SPX, TRAN, USD/JPY: Bull Case, Bear Case, and the Key Levels

Sometimes the market presents patterns and wave structures that allow for high-odds predictions (or "high probability trades," use whatever terms you want here) of where price is headed -- other times it doesn't.  Friday, I felt that new lows were high probability, and the market indeed made new lows.  But as of the close on Friday, the situation has changed.

The market has now completed certain requirements of the wave structure, and has thus transmuted into a pattern that I believe can only be "predicted" if one makes assumptions and accepts certain presuppositions.  Personally, I don't see any reason to make assumptions here.  It appears to me that the market has reached another inflection point, and it may be a big one -- so today I'll discuss some of the things bulls and bears need to accomplish heading forward.

One of the markets I've been discussing a lot recently is the US dollar/Japanese yen Forex currency cross; not coincidentally, usd/jpy is also poised at an inflection point in conjuncture with equities.  A breakdown at the key price zone could easily lead dollar/yen to 97-98, which would suggest "risk off" was taking over, and that would be bad news for equities.  Since this is an important juncture, let's discuss what would constitute a breakdown in dollar/yen.

Traditional Elliott Wave wisdom would look at the usd/jpy chart and say that 101.201 is the key overlap to "guarantee" the last rally was a corrective ABC rally -- however, I've traded this particular Forex pair quite frequently, and I've seen usd/jpy violate this same type of "guaranteed" pattern on many prior occasions without consequence (i.e.: break below an assumed B-wave low, only to then reverse and hit new highs).  When we get to the chart, I'll illustrate the wave count which makes said violations technically possible.

After studying both sides of the trade, I would say 101.201 is the next bull warning level, and a break there would add some confidence to the bear scenario -- but, based on my prior experiences with this market, I cannot in good conscience say that level would be the end of the road for bulls.  100.756 is, in my opinion, a better "all clear" level for bears; and, as noted, a sustained break of 100.756 should likewise spell trouble for equities. 

Currently, the exact key level is a bit of a moot point, as neither of the above-mentioned levels have yet been violated.  Dollar/yen has been rallying off the recent test of 101.200, and is (as of the time of publication) approached a back-test of the yellow base channel.  Also note the potential head and shoulders pattern that's forming with 101.200 as the neck line.

The chart below illustrates both the bull count and the bear count, and shows why 101.201 could be briefly violated without creating any true technical issues for bulls.  These two counts run in diametric opposition to each other on an intermediate basis, which is one feature that helps define inflection points -- but near-term, they may be in agreement.

As long as this market doesn't sustain trade below the key 100.756 pivot, a rally back toward 102.600 +/- would be reasonable for both the bull and bear counts.  For the bear count (red), 102.600 fits the expectations of the retrace for an extended fifth wave decline, and would also make a nice right shoulder for the potential head and shoulders pattern.  For the bull count (white), the rally in usd/jpy would, of course, ultimately exceed 102.600 and head back toward 104.

Note the bull count could bottom anywhere north of 100.756.  If 100.756 is violated, then at best, bulls get a quick new low that leads to a large second wave rally before a monster third wave sell-off -- we'll discuss that in more detail as and if it becomes appropriate.  The key point is that I think this market is as important or more important to watch than equities at the moment.  Forex tends to be "smarter money," and often leads equities. 

Let's look at another market that's reached an inflection point:  the Dow Jones Transportation Average (TRAN).  TRAN has so far formed a three-wave decline, and decisive new lows are needed to start giving the decline an impulsive appearance.  I've noted the first two bull/bear pivots on the chart.

On Friday, the S&P 500 (SPX) reached the anticipated new low, but has not yet reached the (implied) target.  The 1854 level, which I noted was the key overhead pivot for Friday's session, did contain all rally attempts -- but it's valuable to mention that since new lows were achieved, that level is no longer important.  If bears are in control, that level could, of course, still act as resistance, but it's no longer a key overlap that technically damages the bear case.

