SPX and RUT Updates: Red Alert Indicators in Conflict with Short-Term Wave Counts

I've been pulling my hair out all night trying to nail down the exact short term count, and have compared the NYA, INDU, SPX, RUT, TRAN, BKX, WLSH and several others -- partially because, due to the indicators, I'm having trouble believing what I'm seeing in the counts. 

The short-term wave counts are suggesting the rally is due a minor correction, then more upside --  however, the indicators seem to be contradicting that, and are now reaching full-blown red alert stage.  While it's possible that a meaningful decline is due, it remains dangerous to front-run against a rally that has shown this level of resiliency. 

Let me present a few of the arguments I'm wrestling with, along with the charts.

First, let's start with the wave counts, which appear to need a minor correction, followed by further upside, to reconcile.  My preferred count is shown in blue and red below, on the 10-minute S&P 500 (SPX) chart, followed by a zoomed-in view on the 5-minute SPX chart. 

I have highlighted some of the key price levels on the charts.  For the SPX, trade beneath 1321 would invalidate the blue count, and cause me to shift preference to the idea that a more meaningful top might be in place.  For anyone wishing to enter long on the idea of a fourth wave correction that leads to a bounce, there are plenty of support zones shown on the chart which could serve as stop loss levels.

The Russell 2000 (RUT) appears to be a similar position (below), and also suggests that a minor correction will be followed by another leg up.

Logically, one of the problems I'm running into with these wave counts is that 1350-1360 is a substantial resistance level, as I mentioned in numerous articles well before the market got here.  So this seems like a logical spot to turn back the rally -- but then again, head fakes are common in fifth waves.  Think of October 4, when the market broke down in an attempt to get everyone on the wrong side of the trade, and then whipsawed.  A head-fake breakout over 1350-1360 could serve the same purpose in reverse. 

Let's move onto some of the indicators, which are warning that the rally is getting substantially over-extended.  (This is more stuff that makes me want to doubt my short-term counts.)

The latest signal is a sell indicator that has proven to be very reliable over the years, which compares the total volume on the Nasdaq as a ratio to total volume on the NYSE. The idea behind this indicator is that extreme amounts of volume flowing through the higher-risk Nasdaq in relation to the "safer" NYSE indicate that investors are feeling exceptionally bullish. And we all know what happens when bullish sentiment reaches extremes and investors are feeling invincible -- the market usually whaps 'em upside the head.

This indicator serves as further warning to bulls that a correction, or worse, is probably close by.

Next is a top study I first presented a couple weeks ago.  When this signal triggered in 2007, the rally lasted another two weeks before ending.  It has now been two weeks since the latest signal.  The similarities in behavior during the two weeks subsequent to the signal trigger are quite noticable in the current markets compared to the 2007 markets.  I have highlighted both time periods in blue.

Another warning sign yesterday was the Volatility Index (VIX), which was up for the second day in a row while the SPX was also up.  In about a third of the prior cases where both indices were up for two consecutive days, the market launched into a decent size correction.  The most recent time this happened was right at the December top.

So... on one hand, the short term wave counts suggest to me that, at the minimum, there should be another leg up left in this rally.  On the other hand, there are numerous sell signals arguing against that.  I suppose the two aren't necessarily contradictory, since indicators frequently lead prices.

In a "normal" market, I would say the preponderance of evidence suggests a meaningful correction is due.  But this market has proven to be unusually resilient, and as a result, I'm slightly favoring the wave counts over the indicators -- so I suspect we'll see a sharp correction into the 1335-1342 zone, and then another leg up before a more meaningful decline.  

It's a very tough call, though -- I'm sure now you can see why.

In conclusion, where the wave counts and indicators agree is that the rally is now getting quite stretched to the upside, and the risk for long positions continues to increase substantially.  However, just in case I haven't driven this next point home enough over the past few weeks: until the market starts printing some closes beneath its major trendlines, there is no confirmation of any significant trend change.  There are more hints and allegations, but in the end, sometimes the market just doesn't care.  Trade safe.

