SPX Update: This is Still the Bulls' Battle to Lose

Before I get into the market update, my heart goes out to all those impacted by the super-storm on the East Coast.  Those affected are in my thoughts and prayers, and I wish you all the best in recovering.

Despite two days of storm-related market closures, there's been no material change in the outlook since Friday.  It is still anticipated that the market is likely to find a bottom in this zone and head toward 1480 -- though if for some reason it doesn't, then things could get very bearish.  

The S&P 500 (SPX) chart below outlines the preferred path, as well as the short-term (ST) alternate path (which allows the margin-of-error of a marginal new low), and the intermediate-term (IT) alternate path (which allows for a major trend change at 1474).  It's obviously too early to confirm a bottom here, especially since the short-term trend is still down -- so we'll watch how it unfolds going forward.  (continued, next page)

SPX, INDU: Bulls Need to Find Support Soon

I'm going to use an analogy I've used before, because I believe the current market fits:  The market is like a rubber band stretched to its breaking point -- either it will snap back and begin a strong rally over the next few sessions (quite possibly as soon as today's session) or it could break.

As we look at the options, it's important to remember that QE-Infinity hasn't actually started yet.  Some bears are calling QE-Infinity a "failure," and even the mainstream media (who should know better) has been guilty of this.  The effects of the QE MBS (Mortgage-Backed Securities) purchases won't be seen until the Fed cash actually makes its way into the Primary Dealer accounts -- there was no liquidity flood released when the media announcement happened.  And no liquidity added even once the first purchases were made, as MBS settlements are done on a forward basis.  The first MBS purchases aren't scheduled to settle until November 14, so that's roughly when we'll finally begin seeing the "real" effects of QE-Infinity, which is anticipated to be inflationary (i.e.- rising equities and commodities prices).  

The old adage of "don't fight the Fed" sticks in my mind going forward.

Yesterday's preferred short-term count played perfectly, as the market rallied up to my wave 4 label and reversed immediately to a new low.  So, the short-term count was correct -- but what about the intermediate-term counts? 


The predictive power behind Elliott Wave analysis is underpinned by two key strategies:

1.  Using the available price action to attempt to anticipate the pattern that will unfold going forward.
2.  Understanding the key levels where that anticipated pattern becomes invalidated and mutates into something else.

This is why I usually give both a preferred and alternate count.  The preferred count is "here's what looks most likely, given the price pattern that's currently visible"; the alternate count is the "okay, that fell apart, so this might be unfolding instead."

This task can be quite difficult in certain markets, because some patterns start off looking like a specific high-probability pattern, but then turn into something else entirely.  This happened near the recent peak.  The Dow Industrials (INDU) in particular looked like a nice clean pattern called an "expanded flat," but then went on to mutate into something much more extended.  The upshot of Elliott Wave, even during such predictive failures, is that it does provide clear levels where we can recognize that the first predicted pattern was wrong -- and sometimes the short-term work can still get you a winning trade even when the larger pattern fails.

To stick with the example of INDU, on October 19, I suggested it was due a correction to roughly the 13400 zone -- and also noted that "sustained trade beneath 13398 would open up more bearish intermediate prospects."  Even though the larger pattern failed, Elliott Wave allowed the patient trader to locate a low-risk entry-point, and further allowed the patient and nimble trader to bailout with minimum damage when the trade didn't work (as we know, patience isn't the only skill required of successful traders).  A really nimble trader could even have played the decline on the short-side and made a profit along the way. As an aside, this drives home a big part of what trading is all about: managing risk.

So, here we are in today's market -- trying to put the puzzles pieces together into a "most likely scenario," while at the same time looking for key levels that will suggest the preferred scenario is failing and "something else is going on."  I realize things can get a bit confusing to readers at times, because I'm working on several different time frames, and sometimes the five-minute (or one-minute) chart looks crystal-clear, while the daily or hourly is more of a toss-up, or vice-versa.  As best I can, I try to fit them together into something readers can understand.

And sometimes, it seems like detailing the alternate prospects is a ridiculously-complicated task which will only confuse everyone -- and to some degree this market fits that bill.  During these times, I try to note a few key levels where it's time to capitulate or reverse position.