SPX made two lower-lows during Friday's session, and both came with bullish RSI divergences (see red annotation box below).  This entire wave may still be part of a fourth wave, but we can't automatically make that assumption at this juncture.  If the market's intention was simply to form a correction to the prior large rally, then there are now enough waves for that correction to be complete.  And since we can't say with certainty yet what the market's intention is at intermediate degree, the bull option must be respected here.  How the market behaves at the pivots and key levels will provide the next bits of concrete information.

If we assume we're dealing with an impulsive decline, then a rally toward gray "4?" followed by a decline toward gray "5?" would be the outcome -- but I can see the bull argument here quite clearly, so I can't see how we'd be justified in making that assumption.  Better to let the market point the way.

There's an option I haven't shown on the chart above: It's technically possible the market is nesting a series of bearish first and second waves, which would mean it's setting up for a waterfall decline.  The bear count on dollar/yen supports this potential as well.  So, because that's still a very real possibility at the moment, I would be inclined toward caution and nimbleness on long positions until SPX sustains trade north of the key bullish pivot.  That's certainly not trading advice, and your personal risk tolerance may vary.

In conclusion, early in March the market reached an inflection point, which proceeded to generate a reversal and decline.  By virtue of the wave structure, it has now reached the next inflection zone -- and what happens next, especially in usd/jpy, should have big-picture implications for both bulls and bears.  Trade safe.

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USD/JPY and SPX Updates: Warnings for US Equities from the Forex Market?

In the last couple updates, I mentioned that I felt the market was ready to break away from the sideways grind, and bears were finally rewarded for their patience as the S&P 500 (SPX) had an ugly day on Thursday.

There's a lot to cover, so let's start with the US dollar/Japanese yen (usd/jpy) currency cross (or the "gopher" as it's sometimes called -- no, I'm not making that up.).  If you're an equities trader, you might ask why this Forex pair matters to you -- without going into too much detail on carry trades (which I've covered in a previous update), the most simple answer is that equities have been fairly well correlated to dollar/yen of late.  This has not always been the case historically, but for the recent intermediate past, the major turns in equities and the yen have been in sync. 

Last update I warned that dollar/yen appeared to have formed a corrective ABC rally from the 2014 low (suggesting new lows to come), and that 102.600 +/- appeared to be critical support.  USD/JPY wobbled briefly around that support zone, then early yesterday it proceeded to plummet rapidly in a waterfall decline.  At last glance, it was trading near 101.423 and flirting with rising support from the 2014 low.

The low seen on this chart (near 101.800) in dollar/yen came in concert with the February low in US equities.  If that low breaks down -- which ultimately appears likely -- then dollar/yen has lots of room to run on the downside and this could likewise bode poorly for US equities.

   

Next let's take a look at the SPX weekly chart, for perspective.  While it's been a good week for bears, in the big picture, they obviously still have work to do.  Note that weekly MACD has so far failed its upward cross and appears be forming a bearish hook, and that the 1883 high generated a substantial negative divergence in RSI.

Finally, the SPX 30-minute chart:  Last update, I noted that Tuesday's wave structure pointed to 1854-56 as a near-term inflection zone, and SPX hit that zone and then managed a 20 point bounce before continuing down.  From its current zone, it wouldn't be unusual to see another bounce materialize for the near-term.  If there is a near-term bounce, the odds favor the decline will then continue to new lows (see RSI notation).  Of course, there are also options for an immediate resumption of the larger rally -- a bull market is no place for bear complacency.

The first large wave against the prior trend from a major inflection point is always the toughest, because one still can't be certain of whether to expect an impulsive decline or a corrective decline.  So on the chart below, I've shown the bull count in black and the bear count in red, and noted the levels bears want to hold (the first such level being the 1854-55 zone).

In conclusion, as of this moment, the near-term trend in SPX is down, while the long-term trend remains up, which calls for caution on both sides of the trade.  For the near-term, bears have the ball until proven otherwise, and normally, we'd expect to see a test of the 1827-1834 zone at the minimum; I've also outlined the pivot zones where that outcome might be called into question.  Trade safe.

