Bulls and Bears Squaring Off at a Major Battle Line

Yesterday's outlook gave 55% odds to the idea of a wave (2) top for the S&P 500 (SPX), marked on the chart as either 1643 or 1647, and the market reversed strongly off the 1647 level, then declined all the way back to retest Monday's low.  For the near and intermediate term, this is now a potentially dangerous setup for the market.  I'm continuing to favor the bears for the foreseeable future, but since I'm not a perma-bear, I'm also looking for signals which could indicate a bottom.  In this update, we'll discuss both arguments in detail.

There's an upward market bias inherent with the QE-Infinity program, and the market has rallied virtually nonstop since that cash started hitting the Primary Dealer accounts in November.  The notable exception to this endless rally was the weeks leading into the fiscal cliff dilemma (late last year).  As it turned out, during the end of 2012 the Primary Dealers were withholding that cash from the market, due to their discomfort with the entire situation.  Keep in mind that a similar thing could happen at any point, so QE-Infinity in itself does not guarantee a market without corrections.  Further, if liquidity is being destroyed (somewhere down the chain) faster than the central banks are creating it, then the market environment becomes deflationary. 

All that said, I still don't favor the idea of 1687 being a long-term top, but as I wrote on May 23:

In conclusion, the long-term presently remains pointed higher, but that may be irrelevant at the moment.  We can't see around every bend in the market, but most times we don't need to: the near-term appears to be pointed downwards, and the intermediate-term, while too early to confirm, also looks likely for further downside.  This is not a bad time to behave defensively.

Though I've been bearish since 1687, my long-term bias remains bullish, and this leads to an interesting cognitive situation.  I'm not sure how to put it into words exactly, but I'll try:  I "want" to find a reason for this market to bottom, but I'm not seeing it yet.  In fact, my work suggests that if the 1622 level fails, we could actually see a significant sell-off.  Right now, the bull patterns I'm finding (from an Elliott Wave perspective) are obscure patterns that are generally low-odds, while the high-odds patterns continue to favor the bears, as they have ever since the reversal at the all-time high.

Long-time readers know that I attempt a feat many believe is "impossible" with these updates:  I try to predict the market across virtually every time frame (short, intermediate, and long), three to four times each and every week.  I'm bound to get some calls wrong, and I absolutely do -- but since early May, I haven't missed many and that puts me in a good psychological position right now as an analyst.  I'm not talking about ego in this sense, although this may be something that only another public analyst can probably really understand.  Basically, when you hit a top as well as I hit this one (my May target-2 for SPX was 1680-1690), then you have a lot of psychological wiggle room to really see what's going on afterwards, because you're not trapped by your prior bias/analysis.  When you get caught looking the wrong way, you tend to try and find ways for the market to prove you right in the end (in order to justify the fact that you were screaming to buy at much higher prices, or to sell at lower prices). 

It can be a pretty tough gig actually, and analysts don't get enough credit for the painful crises of conscience that (I assume) we all endure at times after a missed call.  If you've ever wondered why analysts love to toot their own horns when they get a call right, it's not because they want everyone to think they "get every call right," it's because they're trying to compensate for the incredible guilt they feel over the calls they blew.  A small handful of readers love to remind analysts of their bad calls -- but believe me, nobody needs to.  We know our bad calls better than anyone, because those mistakes take up residence in our memories, especially late at night when the house is quiet and still.  In fact, many of us remember our bad calls much better than we remember our good ones.

Moving from independent trader to public analyst over the past couple years wasn't an easy adjustment for me -- the challenges of each role are actually quite different.  But I digress.    

I think the market's in an interesting position here, from a number of different standpoints.  In terms of sentiment, bearishness has increased recently, but the BTFD ("buy the friggin' dip!") mentality is still reflexively strong, and we've been hearing a lot of "buy the dip" talk the whole way down so far.  This in itself bothers me, because I feel like the long trade has become almost too reflexive and easy at this point.  I know that during last week, I was one of the few lone nuts suggesting we sell the bounces, and many were suggesting the opposite.  Anecdotally, that tells me there are probably a lot of bulls now trapped north of 1650.  What's most interesting is that even many bears seem afraid to sell into this rally.  And why wouldn't they be, after being beaten to death since January?  Maybe a better question is:  could they, even if they wanted to?  I know there are several popular bear subscription services who've recommended heavy short positions all the way up (some with stops I consider outrageous), and I can only imagine that many of their subscribers are dead broke by now.

So, my question is:  are there even any bears left to sell short this market?  Because if the only sellers remaining are bulls, there could be a problem.  Short-selling gets a bad rap from some folks, but the reality is shorts provide an important layer of support for the market, because at some point down the line, shorts have to buy back whatever they sold.  Additionally, shorts tend to trip all over each other trying to cover their positions en masse, which is why bottoms usually have the classic V-shape -- and shorts are generally the ones who kick-start the momentum for the next rally leg.

On the other hand, bulls all by themselves make "bad sellers" because they are simply trying to get out, often in a rush, and they have no requirement to buy back in; bulls can sit in cash or government Trashuries for as long as they want.  As a result, a decline without short covering can be fast and brutal.  Remember the last time the U.S. banned short selling (of 799 financials), in 2008?  How did that work out?  (Hint: not well; prices fell more than 12% over the next 14 days.)

So my bottom line point here is:  While I've stayed bearish since the 1680-90 target was hit, I still "want" to find a reason for the market to bottom.  I think a lot of people are feeling the same way -- and that tells me we have to be extremely cautious, because when everyone's looking the same direction, the market has a tendency to do the exact opposite.  Let's take a look at the arguments for both cases.

Starting off with the bear case, we have a few patterns that aren't terribly encouraging for bulls, and which I first called attention to on May 30.  The SPX chart below should be examined in conjunction with the NYSE Composite (NYA) chart shown later.

If we look at this purely from the "trade what you see" perspective, we find the cleanest wave count is the bearish nest of first and second waves shown below.  I remain marginally in favor of this count, but I am quite alert to the fact that this is (suspected to be) a fourth wave decline, and fourth waves rarely follow the "most obvious" pattern.  They usually turn infinitely frustrating at some point, and become all but impossible to predict.

