SPX Update: Market Ripe for at Least a One-Day Rally

Much as I'd like to give the bears something to be really excited about, yesterday's action wasn't terribly encouraging, and has left some questions about the decline from 1333-1300.  Yesterday's morning spike exceeded the 1320.06 high, and this price action effectively "locked in" the three-wave structure on the S&P 500's (SPX) decline which only leaves two options:

1) The decline from 1333 is all, or part of, a corrective wave, which means the 1333 high will eventually be exceeded.
2) The decline from 1333 to 1300 is the first wave of a leading diagonal.

In either case, I am expecting further upside for today and/or tomorrow, with a price target between 1321-1330.  The rally off 1300 was a pretty clear five-wave move, and that suggests at least one more five-wave rally is due.  My ideal target would be 1328, where wave c reaches equality with wave a (see short term chart below):

The chart above is labeled with the bear count in blue and the alternate more bullish count in black.  Due to the long-term structures and the dozen top indicators we've looked at recently, I remain in preference of the bear count, shown at length on the 10 minute chart below.  The structure of the decline really leaves the bears only one option over the short term, though, which is the leading diagonal discussed above.  If this decline is part of a leading diagonal (hypothetically sketched in below), then the market is going to be very choppy, but with a downward bias, over the next week or so.

Any print above the recent 1333.47 highs would immediately shift preference to the alternate count shown below.  If the bullish short term count is playing out, the market should form a five wave rally to a new high.  Wave iii of this count would reach 1.618 times the length of wave i at 1340.  The ultimate target for the entire wave would probably be near 1350, but that would need to be calculated after wave iii and iv complete.

In conclusion, as mentioned in yesterday's update, the rally is showing signs of weakening.  However, until we see some hourly closes outside the boundaries of the lower black trendline -- and then some daily closes outside the boundaries of the trendline connecting the November and December lows -- there is as yet no objective confirmation of a trend change.  I remain in preference of the bearish counts over the intermediate and long term, but over the very short term, I'm expecting a rally. 

I was positioned long briefly last night, but dumped the position early for a few points of profit.  Assuming we get a rally, and it reaches the vicinity of the 1328 area, I plan on shorting ES (E-mini S&P futures) with a stop above the recent 1333 highs.  This is, of course, not trading advice.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com 

SPX and Dow Updates: Bears Fire a Shot Across the Bow

The bears finally showed a little bit of strength yesterday, although the decline was almost entirely retraced by day's end.  Before I get to the short-term bear counts, I'm going to present the slightly more bullish alternate, then wrap up the discussion with the bear view.

The recent decline is currently a three-wave form, and played out almost perfectly for the alternate count -- this is causing me to again present the alternate count's chart (not published yesterday; chart last published in Friday's article).  It was brought to my attention that the very short term count I showed yesterday with the black "Alt.: A" and "Alt: B" labels wasn't understood by many readers.  Those labels represented the blue a and b labels on the chart below.

There's an interesting potential at play across markets right now.  Last Thursday, the Dow Jones Industrial Average (INDU) came within 35 points of invalidating its entire Minor Wave (2) count.  The current structure on the INDU appears slightly different than the SPX.  While the SPX looks like a 3-wave decline, the INDU may have formed a five-wave decline.  The INDU also pierced intermediate support, though rallied back above it.  Is it possible that the INDU has topped, while the SPX could still make another run, slightly above the 1333 high?  Today's action should help answer this question.

Below is the INDU chart, which mainly focusses on the support and resistance lines.  For the first time since the rally began, INDU pierced the rising blue trendline connecting the November and December bottoms.  It still maintained the red channel, but each decline has been getting progressively stronger, as each time the channel line is forced lower.  I expect the next decline will finally break the rally's back for good.  In the meantime, until there is a solid close beneath the blue trendline, there is still no confirmation of trend change.

The next chart is the short-term bearish count for the S&P 500 (SPX).  Trade above 1320.06 would rule out the 1-2 portion of the count shown below, and cast suspicion on the blue 5 label, since that would force the entire decline to be viewed as a single first wave, which is difficult.  Trade above the recent 1333 highs would rule out this count entirely, and shift preference to the alternate SPX chart. 

The final chart is simply a big picture view of support and resistance lines for the SPX.  The bears still have their work cut out for them, though they do seem to be getting progressively stronger.  Breaking the black channel in the short-term chart (shown above) is the first step, breaking the 1300-1310 zone is the second, breaking the rising black trendline in the long-term chart (shown below) is the third, and breaking the rising blue trendline below would be final confirmation. 