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Copper, USD/JPY and SPX: An Overview of Three Important Markets

Lately more and more signals have been nudging their way into "sell" territory, while the market has continued to grind sideways/down.  Last update I mentioned that a break of 1870 would suggest a first target of 1865, and that target was captured on Tuesday.  The second target of 1857-62 now appears probable -- and I'll discuss another inflection point when we get to the S&P 500 (SPX) chart.  Let's look at two other charts first, though.

One has to dig pretty deep into the archives, but it's a matter of public record that I've been bearish on copper since November 2011.  Copper has been hit hard recently, as concerns continue to mount over China's troubles, and prices have now hit multi-year lows.  Copper is generally correlated with economic growth, since it's used in construction and for electrical and communications wiring, but, historically, copper prices don't always correlate terribly well with U.S. equities.  In fact, copper fell steadily from 1995 through 1999, losing more than half its value during one of the greatest bull runs in equities history.

There are numerous reasons why copper may be getting hit hard at the moment, and China seems to be at the core of several of them.  China accounts for about 40% of the world's copper consumption, and last week China reported the biggest drop in exports in four and a half years -- so, fundamentally, there are continuing signs of economic slowdown from the world's largest copper consumer.  Some of the price drop in copper also appears related to the weaker yuan (China's currency), which makes purchasing copper more expensive for China.  And some of the price drop seems due to the fact that copper is used as collateral for loans in China:  The recent weakness in copper hit at the same moment as China's first domestic bond default (Chaori Solar).

Copper now appears to be breaking down from key price support.  Looking at copper's price chart, we can see that potential exists for (ultimately) a trip back toward the 2008 lows:

Let's take a look at a market I continue to feel is important as a correlated market for U.S. equities: the U.S. dollar/Japanese yen currency pair.  Equities bulls would like to see strength in this market, but so far, usd/jpy has only formed a good-looking ABC corrective rally to the last large decline.  While I haven't annotated a wave count on this chart, I have highlighted the zones which appear to be key support.  My instinct is that bulls probably don't want to see usd/jpy sustain trade below 102.600ish -- though, technically there are a couple last ditch support areas below that price zone (yellow and white trend lines). 

Finally, SPX has been grinding sideways/down for the past several sessions, and while it took the long way around, it nonetheless captured Monday's downside target on Tuesday.  The second target of 1857-62 appears probable, and Tuesday's wave structure has also given rise to a new near-term inflection zone at 1854-56.

If you're a new reader, you might need to read all the boxed annotations on the above chart to make sense of it -- so, in conclusion, the super-short version is that the market reached an inflection zone last week, and the outlook maintains a slight bearish bias as long as price remains below 1895.  In the event SPX sustains trade north of 1895, then the outlook shifts 180 degrees the other direction, with 100+ points of upside possible.

As yet there have still been no significant breaks in either direction.  However, in the event of a sustained breakdown, there is now some coiled bearish potential energy in the charts.  Bulls will need to recover any lost key zones quickly if they wish to create a springboard -- or risk an accelerating decline. Trade safe.

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Discussion on Trend Following, and a Striking Fractal Comparison

At some point in the bull market, virtually everyone will decide that the only type of trading system that "works" is trend following.  Folks will bash systems that try to anticipate the market, and the mantra will finally, irrevocably, become "just buy the fargin' dip, the trend is up."  We may have already reached that point.  Lately I've begun to encounter more and more bashing of predictive systems by trend followers.

What's interesting is that as recently as November 2012, some people were asking if trend following was dead.  This is because trend following is only profitable in certain types of markets; specifically (not to overstate the obvious), it's profitable in trending markets.  But not all markets trend.  Historically, markets alternate between cyclical grinds and periods of trending.