Note the black "alt: (2)" as the current wave could become more complex.  In either case, if the count shown in blue and red is correct, there should be downwards acceleration coming when 1622 is claimed.  If there is no downwards acceleration on a breakdown, then we have to give weight to the "less obvious" wave counts.  Again, I'll discuss this in a bit more detail on the NYA chart.

The hourly chart has now been updated with target 3 potential -- beyond that, there's been no change in a while.

SPX and NYA: Is It Time to Sell the Rallies?

Calling tops has always been a difficult endeavor in market analysis, and considering that for the past 12+ years we've been in a historic bull market driven by unprecedented Fed intervention, it's that much harder now.  While I may have jumped the gun just a little very recently, some people (or maybe it's just one person) seem to have forgotten that -- to cite only one example -- in 2020, I believed we would crash, but also believed that was "only" a large fourth wave, and thus destined to recover to new all-time highs.  I mention this mainly because a certain troll recently claimed "this analyst has been saying the same thing for a decade" (implying that I'd been bearish for a decade), which is so wrong that it drifts into the realm of outright stupidity.

(I won't even go into my call for a long-term and massive bull market back in January 2013 -- most veteran readers know that I've been on the right side of this market more often than not.) 

Anyway, in a moment, there's a market-relevant point that I'm going to make about the following charts -- but first, here's the INDU chart I published on February 26 of 2020.  Note the (4) label and the line headed back up to new all-time highs from there:

Here's the SPX chart I published in March of 2020; again, note 4 is followed by new highs in 5:

Now, here's the "market point":  The Covid crash was a pretty clear fourth wave.  That means we have almost-certainly been riding out the fifth wave ever since.  

And the fifth wave is the final wave of a move -- which, now that we're finally getting into a potentially-complete wave structure, means we're likely approaching the end of the 12+ year bull market.

What we're currently trying to nail down is whether the fifth wave of the fifth wave of that larger fifth wave has completed or not.

Read that again.

As I mentioned last update:

Even if SPX manages to make a new high, that will probably be the fifth wave, and (barring an extension) is thus reasonably likely to be followed by a correction (or worse) anyway.

In other words, even if SPX manages to make a new all-time high, we are probably into territory where we should be considering selling the bounces.

Let's look at the near-term chart first, with the emphasis that "bull 5," even if it shows up, could very well be the final high of this 12+ year bull market.

 

Of course, if that final fifth doesn't show up, then we might have already seen the all-time-historic-high.

Let's look at the old intermediate term chart of NYA next.  Worth noting that NYA recently captured its 17,000+ target (published 8 months ago):

So that's the bear case, but what are the remaining bull hopes here?

Well, their first hope would be for an "extension of the extension."  The rally since 2020 has been an extended fifth wave -- bulls would like to see the (presumed current) fifth wave of that fifth wave extend.  That's always possible, but given that inflationary pressures are finally forcing the Fed's hand (per Powell yesterday), it's hard to imagine there's going to be enough fuel for that extension if the Fed follows through and indeed pulls away the punch bowl.  If they don't, then that might be another matter.

But here's the nice thing:  On the next chart, we'll look at a signal to watch that could tell us if the fifth wave of this fifth wave is going to extend.  Thus, we can reasonably presume the fifth wave is ending here if that signal does NOT materialize.

So, on the chart above, in the event SPX sustains a breakout over the upper black line, then we might forget about selling the rallies for a while and watch to see if bulls can get an even-more-extended fifth wave.  We can't yet rule that out, given that the fifth wave is short relative to wave 1 on that chart -- but nevertheless, I'm taking the approach of "making the market prove itself here," so if it doesn't break out, then we'll stick with the idea that the top is now closer than the bottom

Referring back to the NYA chart for a moment:  The second option bulls have is for a more complex fourth wave (shown by black "or 4" and "or 5"), similar to what happened in 2020, but at a much smaller scale.  We'll simply have to track that possibility as it unfolds -- but again, unless there's an extended fifth here, that potential wouldn't change the longer-term outlook too much.

Now, all that said, I would again like to emphasize that calling a top to the most powerful bull market in history is no easy task, so if you think the market is going to keep going up, then hey, you could be right.  I could be wrong, or could be early, or whatever.  Or the market could choose to extend the fifth of the fifth here, which no one can really predict.  I can't promise anything, and nothing I publish here is trading advice; I can't manage your risk for you.  That's what brokers are for.

All I know is that we just about tagged the upper boundary of the very long-term channel, we reached the long-term NYA target, we came within 6 points of the long-term SPX target, and there are roughly enough waves (give or take a couple micro waves) to mark a complete five-wave rally from the 2020 crash low.

Near-term, if bulls are going to get their fourth and fifth wave to new highs, then now may be the time.  Longer-term, until the market dictates otherwise, I'm sticking with the idea that the top is closer than the bottom, and thus that it's probably not a bad time to take some risk off the table.

Trade safe.

Understanding Elliott Wave Analysis, Part I

In this series, I’m going to attempt to explain a bit about market analysis, with a focus on Elliott Wave Theory.  Later in the series (after we’ve covered the basics), I’ll share some ways to utilize these tools for your own benefit.  A small portion of this has been reprinted from some of my earlier articles, so if it sounds familiar, that's because I plagiarized myself.  My attorney assures me that I am immune from litigation, but I have filed suit against myself anyway, because I can't have people stealing my work! 

Anyway... First, I do want to briefly address fundamental analysis.  My primary focus as a trader involves technical analysis, for reasons I will explain shortly – however, unlike many technical analysts, I do believe that fundamental analysis has value.  I believe it serves as a foundation to interpreting charts across the longer time-frames, and aids in understanding what is possible and likely.

Conversely, some fundamental analysts seem to believe that projecting the market using price charts is some kind of “voodoo.”  I suppose this is understandable; most things we don’t understand carry a certain mystique to them.  It’s important to realize that price charts, all by themselves, contain all the collective knowledge about a stock or index. 

