SPX Update: Indecision 2012

No material change in the counts since yesterday.  The S&P 500 (SPX) daily chart shows another indecision candlestick: in this case a dragonfly doji. This candlestick foretells of a reversal roughly half the time -- in other words, it's pretty random.  However, it does indicate an undecided market.

On the daily chart below, I've annotated some of the nearby support and resistance zones, both long and short term.  There is significant resistance directly overhead right now, so a consolidation or reversal may be in order.  Conversely, a breakout through this zone would target 1370-1380 next.

The market is also at something of a crossroads between the pink channel and the green channel.  A breakout through the top line of the pink channel could indicate there's still a fair amount of momentum left in this move. 

The 10 minute chart is unchanged from yesterday.  If a top is going to form here, it may take a few sessions.  As I've said before, tops are usually a process; whereas bottoms are usually an event.

Again, until the trend channels are broken, there is no objective indication of a trend change.

The chart below shows the Nasdaq (COMPQ) daily and notes that the rally has again reached the underside of the old upsloping trendline off the March '09 lows.  It also notes how overbought the market has become (in technical terms: "just a tad").  If the Nasdaq breaks though this level, the next meaningful resistance doesn't come in until around 3040 or so.

There is simply not much to add after yesterday's action, which was essentially just a sideways/up grind.  The market has a lot of options for its next move, so until it either breaks out or breaks down, there's no real way to project what happens next.  The market's as overbought as it gets, and has been for some time -- but an overbought market can always get more overbought.  If the Minor (2) count is still valid, then now's the time for the rally to end -- but the market did nothing yesterday to add or subtract confidence from that count.  So at this point, we'll simply have to watch overhead resistance and the lower support zones for clues to the market's next move.  Trade safe.

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

SPX Update: Do-or-Die Week for the Big Picture Wave Counts

On Friday, the Dow Jones Industrial Average (INDU) came within 6 points of its 2011 high.  If this high is broken, this would be an extremely significant event for the counts, since second waves cannot exceed the beginning of first waves.  Monday is a critical day for the Minor Wave (2) count, and if the market doesn't reverse lower pretty much immediately, it will be time to rule that count out and consider some alternates. 

I continue to favor the Minor (2) top here, but there is now no room for error.  Since I've been wrong before, and Monday may be the bears' last chance for the Minor (2) count, I've looked at a number of alternate possibilities this weekend, and have now decided on my main alternate long-term count.

The Minor (2) count isn't dead yet, and it's still my preferred count.  But in the event that it's way off-base and Monday opens higher, I'm going to present my main alternate count below for reference.  This count considers the possibility that the 2011 decline was an (a) wave, and the current rally as part of a (b) wave. 

On Friday, the S&P 500 (SPX) closed just below a significant overhead resistance zone, as did the INDU.  The bears need this resistance zone to hold.  If this zone can't turn back the rally, then it puts the 1370's, and even the 1400's in play. 

This appears to be a critical pivot point for the market.  My preferred view is that the market heads lower right from Monday's open and doesn't look back.  However, if that doesn't happen, my main alternate count is shown below.  This count will move into the preferred role if the INDU trades above 12876.

If there's no pause at this resistance level, bears may want to stand aside and wait for the market to break its uptrend before taking further actions.  I've said it many, many times before: cash is a position too.

There is really no need to fear "missing out," as I've also said before.  If a big decline is still in the cards, it's not all going to all take place in one day.  Certain posters on my blog have suggested a "flash crash" is around the corner.  I've never been of this opinion.  While anomalies are always possible, I see no signs of such an event in the current charts.  Even the flash crash came after the market broke its uptrend line and started trending down -- not while it was still trending up.  Sudden crashes almost never start from this type of market position.  Patience is a virtue in trading.

In any case, as I mentioned at the beginning of this article, the Minor Wave (2) count isn't dead yet... it's just on severe life support.  Below is the short-term SPX chart, which shows my preferred Minor (2) count. I will continue to favor this count unless the Dow makes new highs above 12876. 

Friday's preferred targets were all hit nicely on the chart below -- in fact, the targets were originally suggested on Jan. 24 as an if/then equation, which is often how the market functions.  Those targets are still shown in the call-out box, which has remained on the chart since the 24th.

