SPX, BKX, USB: A Terminal Pattern for Equities?

Monday saw the S&P 500 (SPX) gap lower at the open (in an extended fifth wave), which was quickly retraced, leading SPX to close in the green.  Neither bulls nor bears have gotten much accomplished lately, and thus both sides continue to keep options open for the intermediate term.  I'm still inclined to give the intermediate edge to the bears, and, presently, the 1910 level looks to be the dividing line.

SPX appears to be in the midst of a terminal pattern.  Ideally, I'd still like to see another thrust up to a new all-time high, but it's not required.

Over the past few weeks, we've discussed the fact that the high-beta indices, such as the Nasdaq Composite (COMPQ) and Russell 2000 (RUT), are in intermediate down trends.  Another index that I watch religiously (but haven't shown lately in the updates) is the Philadelphia Bank Index (BKX).  BKX is also in an intermediate down trend, and has recently broken beneath a three-point validated uptrend line.

BKX is interesting, because it hasn't even come close to taking out its all time high, and my long-time expectation here is that it's simply forming a huge ABC correction.  At the beginning of 2013, I was very bullish on this index, looking for a trip to 72 -- but that target has long-since been captured, and there are potentially enough waves in place for the entire rally since 2009 to be complete.

Finally, the long bond (USB) has held its breakout (as anticipated), and seems to be making a run at February's 138 target -- but, of course, blue chip equities are still holding their own.

In conclusion, right now the near-term charts resemble my four-year-old's refrigerator art, so there isn't much in the way of sure-fire near-term targets at the moment.  Looking at the bigger picture, though, the intermediate charts still suggest equities may be in a vulnerable position.  Until blue chips signal the all-clear for bulls, I will continue to treat this as a terminal rally.  Trade safe.

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100-year Chart of the Dow Jones Industrials Shows Equities at a Major Inflection Point

Wednesday and Thursday's sessions consisted of much sound and fury, but very little price progress.  So today, we're going to step back from the near-term, and take an in-depth look at the very-long-term wave count on the 100-year chart of the Dow Jones Industrial Average (INDU).

First, the good news:  Relative to the last hundred years, it appears most likely that the market will ultimately recover from its next large correction, and continue to rise over the course of the coming decades.  Okay, well, if nothing else, that's probably good news for our kids.  Looking at the immediate future, though, this chart emphasizes the gravity of the current inflection point and the coming inflection point.

The current inflection point is shown in black by the "or A of IV," etc., which considers the potential of a massive expanded flat forming within the blue megaphone pattern.  I first discussed this option back on February 8, 2013 (at that time, I was bullish and noted we should expect a rally toward 1750 SPX at the minimum) -- and that pattern is still on the table because there are only three rally waves complete so far (three waves is the requirement for a B-wave).

The three-wave rally makes this an inflection point.  If the market breaks though that inflection point, then the assumption will be that it's currently within Cycle V of Supercycle III.  In that event, the next decent correction will be a "small" (relative to the last hundred years!) fourth wave down, which would be labeled as red iv.  From there, the market would ultimately rally to new highs, in Primary (red) v of Cycle (blue) V.  That scenario would put the true end of the bull market out at least a year or two into the future.  At the end, though, things would have the potential to get very ugly.

Once Cycle V completes, we'll enter a massive fourth wave correction at Supercycle degree.  How massive?  Well, this pending Supercycle fourth wave would pair with the 1929 crash.  The chart shown below is in logarithmic scale -- which is really the only way to view a century-long price chart in context -- and notice that the 2007-2009 bear market (as nasty as it was) was only a hiccup relative to the 1929 crash.  Supercycle IV would likely make 2007-2009 appear mild in comparison.

That's still a ways off, though -- so no reason to stock up the bomb shelter with extra Fig Newtons just yet (actually, there's no reason to stock the bomb shelter with Fig Newtons at all) -- and the good news is that we should ultimately recover from Supercycle IV in the Supercycle V rally.

The more immediate concern revolves around the potential for the recent bull market to be B of IV, and to complete in the relatively near future.  A c-wave decline at Cycle degree would certainly not be something to take lightly.

The temptation with charts like this is to focus on the negative, and I would strongly caution against that approach.  If the market is going to form a c-wave decline at Cycle degree, then it's not going to Dow 5000 tomorrow.  It's going to take some time to get rolling, and there should be ample warnings along the way.  In the interim, let's stay open to both possibilities:  We've all seen what the "perma-bear" approach can do to investors, and it isn't pretty.


An interesting side note about the chart below is the way price resistance and RSI resistance have collided near the market's recent levels. 

I should also note that, in the past, I've referred to 2009 as the bottom of Supercycle IV, but I've shown that as the alternate count on this chart.  Basically, the last time I worked up a long-term count with this level of detail was 2007, and I figured six years of additional experience made it worthwhile to reexamine the whole thing.  So I dropped my presuppositions and went from "scratch" this time. 