People act on what they know or believe, so it stands to reason that people buy or sell securities based on what they know and believe -- thus(and here’s the critical point about technical analysis) everything known about a given security by all the shareholders collectively is reflected in a price chart.  When an insider makes a trade, it influences the price of that security, and leaves a clue which can be read on the chart.  When a huge hedge fund gains a piece of critical information (usually well ahead of the public) and starts buying or selling a specific stock or commodity, that action leaves its mark on the charts… and so on.   Thus the charts point the way ahead.   

The goal of a fundamental analyst and a technical analyst (one who studies charts) is the same:  they both seek to project the future.  Their methods, while seemingly different, are also quite similar in many respects.  For example, a fundamental analyst might look at Apple and try to project how many iPhones and iWidgets will be sold next quarter, and how that will influence profits, growth, etc.   Then he takes all his research numbers and derives a projection of the company’s outlook -- largely based on what’s happened in the past.  He then plugs that projection into a formula to arrive at a future share price target, which is also based on how things have performed in the past. 

A technical analyst does the same thing, except he looks at the charts directly (which, as we just learned, contain all the knowledge of the collective) and cuts out the middle man.  He seeks patterns which convey information:  When price has moved up by x number of dollars, and then moved down by x percent to create a certain pattern, how has the market usually performed in the past? 

Both forms of analysis are based on past performance and on future probability – they just get there by different means.

The weakness to fundamental analysis is that there are a great many variables which the analyst simply cannot foresee.  Study what happened in 2007-2008 for an example.  Many stocks looked great, and projected earnings looked great, and their futures looked so bright that everyone was wearing shades – but their share prices collapsed anyway, in a spectacular fashion.  In September 2008, did anybody care about how many iWidgets any given company was projected to sell in the fourth quarter of that year? 

Some fundamental analysts saw what was coming back then; others didn’t.  Likewise, some technical analysts saw what was coming (myself included) and others didn’t.  But the probability of a crash was all telegraphed well in advance on the price charts – one didn’t even need to turn on the TV to see it coming ahead of time. 

The big advantage to technical analysis: we technical analysts were able to arrive at actual price-targets for the crash, in real-time, while it unfolded.   Fundamental analysts knew it was “gonna be bad!” but that type of analysis is simply unable to time the market with that degree of accuracy.  This is why the majority of fundamental analysts don’t even try to time the market, except in broad strokes: their system is ill-suited to it.

So, now that we’ve gotten that out of the way, let’s discuss a more detailed form of technical analysis, called Elliott Wave Theory.

On the surface, Elliott Wave is a unique way to understand why the market does what it does, and a detailed tool that allows us to project future price moves by extrapolating the fractals and patterns found on the charts. The theory runs far deeper than that, though.

At its core, Elliott Wave helps us to understand something much more meaningful than markets: it helps us to understand human nature. The patterns formed in the market are, in part, a direct reflection of investor knowledge, and more importantly, investor sentiment.  Like most things in the world, sentiment fluctuates in cycles. 

You can observe the symptoms of this cyclical tendency in the news reports.  One week, you’ll see nothing but happy headlines, as sentiment hits a positive cycle and everyone forgets about all the troubles in the world:

“Rally Takes off as Market Cheers Job Report”

“Stocks Rise as Greece Agrees to Austerity Measures”

“Dow Closes Higher after Bernanke Announces He’s Dying His Beard”  (If you were rooting for that sentence to end without the last two words – shame on you!)

Then a short time later, it’s as if everyone forgot how “good” everything was just a few minutes ago, and suddenly it’s nothing but bad news again:

“Rally Crumbles as Market Boos New Jobs Report, Which Was Pretty Much Exactly the Same as the One They Cheered Last Month”

“Stocks Collapse as Investors Realize They Don’t Actually Know What Austerity Means”

“Dow Suffers Biggest One Day Loss on Record when the Market Realizes It’s Afraid of Snakes”

As I’m sure you’ve seen, even the exact same news item can be received well on one day and poorly on the next – highlighting my point that sentiment is cyclical. In reality, outside of certain “black swan” events, the news doesn’t drive the market directly -- it merely reports what the market did after the fact and attempts to explain it.  Otherwise, good news would always cause the market to go up, and bad news would always cause it to go down.  But as you’ve certainly noticed, it doesn’t work that way.  

The other problem with news is that, even if it was a prime mover for the market, it always arrives too late for you to make use of it.  If you’re dead set on trying to assign a “reason” for what the market did that day, you could simply look at the closing prices to figure out whether sentiment was good or bad (up = good; down = bad), and then make up your own random explanation, just like the news does: “Market Crashes As Investors Realize that Your and You’re Are Actually Two Different Words.”   

Fortunately, we don’t need to pay attention to the lagging-indicator news, because these sentiment cycles often leave clues telegraphing their arrival and departure.  These clues are found in the price patterns.   As we discussed, all the collective knowledge of investors is reflected in the numbers on the charts.   By tapping into that knowledge, Ellliott Wave Theory can, at times, recognize and anticipate the sentiment and cycles in advance.  And since sentiment goes a long way toward driving the price, we can then either:

1.   Anticipate the market’s future price movements before the moves actually occur, or;

2.  Gain a reasonably accurate window into what’s likely to occur if the stock or index crosses a certain price threshold.

The market's price movements are, in the end, a reflection of human nature.  And here’s where things become truly fascinating:

By rule of intrinsic design, human nature must be universally reflected in all human constructs, be they markets, governments, or otherwise.  Once you unveil one universal aspect of human nature, you are often able to locate the same common thread running throughout other human activities. This is one of the fascinating things about Elliott Wave Theory:  it seems to apply to patterns found not only in markets, but in the rise and fall of nations, and even entire civilizations (as well as the ebb and flow of many other things in the natural world). I have studied and applied it for many years, and continue to be in awe of its frequently-uncanny ability to anticipate the future.