There's been zero change in the INDU preferred count -- in fact, this count performed perfectly yesterday, accurately predicting the pop and drop reversal to within a few points.  The $64,000 question is whether we should anticipate the blue "4?" rally and reversal.  Hopefully, we'll be able to determine whether that's probable as the action unfolds.

The alternate intermediate count that isn't shown is morbidly bearish -- so if the market markedly fails target support, then bulls who didn't heed my Monday warning might want to consider that failure as a second chance at taking a vacation.

For SPX wave counts, I'm only going to focus on the daily chart today, since the questions and potential outcomes are essentially the same as for INDU. (continued, next page)

SPX, NDX, INDU, VIX: Signals Suggest a Bounce is Due

There's not much to add to yesterday's update, so I'll simply let the charts do most of the talking.  The first chart worth noting is the Volatility Index (VIX), also known as the "Fear Index" since it substitutes as a good indicator for investor sentiment (high VIX means investors are fearful; low VIX means complacency).  VIX has closed outside its upper Bollinger band the last two days in a row .  This is often the precursor to at least a short-term rally in equities.

Next is the S&P 500 (SPX) daily chart.  As yet, still no material change here. 

The SPX hourly chart is showing some early bullish signals in RSI and MACD.

The Dow Jones Industrials (INDU) probably still needs at least one more fourth wave rally and fifth wave decline -- though yesterday's little rally and decline could theoretically qualify, which would mean the decline is complete.  The strength of any forthcoming rally should narrow the options. (continued, next page)

SPX, INDU, NYA, RUT: Market Wants a Debate

In keeping with the spirit of election season, the bears have decided it's time to open a debate.

On Tuesday, bears broke the market down through some key trendlines in several markets.  The analytical challenge I'm running into remains the same as mentioned last update: there are a lot of mixed messages being conveyed by different markets, and it's difficult to find a pattern that holds across all of them.

The one market that has largely convinced me that higher prices are still ultimately coming is the Dow Jones Industrial Average (INDU).  I can't get past the three-wave rally into the new high, which suggests the final high isn't in yet -- and this is a pattern I've learned to never ignore.  It doesn't work 100% of the time -- nothing does -- but it does work the vast majority of the time.  The main question has become how deep the correction will run, and as I suggested on Monday, wise bulls probably wanted to get out of the way once that lower red trendline broke.

I can now count five clean waves down into the recent low.  Where I'm most unsure is whether those five waves form wave 3 of c, or ALL OF wave c.  On the chart below, I've drawn-in the potential for wave 3 of c, with a fourth and fifth wave still to come -- but there really isn't a clear answer. 

An interesting fractal study I want to share is General Electric's (GE) pattern of March-June 2012 in comparison to the current S&P 500 (SPX).

SPX below.  The beginning of the structure looks remarkably similar to GE, but they diverged recently, as SPX has materially exceeded the lower support line -- and has done so on a confirming MACD reading.  This is the signature of a third wave decline (c-waves are third waves), the question for SPX is the same as INDU -- whether this is ALL OF (c) or whether there is a correction to come, followed by new lows.

The simple SPX chart below still outlines the key intermediate pivots (continued, next page).

SPX, BKX, RUT, VIX, TRAN, NYA, IBM: Market Refuses to Leave the Intermediate Chop Zone

Last update expected that the market was due to turn lower for at least a minor top, and turn lower it did -- however it moved a bit lower than expected, and this has now thrown the intermediate outlook back into the ambiguous zone.  This weekend, I've charted more markets than I can count, and wrestled with what to present to readers to try and keep the whole thing reasonably understandable.  I finally decided to boil it all down to a simple chart of the S&P 500 (SPX) to avoid confusion.  Don't worry, there are plenty more charts coming in this update, but I think it's easiest for readers to focus on the simple message in this chart:

The bottom line is: this is still the intermediate "chop zone" and until the market break down or breaks out, there are multiple options still open -- and the problem I've been running into this weekend is there are simply a lot of mixed messages being thrown off by different markets.  I'm going to present a few charts that convey the case for each side -- and maybe the best assumption from this data is that the market may just continue chopping around for a bit longer.

If it does cleanly break through this zone, the losing side might just want to get out of the way until things clarify again.