And, needless to say, trends eventually reverse, at which point many trend followers get caught on the wrong side.  (Let me preface here by saying that my intention is not to belittle trend following -- quite the opposite, bear with me a moment.)

To a trader who just started trading in late-2012 or early-2013, trend following will seem like the Holy Grail end-all answer to everything.  But, historically, it actually requires a willingness to endure a high number of losing trades (typically more losers than winners), and requires a great deal of patience.  And by patience, we're talking (at times) enduring months or even years of drawdown.

From 2009 through 2012, many trend following systems struggled, as evidenced by the performance of the hedge funds, which often employ similar systems.  From 2010 through 2012, for example, the S&P 500 (SPX) gained nearly 28% -- but meanwhile the HFRX Equity Hedge Fund Index (a benchmark of the performance of hedge funds) actually lost money over those three years.  Which is why, near the end of 2012, people were asking if trend following was dead.

Of course, as it turned out, this was just when trend following was about to shine again.

The general challenge for traders is that the system which worked best in the recent past may not be the system that works best in the future.  As mentioned, the market cycles over months and years -- and it likes to change things up just when you think you have it all figured out.  These challenges apply for every trading system on the planet, my own included.

New traders tend to expect too much from a system.  This is probably because many new traders decide to begin trading after reading a book, and often it's a book written by someone who tells the story of how they turned $5,000 into $20 million in only 18 seconds (or similar) -- because, let's face it, the books that talk about iron discipline and grinding out small profits over time just don't sell as well.  Those are the books traders start reading after they've lost their shirts attempting to emulate the 18-Second Get Rich Quick Trading System!

But I'm getting ahead of myself.  Back to our new trader:  After reading this get-rich-quick book, the new trader says, "Hey, that sounds easy, and I've got $5000 to invest!  Sure, I probably won't make $20 million in 18 seconds like that author did, but I'd be happy with 10% of that in a month!  Why not give trading a try?"

So they start trading.

Let's imagine they start trading in 2011, and decide to start with a trend following system.  By 2012, they're dead broke, because they didn't realize that $5000 isn't nearly enough of a bankroll to get started.  So in 2012, they reinvest (maybe with their new tax return) and try again -- and they're broke again by 2013.  At this point they decide, "This trend following stuff is garbage."  So they switch systems -- just as trend following starts working.  Which then causes them to miss the big rally of 2013 -- and now they're broke again and they're really frustrated.

2014 rolls around and they decide to switch back to trend following, since it seems to have been working recently.  However, due to their anxiety and frustration (and because they still haven't read the book about discipline), they simply buy the very first little dip that comes along, right at the beginning of 2014.  And, of course, then they get creamed again in the ensuing big sell-off.  If they're like many new traders, they probably further add insult to injury by selling all their long positions at the exact bottom in February and reversing short.  So now they're broke yet again after the recent recovery rally.

Nobody said it was easy.  Well, except for the guy who wanted you to buy his get-rich-quick book.

Personally as a trader/analyst, my goal is not perfection (okay, I'll admit that secretly it is, but I realize that's impossible); my goal is to be correct more often than not -- and, more importantly, to manage risk/reward.  If I manage my risk properly, then the times I'm correct more than offset the times I'm wrong.  And as long as I maintain those two disciplines, I can achieve a positive expectation over time.

In the grand scheme of things, trading isn't about being "right" -- it's about making money.

For me personally, trend following is an important piece of the analytical puzzle.  It's not the end-all to everything -- but neither is anything else, really.  It's no secret that my analysis is often based on anticipation of the market, and some trend followers would frown upon such an approach.  However, when it comes to bottom line, it's hard to find any system that's infallible.  Most honest analysts would be forced to agree that, whatever their particular system: sometimes it works quite well; other times, it doesn't.

And the broader point is this:  the market has a way of humbling the proud.  If you're feeling invincible in your trading system lately, stay aware that the market is warming up a brand new pitcher in the bullpen (or "bearpen," as the case sometimes is), and he's getting ready to throw you a pitch you've never seen before.  No one has figured out the perfect trading system (or, if they have, they certainly aren't sharing it with anyone!).