It is important to note that Elliott Wave Theory was derived from back-testing.  Back in the 1930’s, R.N. Elliott studied decades of charts at various time frames, and discovered that there were certain patterns  which repeated across all time frames.  These patterns were of a fractal nature; in other words, the patterns on the one-minute chart join together to make up identical larger patterns on the hourly charts, which in turn make up identical larger patterns on the daily charts – and so on.   He developed Elliott Wave Theory as an attempt to quantify and explain these patterns.

In the next chapter, we’ll examine the underlying patterns that form the basis of Elliott Wave Theory, and we’ll take a look at some past and future predictions made using the theory.  This concludes part 1 of this series. 

(Part II can be found here)

**********************************************

Onto the charts now. 

Short term, there are still some questions as to what the market's next move is.  The minute this wave started, I warned everyone to be on guard for a complex and unpredictable correction.  Waves in this position often take strange forms.

As if for emphasis of this point, yesterday's action opened up the potential of a triangle in formation.  This pattern should be easy enough to confirm or deny, as trade above 1328.49 would eliminate it from consideration.  Conversely, if the market bounces back and forth between the triangular blue lines, then we can cofirm this pattern. 

If the market does rally above 1328.49, I will most likely shift my preference to the alternate count.  This alternate currently appears quite reasonable, and is a pattern called a "double zigzag."  A double zigzag (in this case) consists of two 3-wave rallies connected by a three-wave decline.  The first rally is labeled as a-b-c to form (w), the decline is (x), and the second rally leg is a-b-c to form (y) -- with (y) being the final wave of the rally.  The chart shows the rally from 1292 to 1328 as one potential a-b-c for (w), and the decline back to 1294 being (x).  If this count is correct, yesterday's high marked the peak of wave a, and the decline to 1310 likely marked the bottom of wave b.  Wave c-up would now be underway.  The first target for that count would be 1338-1340; the second target would be 1352-1355. 

Again, the double-zigzag gains preference only if 1328.49 is broken.

My intermediate expectation for the decline to reach the mid-1200's is, as yet, unchanged.  If the bulls could reclaim some key levels north of 1375, my outlook would need to be reconsidered.

The next chart shows that bears have fired a strong warning shot across the bow.  The top indicator panel depicts the Relative Strength Index (RSI), and shows that this month's decline officially entered into bear market territory.  We can see that, since the March 2009 bottom, this has only happened one other time, and that was during the 2011 "mini-crash." 

The other two indicators have not yet confirmed, but if the market proceeds to decline into the mid-1200's, then these indicators almost certainly would confirm my view that the market has (most likely) seen a trend change at intermediate degree, and will ultimately head significantly lower. 

It's by no means a "done deal" for bears yet, but the evidence is mounting.

In conclusion, in early May, I stated that a close beneath the key S&P 500 level of 1380 would strongly favor the bears going forward, and I projected a decline to 1300-1310.  So far, that's been exactly the case.  There are some levels which could turn me back toward bullish, but the bulls have their work cut out for them.  The longer the market hovers around down here, the more dangerous things get for the bulls.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.

Something for the Trolls to Choke On -- Back-testing Pretzel's Calls

Every now and then, when they run out of gravel to chew on, trolls stop by and harass me about random things.  As a result, I’ve decided to put together an unbiased back-test of my calls going back to when I first launched this site, in early September of 2011. 

Now, this summary makes one assumption: it assumes that the person reading the projections is making good trade decisions.  For example: taking profit in a target zone when the potential exists for a big move against one's position, as opposed to just holding and (greedily?) hoping for more profit.  It also assumes that stop losses are being used, as suggested by KO levels, or in the body of the articles.

It also assumes that the reader is not abusing leverage and trading instruments like OTM (out of the money) options, which, for many traders, are the equivalent of playing the lottery.  Triple inverse funds would be a close second, and both these vehicles should only be utilized by expert traders.  The majority of traders using instruments like these will lose money, it's just a question of how much and when.

To summarize results, I assumed an active trading style and a $10,000 “hypothetical account,” using one ES (E-mini S&P 500) futures contract at $50 per point.

In each case, I chose the least aggressive target for profit taking.  For example, on a short trade, if the short was suggested at SPX 1200 and the target zone was 1140-1160, I used 1160 as the point of profit taking, regardless of whether the market went lower into the zone (for more theoretical profit) or not.  I used KO levels (knockout levels for the preferred count) as the stop loss levels.

In several instances, I did not use all the “in-between” trading which, for an active trader, could have yielded a higher return.  For example, during the December decline, an active trader could have picked up additional profit by jumping in and out as target zones were reached. I have also not bothered to include things like the DAX and BKX profits in the results summary, though some are mentioned.  These would add additional profits, but the results don’t need the additions.

I'm also skipping a lot of the daily commentary between the big swings, largely in the interest of time.  I'm quite certain without even checking that I didn't get every single daily call correct in the interim between bottoms and tops, and vice-versa.  I'm assuming neutrality of hits and misses for purposes of these numbers, and mainly tracking the bigger swings -- except for September, because September traded within a pretty narrow range.  

For documentation, I have provided links to each article, and a brief summary of the projections and their outcomes.  Below is the cumulative summary of all listed "hypothetical" trades combined:

620 points of profit
97 points of loss 

Over the course of less than 5 months, that’s a net of 523 points of profit. 

This equates to a return of $62,760 per year for $10,000 invested -- or 628% per year. 

So, all I have to say is… Troll THAT, buddy.  ;)  The results stand on their own. 

Especially when one considers that this hasn't been a trending market, but an up and down whipsaw market which has broken a lot of backs.

And now, of course, the obligatory disclaimer:

Disclaimer: The content on this site is provided as general information only and should not be taken as investment advice. All site content, including, but not limited to: forum comments by the author or other posters, articles and charts, advertisements, and everything else on this site, shall not be construed as a recommendation to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author may or may not have a position in any company or advertiser referenced above. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult your investment advisor before making any investment decisions. Past performance does not guarantee future results.