It is noteworthy that the daily MACD has finally crossed over.  It has also formed a negative divergence with price, and barring a big renewal in the rally's strength, this is often indicitave of a pending decline.

In conclusion, whether I nailed the top yesterday remains to be seen.  I'm not backing off that call yet, but there was nothing yesterday to add any confidence to it.  However, even if the market moves slightly above the 1333 price point, the rally is now showing signs of weakness.  Each decline has gotten stronger, and each time it's knocked out the next lower channel support.  MACD has finally crossed, and I suspect that any upside potential is now quite limited.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: Yet Another Top Signal -- and Sentiment Suggests a Confused Public

This weekend, I was studying some data from the Yale School of Management which I found intriguing.  I can't post their charts in this article, because I didn't receive written approval in time for publication, but I will link to their site in a moment.

Yale tracks a number of sentiment indicators, among which is their "Crash Confidence Index."  The CCI survey measures confidence that there will be no stock market crash in the succeeding 6 months -- and it has now reached levels nearly equivalent to the levels after the 2008 crash.  This is a contrarian indicator, so those lows would generally be interpreted as bullish for the market.  Here's the link to Yale's chart.

Flying in the face of that data, we have the American Association of Individual Investors sentiment survey, and it, too, measures investor expectations over the next 6 months.  This survey shows that the number of bearish investors is still hovering at readings which are extremely low by historical standards.  This would be considered bearish for the market, as a contrarian indicator.

So which is it, investors?  How is it that less than 19% of investors are bearish about the market over the next 6 months, and yet at the same time, the number of investors who think a crash is possible over the next 6 months is near all-time highs?  Has John Kerry been the sole respondent in these surveys?  (Actual quote: "I voted for it... before I voted against it.")  These two pieces of data seem completely contradictory, so I'm left with the conclusion that the public must be very confused.

The charts are also giving some signals of indecision, as this week the S&P 500 (SPX) formed a doji candlestick on the weekly chart, which is an indication that buyers and sellers have reached equilibrium.  A single doji by itself only predicts a reversal approximately 50% of the time, so it has roughly the same predictive value as a coin flip. 

Since the doji by itself has no predictive value, I dug deeper into the charts.  I noticed that the Nasdaq Composite (COMPQ) closed the week more than 1% higher, so I decided to back test prior occurrences where the SPX closed the week virtually flat after a well-defined uptrend, while the COMPQ closed the week greater than 1% higher.  I added the 10 Year Treasury Yield (TNX) into the mix as well, with the qualifier that yields closed the week lower, to further narrow the results and to add another logical component to the study.

The logical components of the study are as follows:

1) SPX roughly flat is suggesting indecision after an uptrend.
2) COMPQ is suggesting investors are now chasing the rally in the riskier Nasdaq stocks.  This is somewhat common to see at the tail end of a move.
3) TNX yields falling flies in the face of the Nasdaq surge and suggests that smart money is in "risk off" mode.

It's an interesting result.  This has only happened three times in the prior six years -- two of those three occasions marked virtually the exact top for SPX; but in 2007 the SPX still had a hair farther left to run on the upside.  On other occasions, COMPQ failed to reach the "greater than 1%" qualifier -- two of those are mentioned below, but are not included in the results since the qualifiers failed.  In the chart below, the SPX is in the center panel.

Add this to the mix of the dozen other indicators we've looked at over the past couple weeks which also suggest a top, and we have the markings of either an actual top in progress -- or a market that is being so distorted by the money flood from the world's Central Banks that these indicators simply don't work under these abnormal conditions.  I suppose our government does have a vested interest in keeping the market afloat, since they have huge stock holdings in companies like General Motors (GM), American International Group (AIG), Citigroup (C), and others.  And, to use just one example, GM's stock needs to double just for Uncle Sam to break even.  Can you say "moral hazard"?

Anyway, much as I'd love to go off on a rant right now, I'm going to move on to the next chart. 

The decline off the 1333 high in SPX can be counted as an impulse wave and subsequent completed correction.  It's a bit ugly and very complex... however, assuming it's an impulse, then it's a first wave -- and first waves are often ugly.  Below is my preferred very-short-term count.  This count suggests that the top is now in place at the 1333 high.  Interestingly, 1333 is almost exactly double the March '09 666 low (as pointed out by one of my readers, "billabuster").  It's also the level at which wave (y) equals .786 Fibonacci times the length of wave (w). 