While Elliott Wave is no more perfect than any other system, one of the many things I appreciate about Elliott Wave is its ability to quantify the market's cycles through market psychology.  We can gain insight into why all systems fail at times by understanding the wave cycles:

First and second waves exist to foil trend followers:  The first wave of the new trend is assumed to be a correction to the old trend, and the second wave is then assumed to be a resumption of the old trend.  In reality, the second wave is the first correction of the new trend (read that all again if you need to) -- but few recognize that yet, so the majority are positioning the exact reverse of how they should.  Trend followers get stopped out and/or reverse as the third wave hits and defines the new trend.

Third waves can be profitable for everyone -- and they are especially profitable for folks who stick with the trend (this is where we've been in the market recently: a third wave).  Third waves are, in fact, what trend followers are waiting for (whether they characterize them as such or not).  As an Elliottician, third waves are what I trade for too, and where the meat of my profits are made.  As far as I can tell, one of the main differences is I try to position correctly in advance of the third wave.  Yes, you read that right:  I sometimes try to predict the market!  Do I get them all right?  Absolutely not.  As noted earlier, the key is risk management.  And as just one example of how well anticipation/prediction can work:  On July 8, 2013, I suggested Apple (AAPL) as a long play (it was trading in the very low-400's -- See: SPX and Apple: Apple's Worth Taking a Look at Again), with a preferred target of 510-530 (recall that this was well-before Icahn and Soros moved AAPL by announcing their long positions).  That trade was one of the most profitable of 2013 for me, and it was anticipatory and predictive -- against the intermediate trend.  In my view, bashing predictive systems when they fail makes no more sense than asking if trend following is "dead" when it fails.  Everything fails at times.   
  
Fourth waves exist to foil everyone, but ultimately, they are profitable to those who stay nimble over the near term, and who stay on the right side of the larger trend over the longer term.  For position traders, some drawdown must be endured during fourth waves, regardless of the system employed -- but in the end, the fifth wave comes along and makes the position good.  The problem is...

Fifth waves exist to suck in new trend chasers.  The fifth wave rally (or decline) is, in fact, almost solely driven by folks who are showing up late to the party.  The smart money begins distributing their positions to these newcomers, who don't realize that most, if not all (or more!), of the profits gained during an average fifth wave will subsequently be lost during the ensuing turn.

Return to start -- but now add this to the mix:  For those who are too slow to respond to the trend change after the fifth wave, the third wave will wipe them out.

I think the key with predictive systems is to understand their limitations and not get too far ahead of the market.  There's a temptation with predictive systems to overreach.  In fact, certain well-known predictive services have all but wiped out their subscribers by overreaching and trying to anticipate the market years in advance against the prevailing trend.  If one approaches market prediction with the idea that they can see so far down the road, with such amazing clarity, that they don't even need to adjust and respond to changing real-time conditions, then they're ultimately doomed to failure.

But they will not fail due to their system -- they will fail due to their arrogance.

Anyway, for those interested in trend following, here's a starting place, via an indicator I've published previously.  I believe trend following is a powerful tool that one should add to their trading arsenal -- of course, you'll have to decide personally to what degree you wish to employ it (assuming you don't already).

Next is the current S&P 500 (SPX) chart, which is materially unchanged since March 5, though I've added a few signals and levels to watch.  The market has traded in a narrow price range for about a week, and remains paused at the current inflection point.  I suspect we've chewed up enough time and price here that the market will break away from this range in short order.  Do note the market could stretch wave (5) a little higher here without creating any issues for the bear count: As mentioned previously, if we see sustained trade north of 1895, then we'll start to suspect bulls have found a second wind.