The Calls:

September, 2011 

(Starting with September 4, 2011)
Predicted short term decline from 1177 to 1150.
HIT for 27 points profit
http://pretzelcharts.blogspot.com/2011/09/possible-count-on-es-futures.html

predicted DAX would head to 5100 from current level of 5319 HIT  219 points profit
http://pretzelcharts.blogspot.com/2011/09/can-dax-shed-light-on-spx.html

Predicted bounce from 1150 to 1185-1210 target zone target 1195 HIT 45 points profit
http://pretzelcharts.blogspot.com/2011/09/looks-like-possible-short-term-count.html

Two articles, which have to be taken together --predicted move from 1195 to 1101:
http://pretzelcharts.blogspot.com/2011/09/update-as-of-9-7-close.html
then at 1154, suggested market would bounce to 1174-1187: 
http://pretzelcharts.blogspot.com/2011/09/weekend-update-to-short-term-elliott.html
1195 to 1154 HIT = 41 points profit
1154 to 1174 HIT = 20 points profit

Suggested current wave may have more room to run on upside.  Position = flat
http://pretzelcharts.blogspot.com/2011/09/update-as-of-9-13-close.html

Suggested move from 1166 to 1145.  HIT = 21 point profit
http://pretzelcharts.blogspot.com/2011/09/cmon-bennie-lets-do-twist.html

1129-1140 HIT = 11 points profit.
http://pretzelcharts.blogspot.com/2011/09/elliott-wave-update-9-22-11.html

1142-1155 HIT = 13 points profit.
http://pretzelcharts.blogspot.com/2011/09/weekend-update-without-dennis-miller.html

1162-1101 HIT = 61 points profit.
http://pretzelcharts.blogspot.com/2011/09/spx-update-9-26-11.html


Calling the October Bottom:

Nailed the October low, before and after it happened.  Instructed readers on what to watch for before hand.
http://pretzelcharts.blogspot.com/2011/10/spx-update-10-3-11.html
http://pretzelcharts.blogspot.com/2011/10/spx-update-multi-month-counter-trend.html

I’m going to use the same qualifier of "what to watch for" described in the article above as the entry point – a move below and subsequent whipsaw back into the diagonal (that’s how I traded it, as well).  Thus, long positions taken at 1100 for ride to 1265 target HIT for 165 points.

Calling the October top:

Suggested rally would end shy of 1280 - MISS.  Suggested short entry at 1270 per chart… 1280 stop.  LOSS = 10 points.
http://pretzelcharts.blogspot.com/2011/10/spx-and-ndx-updates-last-call-for-bears.html

Favored view that top was in, suggested using 1256 as key pivot for shorts.
Assuming 1256 short entry going forward.
http://pretzelcharts.blogspot.com/2011/10/spx-and-ndx-update-new-key-levels-which.html

First target zone of 1196-1225 HIT.  Profit = 31 points.
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-bulls-running-out-of.html

Unsure on whether current wave was 2^nd or 4^th wave.  SPX at 1218.  Suggested target for 4^th wave 1235-1254.  HIT = 17 point profit.  Suggested target for 2^nd wave 1253-1277
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-so-far-so-good-what.html

Preferred view became that the rally was a second wave, with a target of 1253-1277.  SPX trading at 1238, stop at 1226.97.  HIT for 15 points profit.
http://pretzelcharts.blogspot.com/2011/11/spx-update-bulls-in-control-for-short.html

Suggested market was in topping/reversal zone, short SPX at 1261, stop loss at 1292.  Preliminary target for first leg of decline was 1140, later revised to 1140-1160.
http://pretzelcharts.blogspot.com/2011/11/spx-and-ndx-update-retracement-rally.html


From that point there was a lot of up and down and hemming and hawing on the part of the market.  Nimble traders could have picked up additional points during all this, as new waves became apparent and target zones were posted.  For the sake of time, I’m going to skip ahead, though there was certainly more profit to be gained in the interim period that I’m skipping.

I'm going to post one article from that interim period, because I was particularly proud of this call.  This was back during the November “triangle” that every analyst on the planet was convinced was forming and thought that the market was soon to head higher.  To my knowledge, I was the only one calling for a reversal of the prior trend and a move lower out of the triangle (I’m sure I wasn’t the only one – the key phrase is “to my knowledge”).

How many other technicians convinced their readers to take long positions during that triangle?  Where do you think they sold those longs -- no doubt at the point of max pain.  How much loss did they take?  One never knows, but think about it next time I blow a call.  ;)

http://pretzelcharts.blogspot.com/2011/11/spx-and-bkx-update-next-move-out-of.html

Article above also had a BKX chart, with a suggested target of 34.5-36.25 HIT.  BKX was at 38.01.  Additional profit not included in figures = 5%.

The November bottom:

Suggested first target for wave of November decline was 1140-1160 HIT for 101 points.  Article below also warned readers not to become complacent:

Now, that said, here's where things start to get interesting. Despite the fact that price has performed exactly as I've been predicting, my indicators are now giving some conflicting signals. I'll come back to that in a moment, but first: it's human nature to get complacent when things go perfectly according to plan, as they have for my readers. However, the stock market is no place for complacency. Please don't be tempted to get lazy here; I'd hate to see anyone give up their 100+ points of SPX profit at this point.

http://pretzelcharts.blogspot.com/2011/11/spx-update-crash-1-seasonality-0.html

Then a second time, on November 27^th, the Sunday prior to the rally, I warned of several things, including the fact that the bullish count had reached the bottoming window.  (This bullish chart was originally published in the comments section.)  Some quotes from that article:

One tendency I've observed in many traders over the years is to continue "looking" for things after they've already occurred. Here's an example. Back on Nov. 18, I wrote:

"Assuming my preferred count is correct, market surprises going forward should be to the downside. In third waves, momentum indicators reach oversold and stay there. Bounces that should materialize, often don't."

That has already happened, as indicators have been quite oversold for some time now, and expected bounces have been non-existent to this point. But as I wrote this past Friday, now is the time when I'm finally starting to look for a bounce, because the charts are finally justifying it.

Besides the chart potential, another argument in favor of a bullish move occurring is the fact that everything's gotten so bearish. Something has to give. The market is now like a rubber band that has been stretched to its limit: either it snaps back soon... or it breaks.