Here's the very short-term SPX chart, which shows my preferred count of the decline as wave 1 of a new impulse wave lower. 

Next is a slightly larger view.  This is the same chart from Thursday and Friday, which shows that the Minor (2) rally appears to have completed in the blue target box.  To be fair, if this is the actual top, it has kept me running -- and my short-term alternate counts have been the ones hitting targets.  I keep trying to place a cap on the top, and the rally keeps blowing through it.  However, also to be fair, in prior articles I have plainly expressed my lack of certitude in the short term counts of the structure.  At this point, I now feel a reasonably high degree of confidence in my short term counts.  In any case, if this top sticks, I can still accept kudos for the big picture count... if it doesn't, I have several crows warming up in the oven. 

The bears need to hold the rally below the 1333 high, and start moving the market beneath the three red support zones shown on the chart.  The chart is labeled as “invalidation for bear count” – but this is specific to the count shown and only a short-term invalidation, not long-term.

This is the first time I've felt reasonably confident that the top could be in since the rally started.  This is primarily due to several factors: the first is that the entire wave structure finally seems to reconcile very well (for once); the second is due to the fact that the Dow Jones Industrials came just about as close as they could to the 2011 top; and the third is the combined weight of the numerous market studies I've shown over the past couple weeks, which are all screaming for a top -- as well as the current study shown at the beginning of this article.  I feel like it's now or never for the bears here. 

However, the count above would be invalidated with trade higher than 1333, and until the market starts breaking some key support levels, there's still nothing to indicate a true trend change.  The market hasn't even broken down from the blue channel yet, so conservative traders may want to give the rally the benefit of the doubt.  I'm attempting to anticipate a reversal, which can be a dangerous activity for traders who aren't nimble.

In conclusion, as I've stated on numerous occasions, until the Dow breaks its 2011 highs (among other things), I remain a bear.  I'm going to go on record here with a bold (and possibly stupid -- we'll see) call and say that it's my belief that the top is now in at 1333.  Assuming the market continues lower from here, we'll start looking at targets if and when the market confirms this view -- and I'll attempt to determine at that point if this is, indeed, the significant top we've been expecting, or only a smaller correction.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com 

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 Update: Using Elliott Wave Theory to Choose Entries and Stop Losses

Yesterday the market formed a bearish reversal bar: it gapped higher at the open, but closed solidly in the red.  These types of bars sometimes indicate buying exhaustion.

The market is now as overbought as I've seen it, and if this is still a bear market, then this is a dangerous condition ripe for a serious decline.  If this is a new bull market, then it's par for the course, and the indicators could get even more overbought from here.  Materially, there isn't much to add to the last couple weeks of updates, so I'm going to discuss some of the ways I use Elliott Wave Theory for trading.

The market tagged my target zone yesterday before reversing, and there are now two ways to view the current structure.  I'm going to present both of them -- and then I'm going to talk a little bit about how one can use Elliott Waves to pick entries and exits for a trade, using the the current charts as examples.  This is not going to cover it exhaustively, by any means, but it could serve as a quick primer.  The disclaimer, of course being that none of this is to be taken as trading advice, and you should always consult your investment advisor, your spouse, your lawyer, your doctor, your priest, and a Magic 8 Ball before making any trading or investment decisions, etc..

Anyway, the charts below are the same time frame for the S&P 500 (SPX), but are each labeled slightly differently.  Both interpretations are viable.  So what does one do with this information, when the market "could go up or down"? 

Let's start with the bearish interpretation.  The bearish interpretation would view this as a complete five-wave rally, which would mean a larger decline is due. 

On the bearish chart below, the "c" label marks the potential end of the wave.  Obviously, any trade above that price point indicates that the wave isn't complete, so that becomes one's stop loss level for shorts.  On my charts, I label these as "KO" levels, meaning, in this case, that trade above that level knocks out (invalidates) that interpretation. 

In this particular instance, if one was inclined to go short, as I did yesterday when the rally reached the target zone, then the bullish interpretation (next chart) shows why you don't want to chase the decline and go short at random (you really never want to do anything at random as a trader, but the chart after this one emphasizes that point).

So, one would either wait for a bounce and short from higher levels, where one's stop loss is closer and manageable -- or one would stand aside and wait for the bullish interpretation to get knocked out entirely, since that should act as confirmation that the rally is indeed over.

