SPX and RUT Updates: Avoid Trading Only Your Bias

Yesterday's upward reversal gave the decline off 1378 the look of a three-wave correction, so unless it's part of an expanded flat or similar, this pattern is suggestive of higher prices. 

Interpreting this market with any confidence remains challenging.  On the one hand, the preferred count seems to be playing out fairly well -- but on the other hand, I keep thinking "fourth wave" every time I study this move.  The biggest challenge is that the first portion of this rally, back in December, is very ambiguous.  So I'm not entirely certain how many nested first and second waves need to unwind at this point. 

This is pretty normal -- the counts go through phases where they're pretty clear, and they go through other phases where they're open to interpretation.  This is one of the "open to interpretation" phases.

My preferred count is still that the SPX has either completed a fifth wave or nearly completed it.  If it's an expanding ending diagonal, it completed at 1378 (first chart).  If it's a contracting diagonal, it needs at least one more move up (second chart).  Both charts below.

Diagonals can be a pain in the butt and will sometimes run "one more wave" longer than you think for several days. Hopefully, that won't be the case here. In a perfect world, if it's a contracting diagonal, the move described on the chart below would happen today.

Next the 10 minute SPX chart.  The SPX has yet to break down from its uptrend channel, though it has been spending time in the bottom half of that channel recently.

The next chart is the Russell 2000 (RUT), which has a nice trade-able rectangle pattern. 

I know a lot of my readers are bears, but it's important not to get too hung-up on one's "convictions."  For example, a week ago, I pointed out an ascending triangle in the NDX, which targeted 50 points of upside if it broke out.  It has since broken out, and so far, the NDX has captured 45 of those points to the upside -- that's $900 profit per NQ contract.

Another example would be when the SPX back-tested the 1300-1310 zone.  Since then, with the exception of a misfire that cost about 5 points from 1328 to 1333, I've been predicting higher prices up until very recently.  To be quite conservative, let's call it 40 SPX points of upside -- that's $2000 profit per ES contract. 

I bring these two things up to illustrate why I would strongly recommend that bears don't overlook these types of patterns in favor of trading only their biases.  Let the market tell you what to do. 

This rally could go on for longer than most bears are expecting, and if the SPX ends up topping at 1487, you don't want to look back and see that you've missed every cent of action on the long side due to your bias.  Or worse: lost money because you were only willing to short.  I am, of course, not addressing day traders as much as swing traders.

Anyway, back to the RUT.  I prefaced the chart with the above discussion because it shows a rectangle that could be traded long or short, depending on how it breaks.  If the SPX count is correct, it seems probable it will break down -- but why try to anticipate a pattern that's this clear and simple?  Trade it whichever way it breaks.  Or, conversely, trade it as a range: short near the top of the range, long near the bottom.  Either approach can work, because the breakout/breakdown levels are pretty clear, so the market tells you when to stop out of the trade if it's not working.

From an Elliott perspective, the pattern in the blue rectangle is almost impossible to count, but it certainly appears corrective.

Next is a long-term Dow chart, which simply shows some support and resistance levels.

And finally, a chart I found interesting.  Long-time readers know I like to study ratios of various markets.  This chart compares the ratio of Rydex 2x bull funds to Rydex 2x bear funds.  This ratio usually tracks the SPX pretty closely, but has recently launched way out ahead of the SPX.  I like to study Rydex funds to get a feel for the mom and pop investor sentiment, and this chart confirms that small investors (dumb money) are exceedingly confident in this rally. 

It's only come close to being this far ahead of the SPX one other time, noted on the chart.  But so far with this rally, dumb money has been winning this battle for a while.  Don't blame yourself too much if you've been skeptical of this rally:  based on a conglomerate of indicators, smart money has remained skeptical over dumb money by a 2 to 1 margin for some time.

In conclusion, if the short-term wave counts are on-target for SPX, there's a good chance the market will correct soon.  Either the market holding below the recent 1378 high or a false break above 1380 which whipsaws would be acceptable conclusions to this wave, based on the preferred count.   The caveat is if the market can break above 1380 and sustain that break, then the preferred count is incorrect and bears should get out of the way -- if that happens, then a run to 1400-1410 is probably unfolding.