The move can be cleanly counted as a complete five-wave rally, to complete c of (y) of Minor (2).  Whether this is indeed the case will be revealed by the market directly.

If we combine the two charts above, we can see there are three major upsloping trendlines that the bears need to break before we can have any confidence in a significant trend change.  The first warning shot to bulls will be a break of the short term channel shown above; the second and third will be breaks of the larger channels in the first chart.  No trend line break equals no trend change.  As I've also said previously, until such time as the market breaks down, the benefit of the doubt should go to the established trend. 

My job, as I see it, is to project the potentials as best I can (including targets when possible), warn about the possibilities of a trend change when I see them, and suggest potential pivot zones so readers can be prepared.  Potential trend change zones are areas to consider taking profits.  If no reversal materializes, one can consider adding to positions if the market breaks through a resistance zone.  Actively betting against a trend is tricky business, and traders must realize that. 

Personally, I attempt quick stabs at counter-trend positions and either make a few bucks, lose a few bucks, or get lucky with my best educated guess and nail the exact top or bottom.  Less nimble intermediate-term swing traders should generally either wait for confirmation of a trend change, or be able to close positions without hesitation if they front-run a reversal that doesn't materialize, and critical support or resistance levels are violated. 

For example, in my opinion, this is another very good zone to attempt some counter-trend shorts, since the market is just below overhead resistance, and the risk/reward potential is good.  But in order for the risk/reward equation to work, one has to be prepared to close positions if resistance is broken and the market doesn't reverse.  If one is going to hold and hope forever, then the risk becomes astronomical, as the market could just keep right on rallying.  Trading is all about managing risk; and betting against a trend is always risky. 

As another example, due to a number of indicators, I was looking for a top back when the market was below 1300-1310.  It's fine if you want to try and play that possible top, but once 1300-1310 was broken, and especially when it was back-tested and held as support, then it was time to look up, not down -- and the daily preferred count this week pointed to higher prices and targets the entire way up from that zone.

There are certainly lessons here for those traders who have front-run a top without using stops.

Anyway, back to the market.  There are signs that momentum actually increased on Friday.  For the short term, the bears primary hope is that Friday was an exhaustion gap similar to October 27 -- and this is indeed a possibility.  As is so often the case in the market, we simply won't have an answer to that question until the next session.

Something small the bears have in their favor is that on Friday, the VIX touched its lower Bollinger band for the first time in several sessions.  This first Bollinger band touch generates at least a short-term pull-back in the SPX more than 77% of the time -- although it isn't necessarily a trend changer, it just means lower prices from where the signal occurred in 77% of prior cases.  However, over the past several weeks, the market has not worked out according to most of the historical odds.  It has blown up indicator after indicator, despite past averages.  In fact, VIX touched its lower Bollinger band in a similar fashion twice already in this rally, and the market kept right on rallying anyway.

Below is a short-term version of the VIX chart to illustrate some examples.  The occurrences on this chart do not equate to the 77% figure -- that figure is based on a much broader market sample.

The market's last chance for Minor Wave (2) is at hand.  If that count still holds any water, the market needs to decline more or less immediately at Monday's open.  The SPX and Dow are both facing significant resistance levels, so the bears have a potential opportunity here -- and even if Minor (2) gets knocked out on the Dow, this is still a significant resistance level and represents the market's next hurdle, with or without Minor (2).

The final chart was originally presented last week, and this study is still valid and something to consider; as is the fact that the Bullish Percent Index is at all-time highs (see Wednesday's article). In the study below, in 2007, the SPX continued higher for two more weeks after the signal triggered.  It has now been one week since the recent trigger.

In conclusion, back on Jan 24 I warned that if the market held the 1300-1310 zone as support, then it was likely on its way to 1330 as the next test... and if it got through that, it would head to 1345-1350.  Those things have come to pass.  The market is now facing its next big test.  If the bears can't put something together here and now, and stop the rally from breaking through 1350-1360 SPX, then it's likely that the rally will continue for at least another week. 

I continue to favor the Minor (2) top -- however, ultimately that's just my best analysis; it's not a guarantee.  The market poses the questions, and the price action provides the answers.  If my preferred Minor (2) top is valid, then the market should reverse almost immediately on Monday, and the current highs should hold for a long time to come.  With only 6 points of upside left before the Dow knocks out its count, we shall have our answer shortly.  Trade safe. 