The chart below shows the bullish interpretation and the knockout level.  If one was undisciplined and shorted at random -- say at a really dumb spot, like 1310 -- then one would be risking 23 points (from 1310 to the 1333 bearish knockout) to gain 14.  Why 14?  Well, because the bullish knockout level is only 14 points lower, at 1296.  If one missed going short near the top and can't get a better entry than our hypothetical dumb trader at 1310, then it's really much smarter to either:

1) Stand aside and wait for the bull count to get knocked out (1296) before considering taking any action on the short side. 
2)  Wait for a bounce back up toward the bearish knockout level (1333), where one can get a lower-risk short entry.

Is this starting to make sense?  There's a method to this madness.

Conversely, if one wanted to play the move from the long side, one could go long near the 1310 support zone and use the 1296 KO as a stop loss level. 

If one was already short, the 1310 zone is a good area to consider taking profits, since it seems almost certain that some type of bounce will develop there -- either a small bounce, or a stronger bounce to brand-new highs.  Needless to say, if the brand-new high scenario plays out, one gives back all of one's short profits and then some.  That's why I take profits often.  Bears can still make money in a bull run; they just have to be smart and nimble, and not turn into pigs (greedy). 

Once one is safely back in cash, one has several options, including the following:

1)  If one is still bearish, one can always short again from higher levels after a bounce. 
2)  Still using the hypothetical 1310 profit-taking level, if no bounce develops -- then worst case, one misses out on 14 points between 1310 and the bull count KO level.  Once the bull count is KO'd, one can always consider fresh shorts, since that should validate the bear case.
3)  If one is bullish, long positions could be taken for a ride up into the bull count target zone.  1296 becomes the SAR level (stop and reverse) for that trade.

Going back to the first chart, I personally wouldn't use the bear count's KO as a SAR level to go long, because it appears that even if the bullish count is playing out, then the rally is entering its final leg -- and with the KO level at 1333 and the lower portion of the target zone only a couple points above, at 1335, the risk/reward seems marginal.

Those are a few basic concepts.  As I said, it's by no means exhaustive.

So, which of the two counts am I favoring?  I thought you'd never ask!  (Yeah, right.)  Well, currently the decline is only three waves, which -- if it stays that way -- indicates it's corrective, which means it's just what it sounds like: a correction to the next larger trend -- which is up.  Tomorrow's action could change that -- if it adds another wave down in a proper Elliott way and turns the decline into a five-wave move, then that could be an indication of a trend change.  But at this exact moment, there's nothing to indicate that the trend has reversed.

If the bullish count is unfolding, then what would usually play out in this type of wave would be a bounce back up toward the mid-1320s and a subsequent decline to roughly 1310, before rallying up into the target zone.  It's also possible that the three wave decline the market formed yesterday was it, in which case all my talk about 1310 is meaningless, because the market is on its way to immediate new highs. 

If the bear count is unfolding instead, then ideally the market needs to keep the bounce that started just before yesterday's close below 1325.30 to keep open the bearish possibility of a nested series of first and second waves, or it needs to head down off the open to create a five wave move.  Note that the bull count could clear 1325.30 and then decline to 1310 without creating any rule violations.  Trade safe! 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX and VIX Updates: Bears Running Out of Real Estate

Yesterday, the Fed announced that it will continue to keep interest rates low "until late 2014 or until we all get fired, whichever comes first."  The market immediately rallied, as hopeful investors cheered the news that the Fed could get fired.  As I predicted, there was no announcement of QE3, however the Fed has effectively stated that they're going to keep juicing the money supply as much as they feel is necessary to continue driving inflation higher.  Inflation creates higher prices in all asset classes, including of course, stocks and commodities.

It seems to me that the Fed realized some time ago that the scenario they face now is basically "inflate or die."  The practical difficulty they are challenged with is outlined in the quote below (from Paul Samuelson's 1948 Economics textbook):

By increasing the volume of their government securities and loans and by lowering Member Bank legal reserve requirements, the Reserve Banks can encourage an increase in the supply of money and bank deposits. They can encourage but, without taking drastic action, they cannot compel. For in the middle of a deep depression just when we want Reserve policy to be most effective, the Member Banks are likely to be timid about buying new investments or making loans. If the Reserve authorities buy government bonds in the open market and thereby swell bank reserves, the banks will not put these funds to work but will simply hold reserves. Result: no 5 for 1, "no nothing," simply a substitution on the bank's balance sheet of idle cash for old government bonds.