One of the more bullish charts I studied is the Philadelphia Bank Index (BKX), which, at the moment, sure looks like a fourth wave triangle -- and it's right where you'd expect to find one.  Sustained trade beneath the (C) wave low would open up more bearish prospects.

Also still looking bullish is the NYSE Composite (NYA) (continued, next page)

SPX and INDU: Key Levels and Next Targets

The intermediate outlook is materially unchanged and continues its bullish bias.  The short-term outlook has become slightly ambiguous, but suggests a minor top may be near.  It is currently expected that this will only be a short-term top, and that new swing highs will follow.

I've loaded up the hourly chart of the S&P 500 (SPX -- shown below) with virtually all the relevant info, so I won't retype every data point here.  The bottom line is that a correction lower could be due as soon as today's session, though a bit more upside would be within the margin of error (the second chart may help with this).  In either case, if the next decline is indeed the expected small second wave lower (blue (ii)), then ideally it would be a bit scary and cause a fair number of traders to turn bearish.  Conversely, if it does not correct as deeply as shown, that would actually stretch the wave (iii) targets even higher.

I'm viewing 1438-1439 as the key bearish pivot, and sustained trade beneath that level would dictate that more bearish intermediate outlooks be considered.  Ideally, if this is to remain a correction to an uptrend, this wave should not break the lower black trend line that connects blue (2) and blue (4) -- so that occurrence would act as a second subsequent warning if 1438-1439 were to be broken.  Beyond that, trade beneath 1425 would put the bears in control.  The chart annotations pretty well detail everything I'm watching, and my expectations, at the moment.

The 5-minute SPX chart looks at the short-term trend-channel, which is still intact.  The short-term trend remains up as long as it holds, but a breakdown here would be the first warning that a correction was unfolding.  The chart also notes the potential of a small head and shoulders top, along with the classic measured target if prices were to break down through the dashed red neckline.

The Dow Jones Industrials (INDU) is in essentially the same position as SPX, and it's also unclear here if there's a bit more upside due before the correction.  Note that both hourly RSI (SPX chart above) and 30-minute RSI (INDU below) are showing bearish divergences.  (continued, next page...)

SPX, INDU, NYA, NDX: Bears on the Run

For several weeks, I have projected that after this correction completed, the market would make new swing highs for the intermediate term.  In the most recent update, I discussed two short-term possibilities: a short-term turn near 1444-48 SPX, or a run directly to new swing highs.  I listed 1453 as the key level to differentiate one outcome from the other, and the market both sailed through that level and also closed above it, which now causes me to favor the view that the bottom is in at 1425.  It's simply going to take a break of that level for bears to get anything going at this point. 

It's too early to say for sure and declare bulls the long-term winners, but there are some signs that this rally has the potential to pull the indices at least another 10% higher.  The first case in point is the NYSE Composite Index (NYA), which, as I've been warning since September, still looks quite bullish.  Bulls have now held the breakout level on two back-tests, and the last test resulted in a very strong bounce -- so unless that level fails, it's simply wishful thinking to view this chart as bearish in any way.

The next case in point is the Nasdaq 100 (NDX).  On September 20, I warned that NDX appeared to have formed a complete five-wave rally, which meant it was likely to correct lower.  The problem now for bears is that if the blue (2)/b high is broken, that will strongly suggest that the recent decline was a second wave lower.  This would mean that the current rally is going to be a Minor Third Wave up -- which is every bulls' dream.  Third waves are usually the longest and strongest wave, since they represent a "point of recognition" for the masses.

Again, it's too early to be certain here, but a third wave up would largely be confirmed by a break of the (2)/b high at 2846, and could put the bears on ice for months. 

On the S&P 500 (SPX), while my short-term outlook stayed bearish until 1425, my preferred intermediate outlook has remained bullish for some time.  The question that now needs to be asked is whether it was "bullish enough" -- the next swing high may mark ALL OF wave (5), or only wave (i) of (5), with (ii)-down, (iii)-up, (iv)-down, and (v)-up still to come. 

Of course, I'm getting way ahead of the game here, and the first step, of course, is for those new swing highs to occur... but it looks increasingly probable that the projected turn at 1425 was a meaningful one.  Obviously, closes back beneath that level would create problems for the bull case (continued, next page...)