Finally (as far as I know, anyway) this next chart is wholly original.  I'm actually a little surprised I didn't spot this analog sooner:  The fractal similarity between the current bull market (linear scale) and the long-term SPX chart (log scale) is somewhat remarkable.  Note the very long-term chart I'm using ends in 2008 -- I used it anyway because it was the right scale and we all know what happens in the missing portion of the chart.

Incidentally, the 1929 analog so many were tracking went off course -- possibly because too many people were aware of it. 

The most interesting part about the fractal below is that the wave counts are basically the same.  On the very long-term chart, the massive bull market at the end of the 20th century was an extended fifth wave of Supercycle Wave III.  The current market is assumed to be in the fifth wave of Intermediate Wave III.  If the current market extends this fifth wave, it could make a similar move as the very long-term chart (relative, of course).  However, if the current market's fifth does not extend, then there are already enough waves in place for a large fourth wave correction to begin (the bear market of 2000-2009 was Supercycle Wave IV).

In conclusion, SPX remains paused at the inflection point I've discussed over the past week.  Inflection points are not, of course, "guaranteed" reversal zones; they are zones where trend reversals have higher odds of occurring.  Bears still have a solid shot at generating such a reversal here, so stay nimble -- and trade safe.

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Decision Time for SPX -- and RUT Captures 2012 Target

Friday is a non-farm payroll day, which usually leads to a wild pre-open.  The recent history of NFP days is bullish, with 14 of the last 15 ending in the green.  What's happened in the recent past with some regularity is that futures sell-off immediately on the bad payroll number, then everyone suddenly remembers: "Hey, bad payroll is good for continued QE!  And continued QE is good for equities!" At which point the futures rally to recover all their losses and then some.  It will be interesting to see if a good jobs number leads to the reverse effect or not.

There's really no significant change in the outlook, and the S&P 500 (SPX) remains poised at an inflection point.  Not to overstate the obvious, but I think the biggest challenge for bears is the fact that we're still in a bull market, and bull market surprises are almost always to the upside.

In the last update, I discussed the details of the market's inflection point, so today's first chart is an interesting look at how inflection points work.  The chart below is the Russell 2000 (RUT), and it was originally published (exactly as reprinted here) on December 19, 2012 (See:  SPX, NDX, RUT:  November's Targets Captured, and a Look at the Long-Term).  This chart illustrates the value of identifying, and respecting, inflection points.

I'm also republishing this chart because an interesting thing has happened since that 2012 inflection point:  On March 4, 2014, RUT finally captured its 1200 target, with an intraday high of 1212.82.  By virtue of the wave structure, the 1200 target was identified as an "if/then" equation in the event RUT exceeded 902.30.  Needless to say, 1200 represented a 25% gain from that level -- which sounded incredible and unbelievable at the time.

This was one of those "unpopular" bull articles I referenced recently -- a grand total of four people shared that 1200 projection on Twitter in 2012.  I use this stuff as my personal, admittedly anecdotal, gauge of sentiment, because we all have a tendency toward confirmation bias.  We surround ourselves with information that matches our beliefs; we like people who agree with us; and we usually only share articles that support our views.  In fact, an Ohio State University study concluded that we'll spend 36% more time reading an essay if it agrees with our opinions (more on this after the chart).

For this reason, I sometimes get nervous when my projections seem to be in line with the majority of analysts and readers.  This is probably one of my personal challenges this late in the bull market.  Being bullish when most were bearish suited me fine -- but now it seems "everybody" is bullish, and that makes me uncomfortable.  I get uncomfortable not because I'm a crazy rebel, but because the market often likes to disappoint the majority.  I have to keep reminding myself that the latter stages of bull markets can be the exception to that rule, and the majority are "allowed" to get on board for a while.

Anyone who was trading back in the late-90's knows exactly what I mean:  In 1999, stocks were so universally loved that books titled Dow 800,000,000! were flying off the shelves; teenage fry cooks at McDonald's frequently offered hot, unsolicited stock picks which later turned out to be winners; and even my grandmother's dog had a profitable portfolio (of stocks the dog had chosen himself, up 12% in 1999) -- and yet the market just kept running higher and higher anyway.