Their hope seems to be that they can keep everything afloat just long enough to move into a recovery period, at which time the economy will pick up and the banks should start lending again.  So far, it's been a pretty tepid recovery, and it's difficult to see what, if anything, has changed since 2011.  The market sure seems to have gotten ahead of itself -- but since the money the Fed pumps to its primary dealers ends up in stocks and bonds, which drives higher prices, reality isn't much of a factor in the market these days.  If you want some illustration of that fact, consider that the Dow is currently at the same price level it was at in early 2007 -- and then compare the fundamentals between then and now.

Fundamentals don't drive the market; liquidity does.

So, fundamentals aside, there's a cardinal rule to Elliott Wave Theory that wave 2 cannot exceed the start of wave 1.  Several indices are still some distance away from violating that rule, however, the Dow Jones Industrial Average (INDU) is only 120 points away from its 2011 high.  12,876 would be the line in the sand for the bear count in the INDU.  And since the Dow leads, it is probably safe to assume that if the Dow knocks out its bear count, the S&P 500 (SPX) would follow soon after.

We're not quite there yet, but it's an awfully close shave for bears right now.  As such, today I'm going to present an alternate long-term bull count alongside the bear count.  If the Dow knocks out its bear count, this bull count is likely to become my preferred view, though I'll have to do a lot more cross-market studies before committing fully to a new preferred count.  I'll need to see what form the knockout takes.  However, I'm getting a bit ahead of myself here, since the market still hasn't knocked out the bear count.  In any case, I wanted readers to get an idea of one possibility (chart below).

There are of course, always other possibilities, but we'll burn that bridge if and when we come to it.  First things first, though. 

Part of the reason I'm giving serious consideration to the bull counts at this stage is that numerous overbought indicators have been failing to generate any sort of meaningful pull-backs in the rally.  This is usually a hallmark of bull markets.  But price is the ultimate indicator, so let's see whether the bear counts get knocked-out or not.

Speaking of indicators, below is yet another top indicator that triggered recently.  This indicator uses the ratio of the Volatility Index (VIX), which measures one-month volatility, to the VXV, which measures three-month volatility.  The VXV is generally more stable, so low readings in this ratio indicate investors have become complacent quite rapidly, which is often a recipe for disaster for equities.  It's not my best "top" indicator, with roughly a 64% win ratio over the prior four years -- but it is yet another addition to a long list of recently-triggered top indicators.

Note the current development of this second signal trigger, about a month after the last one.  The last time this happened at a one month interval is highlighted on the chart, and in that prior instance, the second signal did nail the top.  I've also noted the bullish falling wedge in the VIX (bottom panel), mainly to point out that it might not mean anything.  Recall that the VIX acting bullishly is actually bearish for the broad market, as the VIX rises when the market goes down... however, I recall similar talk of these VIX patterns in the past, and indeed you can see on the chart that the prior two falling wedges both failed.  It seems that VIX traces out falling wedges with some regularity, and I think it's an error to read too much into that pattern on VIX.

But maybe in concurrence with the sell signal trigger, this time will be different.  We'll find out soon enough.

Last but not least, the SPX short term count.  Once again, my alternate count is the one that played out yesterday.  I keep favoring the bearish counts based on the indicators, and as the indicators fail, the bear counts fail with them.  Be that as it may, the current preferred count appeals to me a great deal.  I continue to feel that the first portion of the rally counts best as a leading diagonal first wave, and that suggests the market is now in the final stage of this leg upwards.  This might be the last hope for bears over the intermediate term.  However, until the market knocks out the long-term bear case as outlined earlier, I will continue to play this rally as a bear.

The count below suggests that the market is due one final gasp into the target zone.  If that count is correct, then the rally is finally getting ready to roll over.  Yesterday did have some hallmarks of an exhaustion day.  If that count's not correct and the rally keeps going, then it's likely the INDU will knockout its bear count.

     
In conclusion, if the bear case still holds water, then it's time for the bears to make a stand.  The indicators continue to signal a top -- but if this is no longer a bear market, it would not be uncommon for these indicators to fail.  The price action over the next few sessions is key.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com

SPX Update: Giving the Bulls Some Airtime

"Everybody knows that the dice are loaded, everybody rolls with their fingers crossed.
Everybody knows the war is over, everybody knows the good guys lost.