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

SPX Update: Proprietary Indicator Suggests Long-Term Caution for Bulls

A contributor on my website called my attention to the fact that some readers "hear what they want to hear" when they read my articles.  I do tend to be verbose sometimes when I get going, so maybe some of the key concepts are getting lost in the shuffle.  As a result, I'm going to try to keep this article as succinct as possible... right after this detailed discussion regarding the reproductive cycle of the Western honeybee.

Sorry!  Just a little off-beat humor there, designed to lighten the mood and elicit outrage from entomologists.

To keep it really simple: I have not capitulated the entire bear case.  I'm not going to be on CNBC next week talking about how stocks are "undervalued" and how the market always goes up in the long run.  Those statements will be reserved for my appearances on talk radio. 

Of course I'm kidding again!  See how fun this column is?  Seriously, here's the simplest way to understand it:  I am short-term bullish and intermediate-term neutral.

As I attempted to outline yesterday, the shape of the next decline should help answer many of my questions as to whether that decline will turn out to be a buying opportunity or not -- hence my present neutral stance. 

The point I was trying to drive home, and have been trying to drive home for some time is "the trend is your friend." And until proven otherwise, the trend is still up. This isn't an opinion or a projection: it's simply a fact.  Hopefully that clears it up.

The market is still facing a fairly critical test at the 1350-1360 overhead resistance level.  So far, it's been unable to break through.  If it can't and 1321 is violated first, then all short-term bullish bets are off.

Yesterday I showed a more bullish big picture count, but at the same time, I tried my best to explain that the market still has myriad options.  Once the price action takes some options off the table, the big picture counts will come into better focus.  When we get to that chart, I'll try to better clarify what I believe the two main options currently are.  These two options are by no means the only options, though, and more info is simply needed from the market at this stage.

The first chart I'd like to share is missing a lot of data, since I'm only going to share the price portion of the chart.  This chart represents a conglomeration of several of my proprietary signal indicators; it took years to develop, and it's simply too darn good to put out on the internet for free.  It's exceptionally reliable at picking bottoms (only 2 buy signals all decade: March '09 and October '02), and it's reasonably good at picking tops as well, though it tends to be a little early.  I could tell you what all the different signal indicators consist of, but then I'd have to kill you.  And I simply don't have that kind of time. 

Yesterday, these combined indicators fired off the first topping signal in a year.

The chart below shows the S&P 500 (SPX).  The vertical red signal lines indicate top signal trigger points, the green lines indicate bottom signals.  One can see how exceptionally accurate this indicator has been over the years.  While it doesn't necessarily mean the market is going to top tomorrow (though it can), it does indicate that, at best, over the next 6 months the upside should be limited.

This indicator is a big red flag to those Elliotticians expecting an immediate massive new bull market (of which I have never been one).  This top indicator can trigger during bull markets, but even in 2004 and 2010, it indicated a large correction was forthcoming before further advances.  In 2007 and 2011, it was early, but did indicate that a major topping process had begun.

In all prior cases, the market made new lows within 2-3 months of the signal trigger.  So theoretically (assuming this indicator is still working, of which there is no guarantee) one could sell short tomorrow and cover in 2-3 months for a profit.  This is a powerful signal, and I believe it suggests extreme caution for folks considering a long term buy and hold approach at this juncture.  It would seem that, even in the event that a new bull has started, there may be a better entry point further down the road.

The next chart is the intermediate count for the SPX, and I have tried to add more clarity to the chart.  Neither I, nor anyone else, can predict for certain whether the next peak will mark all of wave (c) or only wave (iii) of (c).  At this moment, I am slightly favoring the view that it will mark (iii) of (c), with a correction to come, and another leg up still to come.  This view is largely based on the pending liquidity flood from the European Central Bank, which is due to be unleashed into the world on February 29.  If the coming peak marks wave (iii), then that would allow for a correction heading into the ECB date, and then another thrust upwards when the liquidity hits. 