It took a long time for that sentiment to see judgement day; much longer than many thought possible.  So while the wave structure supports the idea of a turn, we can't simply blindly ignore the possibility that a similar "endless rally" endgame could occur this time around, too.

I think if we want to be better traders, we have to rigorously and continually challenge our own assumptions, lest we develop tunnel vision.  Our tendency as humans is to come up with a hypothesis and then work to prove ourselves right.  We sometimes ignore or gloss over information that contradicts our hypothesis -- but that type of "ignorance is bliss" approach can be deadly for traders.  I think one of the best ways we can judge a good hypothesis is to work to prove it wrong.  If it still holds up to that kind of hard scrutiny, then it's probably solid.

So here we are again, at another inflection point.  Not quite the same magnitude as the aforementioned 2012 inflection point, but significant nonetheless.  We can count five waves up; RUT has reached its long-term target; and there are negative momentum divergences across multiple time frames.  Basically, bears have everything working for them -- except the actual trend.  And that's the most important factor.

Bears need to make a stand directly to wrap this wave up, or risk watching a subdividing rally extend toward 2000.  1895+/- remains the pivot zone for this inflection point, so in the event bulls can sustain trade above that zone, then we'll simply have to keep playing the "everybody knows it's a bull market" trend game.

Near term, SPX has formed five complete waves -- but I've learned over the years that these can be (for lack of a better term) "traps" for fractal-based systems like Elliott Wave.  Five waves marks a complete wave, but it does not tell us if that wave will subdivide into five still-larger waves.  It's a probability play, and it's one of the reasons that identifying key levels and watching other indicators in conjunction with the wave counts is important.
 

In conclusion, the market remains poised at the inflection point discussed in Wednesday's update, and no key levels have yet been claimed by either side.  The market has ground around in an upward-sloping range for long enough that a decision should be close at hand, likely within the next couple sessions.  In the event bears are going to force a turn, then now's the time.  Trade safe.

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

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

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

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

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

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

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

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

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

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

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

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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

   

Bears Make a Stand in US Equities

Last update was a bit tongue-in-cheek regarding my anecdotal sentiment readings, and my personal opinion that there was currently too much bullishness prevalent.  I also noted that I felt the top was closer than the bottom for equities, and that wave (5) appeared to be complete or nearly so.  I outlined the zones where I felt that thesis would be challenged; bulls were unable to reclaim those key zones.

On Friday, the S&P 500 (SPX) made a final thrust upwards, which fell about two points shy of "Target 2" for the bull count (as noted 2/14 on the daily chart -- at the time it was noted, it was contingent on 1850 being reclaimed), and also fell shy of the bull/bear divider noted on the chart.  This now appears to be a complete five-wave rally at multiple degrees of trend, which suggests a meaningful correction is underway.  Granted, one reversal day does not a decline make (though it's a good start) -- so the first important support zone for bears to reclaim is the 1839-40 area.

The count not shown (an ending diagonal) was noted on 2/26 -- that option remains possible (if less likely) and would lead to one last-gasp bull thrust higher.

Bigger picture, there are now five waves up at multiple degrees of trend.  This is one precursor to a larger correction.

The Dow Jones Transportation Average (TRAN) is one of the markets that's kept me looking for a top in SPX recently, and the bear count remains alive and well in TRAN.  The levels bears (and bulls) need to reclaim also remain clear, and are noted on the chart.

In conclusion, this is an excellent opportunity for bears to take control of the market and force a larger turn.  All the ingredients are in place -- now it's simply up to the market to either make it happen, or to find a way to disappoint the bears yet again.  Next I'll be watching to see whether the decline takes the shape of an ABC, or a larger five-wave structure to add confidence to a larger trend change (and then we'll all keep our fingers crossed that it's not yet another expanded flat c-wave -- a favorite poison of this bull market).  Trade safe.

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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.