Recall that the SPX has yet to so much as break its uptrend, so bears shouldn't get too excited yet.  Personally, I love trading diagonals in the way described on the second chart.  If there's a false breakout and whipsaw, there are usually only a few points at risk to attempt that short.  If it fails, you're not risking much -- but if it plays out, it's usually almost the exact top.  Traders looking to play either side of the market should also give some consideration to the RUT.   Trade safe.

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

SPX Update: Was That It?

For several weeks, I've been talking about the Fib zone at 1376-1378 and how I felt that could act as a magnet for the rally.  Yesterday, the SPX hit 1378.04 and reversed.  Could it really have been that simple all along?  There's no way to know for sure yet, but the market has now satisfied the requirements of the preferred count's 5th wave up -- and it may finally be time for the larger correction bears have been waiting for since Santa was in town. 

Even though the market only closed down a handful of points, yesterday had a lot of things going for it to give bears some hope: 

1.  Yesterday formed a bearish engulfing candle in SPX
2.  Commodities took a beating. 
3.  The dollar formed a bullish engulfing candle.
4.  The ECB "anticipation" is over.  Sellers don't have to be scared of it anymore.

There are a couple ways to view the very short term structure, but I'm sticking with the expanding ending diagonal as the preferred count.  This count says the top is in, though it may not be the monster top bears are hoping for -- I'll discuss that big picture outlook in more detail in the final chart.

The wave structure at micro degree is a total mess, so it's also possible this is part of a contracting ending diagonal with one more new high to come.  Below is the alternate short term count.  I like the preferred count better, for the reasons previously mentioned, but the only way to rule out the alternate is with trade beneath 1352.28.  Normally, I'd use the wave (ii) bottom, but the structure's messy enough that I'm allowing leeway for counting errors.

If the alternate short-term count below ends up playing out, it's fairly common for wave (v) to overthrow the upper trendline in a false breakout.  If that happens and it keeps rising, bears should get out of the way -- but if that overthrow happens and the market then breaks back below that upper red trendline (whipsaws), then that's an excellent place to get short with stops at the newest highs.

Now, if the alternate count shown above is invalidated, it does not mean with certainty that the preferred count is correct.  These are not the only two options for this market.  Because of that, I'm recommending that the support and resistance lines on the 10-minute chart below be used as better trade indicators.  Yesterday, the market closed right on trendline support.  Below that, the next important support comes in near the 1352-1355 level, then at 1337 below that.  The blue line is overhead resistance, as are the recent highs.

Finally, the big picture count below.  The preferred view is that wave (iii) is wrapping up, and the market is now entering a fourth wave correction, with another leg up still to come. 

There are two big picture alternate views I'm considering.  The first alternate (shown in gray on the chart below) is that the market is actually now in the process of forming a major intermediate top, and from here would head down to test or break the October lows.  I would give that count maybe 40% odds vs. the preferred big picture view.

The second alternate (not shown -- for the 2nd alternate, see the last chart in this article) is that the market is in the process of forming a very large ending diagonal (c) wave.  In that 2nd alternate scenario, the market would bounce around significantly, but still remain above the October lows for some time. 

Final confirmation of trend change occurs at 1267 SPX.  So the market could conceivably fall 100 points, and still be in a larger uptrend.  It's also important for bears to note the three rising trend lines, which should theoretically act as support -- although neither the blue nor black line have been tested recently.

In conclusion, there are reasonably good odds that we are on the cusp of at least a short-term trend change.  This was the zone we've anticipated for most of the month, and the micro structures now seem to be confiming the larger wave count we've been watching since February 8.  The supporting evidence across other markets is encouraging as well. 

There are no clear invalidation levels right now, but the support zones are pretty clear.  If you didn't get short at the Fib 1376-78 target yesterday, then it's usually advisable to wait for a retrace rally before shorting, since most half-way important tops are retested.  Conversely, one could play off of the support and resistance zones, using them as entry and exit/stop loss points.  Trade safe.

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

SPX Update: In a Surprise Move, the ECB Declares Bankruptcy

That got your attention!  Too bad I'm making it up.