The old saying regarding central banks is, "don't fight the Fed."  This saying was immortalized for bears in the 1959 Crickets song, "I fought the Fed and the... Fed won."  The same saying can also apply to the ECB, even though they don't have their own song yet.  The way things are going over there, they probably won't be in existence long enough to warrant a song.

Anyway, a trip below the red wave (i) peak would rule out further upside for that count.  I do expect a significant decline when wave (c) completes.

The next chart is the short-term SPX count, which suggests that the rally is still underway, with new highs in store.  There are reasonably good odds now that the coming peak will at least lead to a trade-able correction, if not the start of something more bearish.

I find the market's behavior around the upsloping red trend line fascinating.  I first called attention to that line over a week ago, and you can see that the market has continued to behave as if it's an important line.  Can't tell ya' why, but it is what it is.

The last chart is the short-term count for the Dow Jones Industrial Average (INDU).  It's slightly different than SPX, but similar.

In conclusion, there are five key points:

1)  The market is still below an important resistance level.  Going long before it's broken would be front-running, and the equivalent of going short back in December near 1200.  If that resistance level is broken, then the 2011 highs mark the next key resistance.

2)  The trend is your friend.  Once we see an hourly bar print beneath the short-term trend channel, and then some daily closes outside of the larger trend channels, we can have confidence in a meaningful trend change.  Until then, the trend is still up.

3)  I trust my work.  The fact that my proprietary indicator just fired off the first top signal in a year gives me high confidence that there will be no monstrous new bull market starting from these levels.  This doesn't rule out further upside over the near term, even into the 1400's, but this indicator hasn't failed yet.  Near term, the bulls could still run with the ball, but this indicator very strongly suggests that the bulls will run into trouble reasonably soon.   However, see point #2.

4)  I expect a significant decline when wave (c) completes. However, see point #2.

5)  Cash is a position too.

Trade safe.

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

SPX Update: Pre-Eating Some Crow in The Analytical Trap

There's a trap that's easy for analysts to fall into.  Let's imagine you've been bearish for a while and anticipating a top.  Let's also imagine that the market has continued going up anyway, and yet continues to give signs of a top... but it hasn't actually topped (read: a bit of self-flagellation).  The longer this goes on, the more you are becoming increasingly trapped by your own prior analysis.  The signs are all there for a top, and are actually increasing, but the market's kept rallying anyway.  What do you do?

Do you shift your stance to bullish?  Well, you can't really just jump in and randomly start buying, because the rally is long in the tooth, the indicators are overbought, and every objective piece of evidence says the rally is due for a pause at the minimum.  Do you continue looking for a top?  That's challenging, because the market is blowing up the bear view and busting through resistance levels like they weren't there -- plus you're starting to feel like the boy who cried wolf. 

And then the real psychological trap comes: what if you shift to a bullish stance right before the market tops?  Oh, the humiliation! If only you'd held onto your views for a couple more days.  I think this is a trap that a number of analysts have fallen into, which locks them into being on the perpetual lookout for a top.  In particular, I'm referring to a popular Elliott Wave subscription service, whom I won't mention by name (hint: a large international Elliott Wave service whose initials rhyme with "See W. cry.").  They continue to be bearish because it's something of a tradition ("Bearish Since 1988 and Still Going Strong!") -- and they've been bearish for so incredibly long that if they suddenly give it up now, the market is almost certain to drop 4000 points the very next day, and they will have missed calling it.  As a result, they are effectively trapped on the wrong side of the market for as long as the market wants.

I believe this problem can present a potentially huge psychological trap for analysts.

Well, be that as it may, I'm not going to play the Perpetual Top Hunting Game for the rest of eternity, and I don't want my readers to either.  People who have only recently started following my work may mistakenly think I'm a perma-bear.  If you weren't following previously: I nailed the October bottom to the day and rode that first rally leg up to 1265 before turning bearish again south of the 1292 high.  Recently, I switched my stance to short-term bullish yet again after the 1300-1310 zone was successfully back-tested, and stayed bullish up to 1342. 