But after Thursday's action, I tried to convey on Friday that a bounce definitely became something to be cautious of if you're holding short positions. If we do see a bounce here, I expect it will simply be a snap-back rally, though it could retrace as high as 1220.

I blew the snap-back call.  But I gave readers ample warning of the potential of a 60 point move against their positions with the 1220 target.  I had also given this same warning in Friday's article.  If that's not enough to cause one to cover in the target zone (as I did), I don't know what is.
http://pretzelcharts.blogspot.com/2011/11/spx-update-bounce-or-die.html

I blew the next call (the same as above, the snap-back call).  I told everyone to “sell the bounce.”  Stops should have been placed at 1225, as per the article:

Sustained trade above 1225 would call this count into question, and would lend credence to the bullish alternate count shown yesterday.

SPX was at 1192.  LOSS of 33 points.  Keep in mind that even if one was trading very passively and didn’t capture points in the target zone of 1140-1160, then one should have stopped out at 1225 from the shorts taken in October at 1261.  This is still 36 points of profit for the most passive swing trader.
http://pretzelcharts.blogspot.com/2011/11/spx-update-sell-bounce.html

Once 1225 was violated, I began giving serious weight to the bullish alternate count:

The bullish alternate count has of course, roared into the spotlight, and could in the end prove to be the correct count.
http://pretzelcharts.blogspot.com/2011/12/spx-update-uncle-ben-saves-world.html

The December Top:

On December 2, I began suggesting that the market was in the process of topping again, regardless of whether the bull or bear count was in play.  Suggested target zone for the top was 1260-1280.  We’ll use the low end of 1260 as the short entry.
http://pretzelcharts.blogspot.com/2011/12/spx-update-topping-again.html

There was also a series of articles that followed the article above, and in each one I presented more evidence that a top was forming.


The December Bottom:

On December 18, I suggested active traders may want to take profits in the “safe” 1190-1208 zone.  Profit from 1260 entry = 52 points. From the article:

The blue "Alt: B" target zone is the safer and more conservative target.

Below is only a small excerpt, but in this article I also warned at length about the potential for the more bullish counts to play out.

There are several ways to label the current decline, and if it is indeed the impulse wave the preferred count thinks it is, then it needs to show some acceleration lower soon. There are only so many first and second waves that seem "reasonable" -- after a time, one has to start considering that the whole structure may just be a corrective wave instead.

I do feel that the market is in an area where shorts need to remain aware of a potential rally; bearish sentiment is also reaching levels that have generated rallies in the recent past.
http://pretzelcharts.blogspot.com/2011/12/spx-and-dow-update-critical-week-for.html

On the next day, I warned even further about the bullish rally potential, and suggested a stop loss level of 1231.47.  Once again, even passive swing traders should have profitted over 28 points on the December top.

trade above 1231.47 SPX would indicate that my favored interpretation is incorrect

http://pretzelcharts.blogspot.com/2011/12/spx-and-ndx-update-rally-or-just-blip.html

Then two misses. 

Here I suggested the rally would top at 1254, with a stop at 1267.  LOSS of 13 points.
http://pretzelcharts.blogspot.com/2011/12/spx-and-vix-update-indications-rally.html

Here I suggested the rally would top in the 1269-1310 zone.  Wherever one’s short entry, it should be readily apparent from the articles that followed that above 1310 would be dangerous for bears and thus used as a stop level.  Even though this article suggested that the rally was due to move higher than 1269, we’ll use that as the entry and 1310 as the stop, for a total loss of 41 points.
http://pretzelcharts.blogspot.com/2011/12/spx-euro-and-dollar-update-are-bulls.html

In conclusion, emotions of hope and greed and fear are all trade killers.   Trade safe.

Further Disclaimer:  These results are based on hypothetical or simulated performance results that have certain inherent limitations. Unlike the results shown in an actual performance record, these results do not represent actual trading. Also, because these trades have not actually been executed, these results may have under-or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical or simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to these being shown.

SPX Reaches Critical Inflection Point: A Look at the Bull/Bear Battle Lines

Well, we have an interesting market now.  I don't trade news, but everyone who does has had a bad news event to sell, followed by a good news event to buy, both within the prior few sessions.  And both basically the same event.

So, those bulls who were waiting for a "good news event" as the signal to go long have gotten it, and should now be long. (The really good news, of course, is the fact that Taco Bell has finally resurrected their Chili Cheese Burrito.  Do not let me get started on this topic...).  Other bulls have been waiting for a breakout to new highs as the signal to go long, and they've gotten that, too.

The question now is: How many buyers are still left to chase the market higher here?  It's decision time.

One of the things that bothered me about the turn at 1867 was the bad news event that came with it.  I'm always suspicious of "bad news" tops -- the best tops are made on good news, in order to pull in the last buyers and trick everyone into continuing to look upwards.  A good top isn't one where people are shorting the bounces afterwards -- it's one where people are buying the dips.  In other words:  "bad news" tops are usually too obvious to work, and they're too easy as a contrarian play.  The exception to this is tops which are marked by incredibly major, world-altering events -- but, interestingly, those events usually seem to come weeks or months into a turn, after the market has already topped on a good news event.

Back to the present (no relation to the direct-to-DVD sequel, starring a much-older Michael J. Fox):  I can see both sides of the trade here, and they strike me as pretty even at this exact moment.  Bulls have a breakout and back-test of falling support in their favor; but at the same time, so far there's been a bit of "failure to launch" -- each prior breakout has been turned back rather directly and the breakout levels have failed to act as support.  That behavior needs to change for bulls to gain momentum. 

The upside for traders is that this has turned into a massive inflection point for the market.  I discussed this in passing at the end of last month, but the near-term charts are now helping to clarify some of the key levels.  So today we'll look at the bull/bear battle levels -- and the targets which are suggested for the victor of those battles.

First up is the S&P 500 (SPX).  The two highest-probability wave counts here (and minor variations thereof) are 180 degrees reversed from each other.  The bear count has the market within a topping process (bottoms are often "an event," but tops take time).  The bull count has the market on the verge of a third wave rocket launch.  1895ish appears to be the dividing line between the two options.