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

SPX Update: Slight Shift in View After Thursday's Action

There is very little to add to the overall picture after yesterday's action.  The market came within 16 cents of adding confidence to the bear count, but did not.  The action yesterday now forces me to give a slight edge to the more bullish count.  The objective reason I feel this way is because in a diagonal, the peaks of waves 2 and 4 "should" be on the same trendline.  Yesterday's action will make that difficult for the bearish short term count. 

So below is the slightly more bullish count, which has moved into the preferred role, and which anticipates that the market is now forming the fifth wave of the fifth and final wave up to complete the rally.  The preferred target for this count would be 1342-1343 for the S&P 500 (SPX), though any print above 1333.47 would suffice.

The hypothetical leading diagonal bear count is shown below.  This count hasn't been completely eliminated, but with the diagonal sketched into the chart, one can see how the action yesterday creates difficulty for the trendline connecting the second and fourth waves of that diagonal.

Today is a non-farm payroll day, which means that bears should actually hope for a higher open.  The majority of the time when the market opens higher on NFP days, it reverses and closes lower.  A fair number of NFP days have also marked major and minor turns/pivots in the market.

In conclusion, based on the price action on Thursday, I'm now inclined to favor the slightly more bullish count.  Trade above 1333.47 would add confidence to that count, while trade below 1321.41 would add confidence to the bearish view.  If the longer term bear counts still hold any water, this should literally be the last and final leg of this rally, and an intraday reversal today becomes likely.  Trade safe.

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

SPX Update: Market Now Historically Overbought

No material change in the counts since yesterday.  The SPX hit yesterday's targets, and actually exceeded my exact 1328 target by a couple points before reversing.  A small moment of truth for the short term preferred count is now upon us.  Trade above 1333 would eliminate it, while trade below 1321 would add confidence to it.

Below is the very short term chart, which highlights the key levels.

If this decline is to continue as a leading diagonal, it will be very difficult predicting targets until the smaller sub-waves start to unfold.  There are few Fibonacci relationships within leading diagonals, so I'll have to see the form taken by the next wave before being able to take a stab at a target -- much as I did yesterday.  The only concrete rule at this stage is that the next wave (presumed to be a small third wave) must exceed the low of wave 1 (1300.49).  Wherever the next wave bottoms, it is currently expected that after it bottoms, it will then retrace back above 1300.49.  Cautious traders please take note.

Again, if this is indeed a leading diagonal, then the market is expected to have a choppy downward bias over the coming sessions.  "Choppy" is a key word here.

Below is the hypothetical example of how the leading diagonal could unfold, as shown previously.  Please note this is not intended to be an exact price projection at this stage -- as I said, there are few Fib wave relationships in this type of move.  It's merely intended to illustrate the concept; price projections will have to come later.

Yet another signal that a top is likely to be much closer than the bottom now is the Bullish Percent Index for the Dow Jones Industrials (and others).  The Bullish Percent Index (BPI) is a breadth indicator based on the number of stocks on Point & Figure buy signals within an index; readings over 70% are considered overbought, while readings under 30% are considered oversold.  The current reading is 96.67%, a virtual tie with the highest readings ever recorded.

All 3 readings at this level have occurred post-2006.  The chart below lines up the readings with the SPX price chart in the bottom panel.

And finally, the bullish alternate count.  Again, the count below is not my preferred count, and is presented in the event that the market exceeds the 1333 highs, so readers will have one idea of what may be unfolding.  I feel that in the event that my previous call that Thursday was the top proves to be a tad early, then the top is still very nearby.  However, that's only my opinion, based on the supporting evidence -- so conservative bears may want to trade accordingly and keep tight stops on their trades until the trend actually changes.  Until proven otherwise, the trend is still up.

In conclusion, several days ago, I put forth my preferred view regarding what's unfolding -- and now it's up to the market to either disprove my theory or add confidence to it.  The key levels for the short term are both nearby, so the first question should be answered soon.  For the intermediate term, I continue to believe the market is very close to a meaningful trend change, but there is still no confirmation of that view.   Trade safe.

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

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