I do realize I've been top-hunting for a while and have failed to pin it down here.  I've been early at best, or completely wrong at worst -- to be determined.  But practically speaking, since the October bottom, I've only missed about 50 points of upside (3.7%) on the S&P 500 as of Tuesday's close (1265 to 1310 = 45 points; 1342 to 1347 = 5 points), while capturing nearly 200 points of the rally on the long side.

Now, all that said, here's the relevant conundrum.  On one hand, it is objectively difficult to give up the bear case here.  When top indicators are firing off daily and historic highs are being reached in overbought indicators, the odds suggest there's some kind of top nearby.  If it looks like a duck and quacks like a duck, then it's probably a top (or possibly a duck, but duck hunting is considerably easier).  On the other hand, and I've said this before: the only time I've seen indicators fail this consistently is in a bull market (or a nested third wave: more on this later).  This contradiction makes it a tough call.

So what's a trader to do?  The simple solution is to be aware of the indicators, but give precedence to the trend.  The indicators serve as a warning that when the trend finally does break, it might be a meaningful break, so caution is warranted.  When the market becomes as complacent as it is now, it's ripe for an "event."  To paraphrase the famous proverb: pride goeth before a great fall.  Bulls have been openly gloating for some time, attacking and mocking bears, and talking about how "smart" they (the bulls) are.  The market rarely respects a "smart" investor, especially one who's become complacent enough to gloat (more commonly called a "smart ass" investor).

But as I've been suggesting for a couple weeks, until the trend breaks, it must continue to be given precedence.  The key now is to avoid the temptation to chase and/or front-run.  If one wants to go long, then reasonable entries where one can mitigate risk must be found.  The same applies to shorts.

Yesterday, the Dow Jones Industrial Average knocked out its Minor Wave (2) count by exceeding the 2011 highs.  A few people have taken this as if it's some monstrous failing of Elliott Wave Theory, which is just plain silly.  If one takes the approach that a system must be 100% perfect for it to be considered valuable, then no trading or investing system on the planet is valuable.  In fact, if perfection is the standard, then pretty much nothing on the planet is valuable.  Fundamental investing fails at times, value investing fails at times, moving average trading fails at times, classical technical analysis fails at times, candlestick patterns fail at times, et cetera, ad infinitum. 

At the end of the year, nothing and nobody has a track record of 100% success.  Obviously.  We'd all be beating down the door to get in if there was.

I've said it many times, but the key to trading success is as much about an individual trader's ability to manage his money and his own psychology as it is about the system.  To draw an example I've used previously:  if one has a system that is merely 50% accurate (random) -- but one only suffers 3% loss on each losing trade and makes 10% on each winning trade, then that system will make money in the long run.

Some of the keys are discipline, careful choices of entries/exits, limiting losses, not taking overly-aggressive risks (such as overusing leverage via options, futures, etc.), and protecting profits.  Figure that stuff out first and you're on your way to making money.  There are entire books dedicated purely to the money management aspects of trading -- it's that important. 

Striding into the market arrogantly thinking one can "beat the house" is a fool's errand.  The edge one has is their money management system and personal discipline combined with their trading system.  Believe me; I learned this stuff the hard way too.

Back to the market.  Over the short term, the possibilities are myriad.  So for the moment, I'm going to limit my focus on the big picture counts.  I'll still present them, but looking beyond the next five minutes, it's going to be difficult to narrow things down until the market provides more info.  This is another challenge Elliott Wave sometimes presents for newer traders:  there is a temptation to get too focused on anticipation of the next move, which can throw one into bad trade decisions.  To turn an old saying on its head:  it can be easy to miss the trees for the forest.

What we do not want to become is the "see W. cry" type traders... i.e - looking for a top the entire way up from the 2010 bottom to the 2011 top.  Granted, bears can make money in bull markets, but they have to be quick, disciplined, and not the slightest bit greedy.  Slower swing trader bears get slaughtered during bull runs.