Yesterday, I gave my arguments in favor of the preferred count.  Today, I was going to play devil's advocate, and actually wrote an entire article along those line.  That took two hours.  Then I scrapped it.

Then I re-wrote it.  I've been charting and writing for almost 12 hours straight now, so I'm completely exhausted and eye may and up with a bunchch of typoses and spalleing airors. 

After all the re-writing, I've decided I am going to publish this alternate count.  There really wasn't much to add to yesterday, so instead of getting lazy, I tried to turn my views on their head.  I don't want to confuse everyone with this devil's advocate attempt, but I don't want anyone to get screwed by this market either.  Normally, I can rule out certain counts by using historical confirming indicators.  But so far this market has blown those indicators up every time, so I feel like I'm charting with half the usual amount of tools. 

Today's action has the potential to answer a lot of questions.

I'm favoring the preferred count by a 65-35 margin.  Perhaps in this market I should favor it by a 80-50 margin, since indicators and math haven't really been working too well lately.  I'm sure Ben or the ECB can print up the extra 30 percentage points I need in order to exceed 100%.

First the short-term count:  I've tried my best to interpret the 5-minute charts in light of the preferred count, and have come up with an expanding ending diagonal as the most likely short-term possibility.  As a result, the upper end of the target zone has increased a few points, to 1385.  If this count is correct, the final wave could end at any time -- ending diagonals often end with a spike-high and quick reversal.  The chart also shows the key short-term price markers.

The danger zone for bears is above the upper red trend line.  If the market shows any acceleration above that line, then bears are in full retreat, and the move is likely to run.

 
Next the 10 minute chart.

And finally, the alternate count.  I used the Wilshire 5000 to give me a chance to look at the market with fresh eyes, and this count considers the potential of an additional first and second wave in the structure.  Normally, I'd use historical indictors to give me an idea of how believable this count is -- but those haven't been much help lately.

As I've said, in a "normal" market, I'm able to use confirming indicators to rule out certain counts with better confidence.  But this market isn't normal -- it's being driven by the central banks instead of investor psychology. 

Trying to navigate this market beyond the next couple hours has been akin to trying to fly a plane without instruments.  The compass hasn't been working, the altimeter is broken, the control tower is speaking broken English, and the stewardess keeps insisting we eat the crappy quiche that's been in cold storage since the Truman administration.

I know bears are anxious to jump in and do something after all this time -- but I would caution those bears who choose to take action to stay nimble.

While I'm favoring the preferred count by 65-35, today the market will hopefully provide some clues to add confidence to, or subtract confidence from, that count -- with the long-awaited ECB announcement finally here.  The first step for bears is to turn and hold this market back below the 2011 highs.

Again, this article was intended to be a devil's advocate approach.  If you're looking for more "conviction," please go back and re-read yesterday's article.  Trade safe. 

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

SPX Update: Studying the Divergences in the Trannies and MACD

SPX finally broke the 2011 highs, which is a huge monkey off my back, since I've been insisting that it would ever since the Dow broke its 2011 highs back on Feb. 7.  Now we'll see if SPX has any interest in the double Fib zone of 1376-1378, and in making a turn soon.

As I've discussed previously, the Dow Transportation Average has been diverging from the Industrials since then -- and now, with the Monday's action, the SPX is diverging as well.  I took a look at the two most recent times the Trannies have made a solid turn ahead of SPX, and both instances eventually led to a correction in SPX.  Averaging these two recent instances, the SPX target for a turn is roughly 1375 -- which lines up nicely with the wave counts.  Chart below.

The SPX chart is next, though there's not much to add over the past few weeks.  Yesterday's decline bounced right at the trendline and rocketed up over the 2011 high.  If my count's correct, this is the zone where a turn becomes likely.  

Of anecdotal note, the bears seem to have given up all hope of a turn ever happening, and the bulls are amazingly complacent now in their "buy the dips" thinking.  This psychology is perfectly in line with the end of a fifth wave. 

The next chart takes a look at the massive MACD divergence currently present, and should give pause to those bulls who believe we've kicked off a never-ending rally to the moon.  The MACD and other market internals are giving fair warning that this rally isn't as strong as it looks.  Note how differently MACD behaved coming off the 2009 and 2010 bottoms.