 
For more perspective, let's refer back to the long-term SPX chart I published on February 28.  The chart below is materially unchanged since then -- but as outlined above, the near-term chart is now helping to point the way in identifying the key levels.

A related signal chart, which I've posted a few times in the distant past, is the ratio of high yield corporate bonds to the 20+ year treasury bond fund (HYG:TLT).  This ratio serves as an effective barometer of the market's current appetite for risk.

In conclusion, the market has bent and stretched the wave structure a bit recently, and this has created a nice inflection point for traders.  The market now appears to be on the verge of a big move, and the noted key levels should help point the way.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

   

Understanding Technical Analysis Using the Current Market

In the pre-market update of February 14, I anticipated that 1514 would become an important short-term support level, and so far the market's bounced twice from that level.  I'm going to use this opportunity to unveil a bit of the "magic" behind technical analysis, and discuss some of the logic behind it, and a few of the reasons why anticipating future price action based on technical analysis works more often than it doesn't. 

The 10-minute SPX chart now sports a pretty decent triangle consolidation, which has been formed with two rejections at the 1524 level, and two bounces off the 1514 level (see chart below).  1514 has been tested several times now, and support becomes more important each time it's tested.  In a moment I'll discuss why.  I'll also discuss why we can further anticipate that this is now quite likely to have turned into a market where additional buyers will show up at higher prices, while additional sellers will arrive at lower prices.

Everybody knows the rule that support tends to become resistance and vice-versa, but I don't know if everyone has thought through why this happens.  Investors who think that technical analysis is some kind of "voodoo" clearly haven't thought much about it, but it's all very interesting to me from a psychological standpoint. 

Let's say the market is moving down to test support.  As it hits support, bulls are buying, which usually causes the market to bounce, especially on the first test of support, and sometimes on the second test or beyond.  But, obviously, it doesn't bounce every time (if it did, of course, then trading would be ridiculously easy).  On the times that support fails, we end up with many of the bulls who bought the level earlier now trapped at a loss -- particularly the ones who bought on that last leg down, just before support broke.  When support fails, the breaks are usually fast, and trap more than a few people, since most traders won't put their stops that close (unless they're scalping; nobody wants to get whipsawed out by a few points).

Shortly after the break, the majority of the time the market rallies back up to the zone that broke -- so if you bought it earlier, you have a decision to make: do you take the chance to exit very close to break-even, or do you stay long and strong with your original stop?  If enough of the trapped bulls do decide to take that exit, then that prior support zone becomes resistance, as the market gets hit with a wall of sell orders on the rally.  If the bulls are of high conviction and don't sell, or if the market has simply exhausted its sellers (sometimes "too many" stops are run when the break happens, and you end up with traders chasing back into their original positions), then you get a whipsaw.

Let's study a real-life example, using the 10-minute S&P 500 (SPX) chart.  When we study this chart a little more closely, we can see that sellers came in at 1514 in a pretty big way on two occasions during the first week of February (on the way up).  Unfortunately for some sellers, due to the gap up on February 8, it's a fair bet that any sellers who came late to the party got trapped short.  We can then see the back-test of 1514 on February 11, and further reason that some of those trapped sellers surely elected to cover their positions -- but it's unlikely that all of them did.  SPX has only moved up about 10 points since then, so it's also a reasonable bet that a fair number of swing-trader bears are still holding onto their shorts.

Looking to the upside, 1525 has rejected the advance twice, and thus now becomes an obvious stop-loss level for shorts.  Typically, most traders will leave a bit of cushion beyond the obvious level, so we should assume 1525 plus a few points.  The chart also shows us that ever since February 8, the market has been in a battle between buyers and sellers -- the pinball back and forth action tells us that bulls and bears are pretty equally balanced in this zone.  And that then tells us another piece of information about 1525: if the market does more than take a quick peek above that level, additional buyers should show up in the form of short covering (and possibly also in the form of bulls who are hoping to buy in lower, but will feel the urge to chase a break higher).  The reverse is true of 1514 on the downside: 1514 (minus a few points) has become an obvious stop-loss level, so we can make a reasonable assumption that additional sellers will show up below that level.  This is why the triangle breakout or breakdown can be projected to run at least 10 points. 

So, sustained trade beneath 1514 is very likely to lead to a test of the next support shelf, in the 1495-1500 zone, where buyers are likely to show up again.  Sustained trade above 1525 is likely to lead to 1535 (+/-), where many short-term traders will take profits.   

Technical analysis really isn't a bunch of voodoo, it's simply based on trader psychology.

We've discussed and charted the triangle above.  In classic technical analysis, triangles typically show up as continuation patterns to the prior trend, which in this case was up; more rarely, triangles are reversal patterns.  In Elliott Wave analysis, triangles always show up as continuation patterns, but typically show up as the penultimate (second to last) wave in a waveform.  There are two challenges here for Elliott Wave: the first challenge is determing whether or not this is a true Elliott triangle, and thus "destined" to resolve higher.  The second challenge is which wave it would actually complete if it is a triangle.  Neither question has a clear-cut answer right now, so this becomes a bit of a "confirmation" market.  Trade below 1514 would rule out an Elliott Wave triangle, while trade above 1525 would largely confirm it. (continued, next page)

SPX Update: Questions for the Short-Term, but Long-Term Bearish

Let's recap what we know for sure:  Monday hit my anticipated target perfectly, and there are now five waves down on the S&P 500 (SPX), which satisfies the minimum expectation for Minute Wave-i -- as such, the larger expected wave-ii rally might be underway.  After Minute Wave ii completes, it is expected that Minute Wave iii-down will travel beneath the 1266 swing low.  Ultimately, the larger degree Minor Wave (iii) should travel into the 1100's. 

I have some questions over the short-term, though, and the only one capable of answering these questions is the market -- hopefully in the next session or three.  Here are my short-term questions:

1. Is the current rally Minute Wave ii, or the lower degree Minuette Wave (4)? (I'm favoring the Wave (4) interpretation.)
2. Is the current rally over?  (I suspect it is -- though it could have one more slightly higher high.)
3. If the rally is Wave (4), will Wave (5)-down extend and blow through the lower target zone?

