowledge, I was the first to propose it, many months ago.  This pattern can't be confirmed yet, though the whipsaw of the upper trendline is a good start.  In any case, I'm continuing to track it, and am watching the market's behavior before putting all my eggs in one basket.

 
Over the short-term, the prospects for both counts remain viable.  The market has simply not declared its long-term intentions yet, and the first step for bears would be to complete a five-wave impulsive move to the downside.  In order for this to happen, it would take a low toward the (3)/c level, followed by a reasonable bounce and then another new low to begin to consider the decline impulsive, which would suggest a major trend change.

Some key short-term levels with larger-degree implications are noted on the chart below.

Publication Note

Publication will be spotty this week, as, unfortunately, I have a number of more pressing and urgent personal issues to attend to.  I will do my best to get at least one more update published before the end of the week (possibly tonight, with any luck...).  Thank you for your understanding. 

Dow Theory Gives Warning; Can the Fed "Print Over" It?

In this article, I'm going to discuss Dow Theory, the dollar and inflation, and how they relate to the Federal Reserve in today's market.

Dow Theory views directional divergences between the Dow Jones Industrial Average (INDU) and the Dow Jones Transportation Average (TRAN) as important, and the two markets are diverging significantly right now. 

There are six basic tenets behind Dow Theory but, for discussion purposes, the one we'll focus on today is the tenet that the market averages must confirm each other.  As its name suggests, the Dow Jones Industrial Average is concerned primarily with industry, i.e.- the production of goods, while the Transportation Average is more concerned with shipping those goods to market.  The logic behind the theory is fairly simple:  If the economy is improving, then economic production should be increasing (positive for INDU), which also means there will be more goods needing shipment (positive for TRAN).  Logic tells us the reverse should also be true: less production should equal less demand for shipping.  Thus the two averages would seem inexorably linked in an economic sense, and should generally be moving in the same direction.

According to Dow Theory, when the two indices diverge, it's a warning that a trend change may be brewing. 

 
Here's where things get a bit interesting...   

Dow Theory finds its roots in editorials written by Charles Dow, who founded the Wall Street Journal.  He remains a household name with investors because he also co-founded Dow Jones and Company (presumably his co-founder had the last name of "Company."). 

Mr. Dow passed in 1902 and therefore never had to contend with the Federal Reserve, since the Fed wasn't an entity until 1913.  In Dow's day, the gold standard still existed, so money couldn't simply be "spoken into existence" by Mr. Bernanke and his printing press.  Back then, money was viewed, first and foremost, as a way to exchange goods and/or services without the need for direct barter.

In other words, in 1902, wealth could only be created through the archaic concept of production.

SPX Update: Keeping Things Simple

There's not much to add to the last several updates, so I've prepared a series of charts that should help with pointing the way over the next few sessions.  This isn't infallible, but in an attempt to keep this update as simple as possible for readers, I'm trying to work with the highest probability options.

Below are four charts of the S&P 500 (SPX), each at different time frames, with different successive levels to watch on each time frame.

First is the daily chart.  Because the beginning of the structure is unclear, I feel that it would be a bit misleading for me to imply too much confidence in the final outcome -- as such, upward prospects for this wave will be adjusted as needed (shown in gray).  I have also tried to simplify the labeling on this chart.

Interesting to note that yesterday the market "recognized," and bounced off of, the upper boundary of the potential diagonal that I've been blathering on about for several weeks. 

The next chart is the SPX 3-minute, and adds more detail to the chart above. 

Nine Charts of a Market in Long-Term Flux

Lots of charts to cover today, since the next week or two should be important.  While price action has been nothing but bullish, the market has stalled right at the level it needed to in order to keep bears' hopes alive.  Most indicators suggest higher prices still to come, but the market has reached an inflection point, and it is presently unclear if the longer-term wave counts will extend upwards more significantly or not. 

The first chart of import (pun intended) is light crude oil, which I discussed a few days ago -- and which then immediately whipsawed the recent breakout.  I mentioned that the green trendline was a "must defend" level for bulls, and the results of the whipsaw beneath that trendline have been ugly. 

The problem oil presents for equities bulls is that continued weakness in this market could imply a failure of the QE-Infinity reflation trade, and thus ultimately drag equities down with it.

The next chart is the US Dollar, which started a relentless crash immediately after I switched from long-term dollar-bullish to dollar-neutral.  It has now reached important support, and if it's going to muster a bounce, this is a zone dollar bulls must defend.  One can already see the potential of a head and shoulders top formation if we get a decent bounce to form a right shoulder, but I'm not yet entirely convinced it can't put in a meaningful bottom soon. 

SPX and IBM: Overbought Market, but No Divergences Yet

Last night, in an attempt to keep up with the Fed and ECB, the Bank of Japan announced an increase in their monetary stimulus programs, and the yen reacted accordingly.  The "race to zero," as countries devalue their currencies against each other so that they don't end up priced out of the world economy, is a spectacle to behold.  Somewhere down the road, it seems there will be an ugly endgame here, but these things can go on for much, much longer than seems reasonable.  I remember I felt the same way about the housing bubble back in 2005.  I felt quite certain by mid-2005 that things would end very ugly, but housing just kept ramping higher anyway.  Eventually, of course, it did end ugly... but it first ran much farther than I thought it would.

Most know the old John Maynard Keynes quote: "The market can remain irrational longer than you can stay solvent.  My personal twist on that is: "The market can remain insolvent longer than you can stay rational."  In any case, no matter what the endgame looks like (and who really knows what that will be), things can always keep plugging along in the meantime.

Bears are hoping for a turnaround here, and I've heard a lot of bearish theories floated recently -- on everything from "QE3 is out now, so there's nothing more to fuel speculation and drive stocks higher" to "bullish sentiment is too high."  I'll admit, the contrarian (and the long-term bear) in me wants to jump on that bandwagon.  But there is the issue of central bank liquidity, and since everyone who has access to an inkjet is printing more money, it's hard to imagine that liquidity won't find its way into equities. 

Market Update: I Fought the Fed and the... Fed Won

Part of my weekend self-amusement was to hastily re-write the Bobby Fuller Four's "I Fought the Law" (my lyrics below -- the original song can be found here):

Makin’ trades in the ... hot sun
I Fought the Fed and the ... Fed won
They printed money, 'cause they ... had none
I Fought the Fed and the ... Fed won

(chorus one)
Don’t get bearish and don’t be sad
or Ben will toast your buns,
The economy will be fine if you buy an iPad…
I Fought the Fed and the ... Fed won
I Fought the Fed and the ... Fed won

They’re robbin' people with an . . . inflation gun
I Fought the Fed and the ... Fed won

I miss reality and the ... good fun
I Fought the Fed and the ... Fed won

(chorus two)
Quantitative Easing is the latest fad
it seems they're never done,
Ben doesn’t care if it all ends bad…
I Fought the Fed and the ... Fed won
I Fought the Fed and the ... Fed won

Friday saw the rally extend, with the central bank liquidity pumps running at high speed.  It seems reasonable to assume the bullish wave counts are probably in control, given the Fed's announcement of QE-Infinity -- and the behavior of momentum indicators, which have accelerated accordingly.