I also want to whip out the Bullish Percent Index INDU chart one more time ("Scuse me while I whip this out..." -- sorry, a little Blazing Saddles humor there), to show that the market hasn't been able to get away with these readings for long in the past.  It usually rallies a bit after hitting this level, and that's now happened.  Could go for a little bit longer, but it can't go on "forever," which seems to be what everyone's expecting at this point.

In conclusion, the charts are again aligned for a potential turn.  But if you're a bear, please don't front-run -- as I've been warning for a long time now.  Hopefully, if you've heeded these warnings, you haven't lost a cent on the short side since the 5 points lost when I suggested shorting at 1328 with stops at 1333. 

Not sure if you've wagered anything on the long side, but since SPX 1347, I've been pretty strong on the idea that SPX would break the 2011 highs -- however, it certainly hasn't been the easiest market since then, and I can't say I'd blame you if you didn't hold longs through all the up and down whipsaw action.

I would also say if you're a bear who's survived or made a profit in this market, then pat yourself on the back.  This has been a very rough run for bears, with a lot of false signals being generated across the board in most every form of analysis.  This has been one of the toughest markets I can remember, because the signals have been at complete cross-currents with the price action.  The signals have not confirmed strength, yet the rally has continued. 

This is the type of move that can bankrupt an overly-eager bear, and I do hope that my consistent warnings of watching and waiting on the trend lines have, if nothing else, at least saved swing-trading bears from jumping in too soon.  Nimble bears have been able to make a few bucks -- but in this market it hasn't been easy, or even advisable, to hold a position for long.

The big ECB LTRO announcement comes this Wednesday, and it's difficult to predict how that will impact this market without knowing the details behind it.  This is not a "news" event as much as a liquidity event -- and liquidity drives the market. 

It seems safe to assume that a fair amount of front-running by the bulls has occurred in advance of this announcement.  It also seems safe to assume that the looming threat of this pending liquidity flood has kept the sellers very subdued -- as a result, the announcement has the potential to be a game changer.  The preferred wave count is strongly suggesting a turn soon -- so the ECB announcement may turn into a "sell the news" event.  Based on all the technicals, I feel (as confidently as one can in this bizarro market) that it will.  Trade safe.

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

SPX and VIX Update: VIX Diverging from SPX, and a Look at the Big Picture

Still no material change in the counts since February 8.  The higher prices we've been expecting since then have finally arrived, and I believe that this standing target zone remains the bears' best chance for a meaningful correction, due to a number of factors:

1)  The wave structure now counts as a complete five-wave move at higher degree.
2)  The SPX has reached the 2011 highs, which should offer resistance and present a zone from which bears could attempt a counter-attack.
3)  Bullish sentiment has been extreme for 8 weeks.

There are also some new developments which add some confidence to the view that a correction or reversal may be nearby, but again I would warn that anticipating trend changes is the toughest, and most dangerous, gig in trading.   So take these developments as cautionary signals -- but until the trend lines break, they are only signals.  The trend is your friend... at least, it is until it beats you over the head with a blunt instrument and leaves you for dead in a back alley.

Last week, I talked about the potential that VIX could be in the process of bottoming, due to the VIX:VXV ratio, and this next chart lends further credence to that idea.  There is also a divergence forming between VIX and SPX -- VIX has been making higher lows while SPX has been making higher highs.  VIX usually leads SPX, as the chart shows, since VIX tends to be a "smart money" indicator.

Next is the 10-minute SPX chart, which suggests that a solid correction is due very soon.   I would still like to see the 2011 highs broken, and ideally see the 1376-1378 Fib zone reached, though it's not impossible that wave 5 is complete with Friday's high. 

I would again caution bears that while the current price zone offers good odds for a correction, if said correction does not materialize soon, the rally could stretch on for a lot longer than most bears are willing to consider. Long-time readers will recall that I gave similar warnings about the 1300-1310 zone.

Trying to be smarter than the market is almost always a losing stance. If the market signals strength by breaking decisively through the 2011 highs, then that must be respected; just as 1300-1310 turning from resistance into support was a signal that needed to be respected.