Once the trend begins to shift, and I see where that happens and how that happens, that information will allow me to narrow down some of the big-picture potentials.  Until then, for the big picture we're going to spend some time focused on good old fashioned support and resistance, overbought/oversold indicators, and pattern recognition.  When conditions allow, I will also present Elliott Wave price projections (I have done so today).  Ideally, this picture will clarify soon. 

I'm going to present my new preferred count, but I continue to believe that at this stage it remains more important to watch the trend.

Even though the S&P 500 (SPX) did not invalidate its Minor (2) count yet, I'm going to make the assumption that it will.  No guarantees of course, but generally, this assumption has served me well over the years, as the Dow generally leads the SPX. 

Below is my preferred count, which (still) depicts the SPX in the process of forming the y wave of a double zigzag.  This count is interesting because it revises the big picture count but keeps the double zigzag in the intermediate-term counts.  However, without the Minor (2) hard cap, this count could see the market tack on another 100 plus points from here, and puts the target for (c) of y from 1376 to as high as 1500. 

I'll break down the short term view in more detail after this chart.

What I like about this count is the fact that it explains the five-wave nature of the 2011 decline.  I have worked that decline eight ways from Sunday, and I continue to come up with a five-wave structure.  This decline is what convinced me, and many Elliotticians, that the bear market was just getting warmed up.  There are very few positions in which we find a five-wave decline that doesn't match up with at least one more five-wave decline, but one such position is in a 3-3-5 flat (so named because the a and b waves break down into 3-wave structures, and the c-wave breaks down into a 5-wave move -- as they all do on the chart above).  In this case, it is an expanded flat with an unusually large c-wave.

This count also reconciles the 2010-2011 (c) wave rally into a much cleaner 5-wave structure, which many technicians have boggled over.

Many Elliotticians are looking at that decline as wave a and this rally as wave b, with the next five-wave structure to come in wave c.  I have considered that count, and I don't like it as much because I have a harder time seeing how it fits into the larger structure without really stretching the imagination and using all sorts of x's and y's and failed waves.  In either case, over the intermediate term, it's something of a moot point, since both that count and my count should behave somewhat similarly for a while. 

The challenge now is going to be nailing down where (c) of y ends and trying to find good entries for shorts or longs.  Assuming the rally breaks through 1350 +/-, then the next target is 1376-1378, where wave (iii) equals a 1.618 extension of wave (i) and wave (c) equals wave (a).  This makes 1376-1378 a double Fibonacci target, which gives it an above-average probability of both being hit, and of marking some type of reversal.

In the chart above, you can see that my preferred view has shifted to the idea that this current rally is part of the third wave of a third wave (wave iii of wave c).  Third waves are known for blowing up indicators, so this fits well with the recent action.  The most likely count appears to be that the 1378 area will merely prove to be the zone from which a correction starts -- possibly a decent-sized correction, which could retrace down to the low 1300's or even the high 1200's.  The critical point here is that if this view is correct, the ensuing bottom to this (assumed) correction could then launch the market up into the 1400's.

If the alternate count is correct, then it will amount to much more of a decline.  As I said earlier, my focus is more on the near term right now, so we'll have to see what form the next decline takes (assuming we ever get one), and how well the market holds its trend channel, before I'm able to have more confidence in whether it will mark or not mark the end of the rally. 

One thought regarding liquidity and perhaps another reason to favor the new preferred count, which currently expects that the next decline will only be a correction, is that the ECB launches their next big financing operation on February 29.  It seems that operation could easily fuel another leg up in this rally.

In conclusion, the Dow invalidating its Minor (2) count has forced me to objectively favor the view that the SPX will do so as well.  The projections above are what results from accepting that presupposition -- however, all of this is completely predicated on the idea that the 1350 zone will be broken.  I continue to believe this zone represents formidable resistance, and so far it has at least caused the rally a two-day pause.  If this zone isn't broken, then all my hard work tonight will have been for naught, and we can go back to cheering on the Minor Wave (2) count, since the SPX hasn't technically invalidated it yet.  Wouldn't that be a hoot!  Welcome to The Analytical Trap.  Trade safe.

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

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