Everybody knows the fight was fixed, the poor stay poor and the rich get rich.
That's how it goes... and everybody knows.

Everybody knows that the boat is leaking, everybody knows that the captain lied,
Everybody got this broken feeling, like their father or their dog just died..."

- Leonard Cohen, Everybody Knows

Bears need a game changer.  On Tuesday, the market tested, and held, the critical 1300-1310 zone.  If the bears can't get something going pretty soon here, it's going to turn my system long-term bullish.  The next week or two could become critical.

As I've said before, I'm not a perma-bear.  My system turned long-term bearish some time ago, and it currently remains bearish -- but it's now very, very close to flipping to long-term bullish.  This is as opposed to October 4, when it turned intermediate-term bullish, but remained long-term bearish.

Lest people read this wrong, we're not there yet.  But it seems appropriate to give some thought to the possibility.

While "everybody knows" that the world is in long-term trouble with its mountains of debt and contracting economies, these lousy fundamentals do not preclude a bull market.  The market is driven solely by liquidity -- and if the central banks of the world keep flooding the market with liquidity, then stocks can continue to rally.  This doesn't necessarily mean stocks will be increasing in value in real dollar terms, but it doesn't really matter from a chartist's perspective.  A rally is a rally.   

With Europe now doing its own form of QE, the interesting dynamic at play is that the U.S. equities markets could rally in lock-step with the dollar as Europe floods the system and devalues the Euro.  So for a time, stocks could actually increase in terms of real U.S. dollars as well. 

It seems to me that this gigantic central bank shell game must end eventually; and when it does, it will end very badly.  The governments of the world have been eating all the economic bubbles they themselves created... and as a result, the governments have now become the final massive bubble in this grand economic experiment.  You are what you eat.  They're a bit like the Blob in that old Steve McQueen movie, consuming everything in their path and growing ever more massive -- except the Blob was somewhat more discerning about what it consumed. 

When this massive government bubble does finally burst, as it inevitably must, then there will be nothing and no one left to back-stop it.  And that, my friends, will be a very dark time -- and one that none of us should look forward to. 

Personally, I don't look forward to it; however, I do believe it to be necessary for things to become healthy.  Things can't last when built on a faulty foundation.  The writing on this wall has been pretty obvious since the late 90's, but each time the markets have tried to move back in line with reality, the government steps in and creates more pretend money.  That's how the internet bubble came about; how the housing bubble came about; how the mortgage-backed security mess came about; and why the national debt now borders on being completely unmanageable.

So here we sit, unable to create anything of real value, and unable to produce anything other than greater and greater quantities of pretend money.

But in the meantime, the question on my mind is whether the can has been successfully kicked yet again.  The answer to that question should be revealed by the signals the market sends over the next couple weeks. 

The bullish interpretation of the charts reeks of massive inflation.  I view that as perhaps a scarier resolution to the current ongoing and unresolved crises, because it will ultimately be that much farther to fall.  In any case, I'm watching these things carefully, and if my system flips to long term bullish, then that's how I'll play it going forward.

Let's see if the FOMC meeting can have any impact on the market.  As I've stated, I don't believe there's even a remote chance that QE3 is coming out of this meeting, so it will be interesting to see how the market reacts to that (assuming I'm right, of course).

I'm only going to present one chart tonight, because there's simply not much to add over the last couple weeks-worth of data.  There are two ways to look at the recent decline from the 1322 high.  The bullish view counts the decline as an a-b-c down to a fourth wave bottom, although fourth waves can be quite complex, and as such it could bounce around in a sideways fashion a few more times before rallying again.  If that interpretation is playing out, then the S&P 500 (SPX) is ultimately on its way to 1330 as its next test. 

The bearish count would view the decline as two sets of first and second waves.  If that's correct, then the move lower should accelerate if the recent lows are broken.  If the recent lows are broken, but the move fails to accelerate, then suspect that a more complex correction is playing out, which should ultimately resolve with higher prices. 

On the chart below, I have highlighted some key levels for the bull and bear counts, and also drawn an upside target box in the event the bull count is in play.  I'm hesitant to suggest a target for the bearish possibility at this juncture.  If there's downside follow-through, then I'll add some downside targets in the future.

In conclusion, the market appears to be at an important pivot point for the big picture.  My system remains on a long-term bearish signal, but it's on the cusp of turning bullish.  The next week or two are potentially critical to the bear case.  Trade safe. 

The original article, and many more, can be found at http://PretzelCharts.blogspot.com