I'd also like to discuss a couple of big picture potentials.  I'm going to discuss the preferred counts and the permutations of those counts, and then at the end of this discussion, I'll summarize quite succinctly what my preferred view currently is -- so keep reading if you become confused.   

The preferred count considers that the SPX is in a (c)-wave rally.  The main question still in my mind is whether the fourth wave of this rally has already unfolded or not.  My preferred view is that it has not, which suggests that a correction is due soon, followed by new highs.  I'll simply need to see what the next decline looks like to aid in determining degree of trend.

 

As shown in red on the chart, my preferred view is that the red Minute Wave (iv) correction hasn't happened yet, which means red (iv)-down and red (v)-up still to come.  The big challenge is that until some type of meaningful correction ensues, it is very difficult to triangulate exactly where we are in this count.

The alternate count is in gray and shows the potential that wave (iv) has completed already.  If it's already completed, then the market is closer to an important top than I think it is -- but this remains my alternate count for the time being.

The next chart is the big picture, and has a very large target zone as a result of factoring in both the preferred and alternate counts into that zone.  If the wave (iv) correction has occurred, as shown by the alternate count in the previous chart, then we're in that target zone already, so the chart below reflects that.

Sometimes we can anticipate the market well into the future, but other times we can only see as far as the next bend.  Once a meaningful correction takes place, that will allow me to refine the longer-term target zones.

EDITOR'S NOTE:  The first black 1-2 of blue Wave (5) of red Primary 5 isn't labeled.  I think most readers can see where those labels are supposed to go, and it doesn't change the count at all -- just an oversight on my part when I ran out of the allotted number of Stockcharts annotations.

 
The next chart is a slight twist on the long-term count, and is currently my first alternate for the big picture.  I don't like this count as much for several reasons, the main being that I feel it "forces" the count a bit.  However, this alternate count would confuse and frustrate both bulls and bears alike, and that alone gives it some degree of appeal.  I also like that it retains the idea that this current rally is the third wave of a third wave (c-waves are also third waves), which certainly fits the character of the rally.

In conclusion, let's see if I can sum all this up in a way that minimizes reader confusion...  to aid in this goal, I'm only going to summarize my preferred count; the alternates have already been discussed.

Over the short-term, I'm anticipating that the market is due for a correction very soon.  Over the intermediate-term, I'm anticipating that this will be a fourth wave correction at minute degree, with higher prices still to come after that correction completes.  Over the long-term, I'm anticipating that after this rally unfolds in its entirety (potential time-frame would be May 2012 for completion of the entire rally), the 2008 lows will be revisited, and likely broken. 

In the meantime, the trend lines remain critical.  While this talk of corrections is based on well-informed speculation and historical precedent, it remains merely a potential unless the market validates it. Trade safe.

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

SPX, Oil, Gold, Silver, US Dollar, NDX: Snapshots Across Markets

Yesterday both the preferred count and alternate counts anticipated a rally, which the market provided.  It ended up closing dead center in the target zone for the alternate count, which kept it from being eliminated.  The preferred count continues to anticipate some further upside, but both counts remain plausible. 

Since there's not much to add to the S&P 500 forecast of the past few weeks, I've decided to include a few quick snapshots of some other markets.  First, a quick update on the SPX charts.  The preferred count (below) continues to anticipate marginally higher prices, followed by a reversal from the wave 5 target zone.  My current expectation is for at least a 4-7% correction to ensue from this zone, but until the up-trend actually breaks, I wouldn't advise front-running this particular rally -- unless you're a nimble trader.

Next, a close up of the alternate count, which hit the target zone dead-on.  Trade above the 1367 highs would take this count off the table.

Moving on, below is a chart for silver. I've only published one article about silver in the past year: back on November 21 -- when silver was above 30 -- I predicted silver would move down to 25-27 to complete Primary Wave 4, and then reverse higher.  This is exactly what happened, which lends credence to this count.  This count anticipates that silver is now in its fifth wave up at Primary degree, and will eventually go on to new all-time highs.

Silver appears to be in the process of completing a perfect five-wave impulse move off the lows (blue wave 1), which suggests it's due for a correction soon, as illustrated by the blue "2".  Further, it's approaching two resistance lines.