I'm favoring the idea that this corrective rally has about run its course, that it's Minute Wave (4), and that the market will make a new low beneath 1309.  I'm split on the idea of an extended fifth wave here, and there's really no way for me to know in advance. 

For the intermediate term, I strongly suspect that Minor third wave down is now underway, but the caveat is that the market needs to confirm with a print beneath 1306.62.

If my preferred intermediate outlook is correct, and we are now in the early stages of a Minor degree third wave decline, then there are some things to be aware of.   Third waves are powerful, especially third wave declines, and bounces will be muted and sometimes fall short of targets.  Third waves gain their power from the fact that the majority have been caught wrong-footed.  If you're on the wrong side of the trade, expect this wave will not let you out without damage -- because everyone else will be trying to get out too, and that will keep the bounces muted. (This is relative to the time-frame of course -- Minor degree waves last weeks to months, so I'm not talking about day trades.)

So, third wave declines require the majority to head into them positioned long.  Here's the funny thing about sentiment: I suspect that the majority of people wouldn't really believe my projections, because if they did, then we couldn't have an extended decline.  People who think the market is headed significantly lower aren't holding equities; they are either short or flat.  And people who are short or flat have nothing to sell to drive the market lower in the first place -- so if I'm right, the majority are still long right now: it's something of a requirement. 

Right around the time the majority turn bearish, it will be time for a large bounce.

Let's move onto the charts, and take a quick look at the intermediate picture.  The questions I outlined above are reflected on this chart (as well as the next one).  If Minute ii-up is underway, then just move all the blue lines over to the left.

 

Next, the short-term chart, and the expectations of the wave (4) count.  After re-examining the first stage of the decline, I have moved the Minor (ii) high to match the price high at 1363.  I now suspect that the move from 1363 to 1346 was, in fact, the first wave... though it looks a bit odd because it had an extended fifth.  This also matches the strength of the recent decline into the 1309 low, since that would still be a portion of the Minuette wave (3). 

The alternate black count may or may not have more rally left in it.  If the market does more than a very marginal new high, suspect the black wave ii count.  Conversely, if the move starts to accelerate lower from here, suspect either the extended fifth or the alternate count, and we should start looking for lower targets.  If this is a standard fifth wave decline, it should make a new price low, but there should be numerous bullish divergences on the indicators when it does.

In conclusion, the short-term was dead-on clear last week and I hit the last 3 turns almost to the penny, but things just aren't always that clear, unfortunately, and the short term is now a bit hazy.  It will clarify again soon enough.  Regardless of the market's short-term path, the intermediate term appears decidely bearish.  Trade safe.

Reprinted by permission; Copyright 2012, Minyanville Media Inc.

SPX Update: 81 Points of Profit Captured as the Market Reaches Critical Support

I'm very interested to see what happens today, as most are expecting a "Facebook bounce."  There is some indication that at least part of the decline was caused by investors selling other stocks in order to raise cash for the Facebook IPO.  These days, there is little new money coming into the market -- so the only way to raise cash for Facebook was to sell other holdings, which in turn contributed to the recent decline.  Theoretically, this cash should come back into the market with the Facebook IPO, and this would argue that Facebook’s IPO may, indeed, help drive some type of rally here.
 

Interesting how the Facebook IPO coincides with the fact that SPX has reached a potential bottoming zone according to the wave counts, and the market is oversold according to the indicators.   I’m intrigued to see how it plays out today.

Yesterday was another victory for bears, and the market is now in a price zone that crosses numerous long-term support levels.  It's also sufficiently oversold that it's advisable to watch for a potential bounce.  However, so far the decline has blown through support as if it wasn't there -- so this offers probability, but no guarantee. 

Moving onto the wave counts, there are two higher-probability interpretations.  I'm inclined to view this wave as the third wave of a larger third wave, but the charts do leave open the potential that the recent decline was an extended fifth.   Both scenarios are currently expecting some type of bounce, possibly as soon as today, though the idealized target for either is still a few bucks beneath the current market.  It's not always advisable to try and chase the last few bucks of a move, though.  As we'll see in a moment, we've already captured 81 SPX points, so there's certainly no need to get greedy here. 

Conversely, I would pay close attention to the trendchannels in the chart below before getting too excited about any bounces.  An "expected" bounce is not a "confirmed" bounce until the trendlines are broken, as noted on the chart.

This is where a trader has to decide whether they want to risk giving back some profit to chase a potential extended drop (by placing stops above the market), or whether they want to trade actively and take profits directly.  I myself am very tempted to use the first option, but my real-time read during the trading day might change that view.

I do want to call attention to the 60 point trade trigger discussed on May 2, as that trade has now captured the full profit of 60 SPX points (1305 target reached) since the trade elected at 1365.  Keep in mind that this trade came directly on the back of a successful 21-point trade trigger which elected at 1394. 

Thus those two trade triggers have captured a combined 81-points of the decline from 1394.  Not a bad two weeks!

To wrap things up, one of my favorite indicators, the McClellan Oscillator (NYMO) has finally reached the oversold zone where larger rallies often begin.  If you'll recall, this was the same indicator I called attention to on the exact day the market bottomed back in April.

As I've also pointed out on a number of occasions, this is also an area that should have longer-term price support. 

What happens next is absolutely critical to the bull case.  A bounce looks possible, and even likely here -- but the market makes no guarantees.  As I discussed yesterday, bulls absolutely must hold this zone.  An oversold market can be extremely dangerous if an expected major support zone fails. 

If support holds here, then a quick trip to the 1320's, or even the 1340's, appears likely.  So -- be on guard for a bounce here, but stay nimble.  If by any chance the 1290-1300 zone fails, I would give absolutely zero thought to holding long positions at this time.  Beneath that zone and the market could easily go into free fall.

To put it simply: the next session or two represent a critical test for the bulls.  I'm favoring the view that they'll manage some type of bounce here, but also favoring the view that this bounce will be short-lived.  Trade safe.

Reprinted by permission, copyright 2012 Minyanville Media, Inc.