Gold may be in a similar position, though I find gold's wave count difficult to pin down at the moment.  I would be more inclined to trade the trendlines on gold right now. Gold chart below.

Oil shows a much different pattern over the very long term, and its advance since 2009 does not appear nearly as constructive as either gold or silver.  It does, however, present a similar inverted head and shoulders pattern for the intermediate term. 

However, oil is massively overbought -- and as the RSI highlights show, similar RSI levels in the past have often preceded sizable corrections in oil.

These three commodity markets bring us, inevitably, to the dollar.  The dollar has been toying around with a key breakout level for over a month, and my expectation is that it's likely to be forming a base here.  Based on the Elliott Wave patterns, I believe the next meaningful move in the dollar will be up into the 85-87 zone.  This would seem to be consistent with the idea that oil and silver are due for corrections (gold's chart is more ambiguous).

Now, these expectations are based on Elliott Wave analysis.  The fact is, oil and gold have both broken out to the upside (silver has not), and the dollar is below an important support level -- so my expectations are running in direct opposition to the traditional technical patterns in these markets.  Despite my Elliott Wave expectations, these levels and patterns which contradict it should not be ignored.  It would be wise to wait and see how the market responds to these levels -- for example, going long the dollar while it's still beneath a key support level is front-running. 

In other words, a little patience may be in order.  The dollar closed right between two nice trade triggers, so one could play it either way, depending on how it breaks.  Dollar chart below.

The last chart is a short-term Nasdaq 100 (NDX) chart.  The NDX is forming a very clean ascending triangle pattern.  Ascending triangles are usually bullish, though not always.  A break out would suggest 50 points in the direction of the break.

In conclusion, there appear to be many good trade opportunities across various markets right now.  Regarding the SPX: we've been anticipating it would trade up into this zone since February 8, and as I've mentioned before, this is an excellent zone for a reversal.  However, this has been a very resilient trend, and most technicians will agree that this market has not been behaving in its "usual" way... so it's advisable not to get too anxious to buck this particular trend.  If this zone doesn't slow it down, it's likely headed into the 1400's next.  Trade safe.

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

SPX Update: A Tough Call

It all seemed so simple when I started writing tonight, but after studying the charts in more detail, it's not as clear-cut as I'd hoped.  I believe the wave down from the 1367 high counts best as a 5-wave impulse, which initially had me leaning in one direction -- however, this impulse could fit into the picture in one of two ways. 

1.  It was wave c of an expanded flat fourth wave correction, with a new high to come (preferred view).
2.  It was wave i of a much larger five-wave decline (alternate view).

I am leaning toward the first option, though it's a very tough call. 

Since February 8, I've been anticipating that the rally would reach this price zone -- but I now firmly believe that this leg of the rally is indeed nearing completion (possibly complete) and that a larger correction is due very, very soon.

My preferred view is that there will be one last high for this leg of the rally, in the 1371-1380 zone.  That count is shown in blue on the chart below.  The alternate possibility is shown in black and gray.

The 5-minute chart below depicts a possible topping formation underway, however that's the alternate count.   Breaks of the black channel lines and the red trend line will be the keys to watch on the downside -- a break of the recent highs would be key on the upside.

I want to expand on the alternate count briefly, and show how I arrive at labeling the decline as a five-wave move.  If the alternate count is playing out, the recent 1367.76 print high should remain intact.  Below is the alternate count shown in more detail.

Next is the 10 minute chart, which shows the larger, more important trend channel and various support zones.

And the final chart is another one of my proprietary indicators, which recently generated a sell signal. This particular indicator has a 78% win rate, though it doesn't predict the magnitude of a decline.

In conclusion, while both counts favor more upside on Thursday, the preferred count favors a slightly higher high still to come. I am now firmly convinced that, one way or another, this leg of the rally is wrapping up inside this anticipated target zone.  A moderate-sized correction should be on deck. 

Trade above the recent highs would indicate that the preferred count was correct and wave 5 is still unfolding, with a target in the 1371-1380 range.  Conversely, solid breaks of the lower trend lines would favor the alternate count.  I would remind everyone that while the counts strongly anticipate that the market is very close to a trend change, the upward trend is, as of this moment, still very much intact.  Trade safe.

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