On balance, I think the 2007-2009 bear probably pairs better with 1937's Cycle II than it does with 1929's Supercycle II -- which is why I landed on 2007-2009 as Cycle IV instead of Supercycle IV.  Ultimately, it's a judgement call, and one could potentially view red i and ii as the fourth wave that pairs with blue I-II, which would make everything since part of an extended fifth wave (and put SC IV back where I had it in prior labelings, at 2009).  I'm pretty evenly split on the two options, but would probably give a modest edge to the preferred/alternate counts as labeled here.

(If you're new to Elliott Wave analysis, understanding this chart would be aided by my quick primer on the subject: Technical Analysis: Understanding Elliott Wave Theory)

NOTE:  To bring up the chart at full size, right click with your mouse and select "Open in New Window."

   

Let's take another look at the Russell 2000 (RUT) chart, which shows the small caps remain in an intermediate down trend.  Investors are still avoiding risk and, as I discussed on April 23, this represents a marked shift in the market's behavior from 2013.  This is one of the reasons I've been advocating caution recently.

Back in February, I turned unequivocally bullish on the long bond, and more than a few folks thought I was nuts.  But in the meantime, the long bond has continued to outperform, and appears headed for my targets.  This is another reason I've been advocating caution in equities.

Recently, I've observed a lot of traders shifting back and forth from bullish to bearish and vice-versa, which is a function of the trading range that blue chip equities have been stuck in for the past few months.  Trading ranges can really play on a trader's emotions -- which is why "neutral" is sometimes the best stance when the picture gets muddy.  Always remember that cash is a position, too; it's usually better to be "out wishing you were in," than "in wishing you were out."

When I look at the current chart of the S&P 500 (SPX), I view it as a fool's errand trying to assign probability to the patterns that have emerged from within this large trading range, since I've learned over the years that giving too much credence to patterns that form within a range is often a losing proposition.  So I apologize to readers if that's frustrating at the moment, but I'd rather say nothing than make a hard call that's patently ill-advised.

So, near-term, here are the main options, for what they're worth:  There are enough waves in place for the rally to be complete, though there may be one additional fourth wave decline and fifth wave rally pending.  At this point, I'd almost rather see the latter, which would lead to a near-term decline, followed by a trip into the 1905-1920 zone (to get the trend chasers back on board, and to get everyone to forget about "sell in May and go away"), followed by a surprise whipsaw into an intermediate correction.  But frankly, none of my systems, signals, or indicators are giving me a solid answer one way or another here.

In conclusion:  At the present moment, the song remains the same as it has over the past week or so, and the message from equities is still "caution."  If you held my feet to the fire, I'd say I'm more inclined to be intermediate bearish here than intermediate bullish, based on the weight of the current evidence.  Ultimately, I'm simply patiently waiting for the market to give us a more solid signal.  Trade safe.

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Blue Chip Equities: Still Reasons for Caution as the Market Awaits the Fed

Monday's update noted the market had reached an inflection zone and could bottom in short order.  The 1858 downside target was captured (and exceeded, as I suspected it would be) during an ugly whipsaw session -- and as of Tuesday, the S&P 500 (SPX) was again testing the 1880-85 resistance zone.

The Fed wraps up a two-day meeting today, and will announce its decision on interest rates.  The consensus expectation is that the Fed will also reduce QE asset purchases by another $10 billion.  Any surprise deviations from that number could generate directional fireworks.  ADP releases its monthly report on hiring today; and the government's Bureau of Made-Up Statistics (BOMUS) will release its initial estimate of first quarter GDP (this number will later be revised approximately 347 times, but no one will pay any attention whatsoever to the revisions, regardless of how dramatic they are).

Looking at the price charts in equities, I'm inclined to simply say that upside potential presently appears fairly limited.  There are two things that could change that:

1.  A sustained breakout over key resistance.
2.  A positive surprise from the Federal Reserve.

The Fed is the ever-present market-moving wildcard, and they're simply going to do whatever they're going to do -- so I'll wait for the announcement and leave it to the economists to speculate in that regard.  Chart-wise, I've broken down the intermediate wave structure in the Dow Jones Industrial Average (INDU) to illustrate why I'm not terribly bullish with prices at current levels.

I should clarify that I'm not exactly full-on bearish here either, because I do respect the fact that the market is in a long-term uptrend, and betting against the trend is always risky business.  I'm not screaming "top" here, because there's nothing screaming "top" in the charts yet -- it's more like there are whispers of the potential for a top, and I'm respecting that.

By way of further clarification:  The blue chips have been stuck in a trading range for months now, so that doesn't give us much to work with there -- yet beta indices have been in intermediate down trends, and that's a shift from the way things have been for the majority of the bull market.  I've also talked about the long bond in prior updates, and I'm still inclined to think the bond rally has farther to run.

On the long-term INDU chart, we can see that five rally waves may be complete or nearly-complete.  The x-factor is still the potential of a subdividing fifth wave extension, which is entirely possible, but difficult to anticipate.  Until INDU sustains a breakout over resistance, it's a moot point, and obviously I can only draw from what's in the charts as of this moment.  

  
At near-term degree, INDU appears to be in the process of completing five rally waves.  There are already enough waves present in the structure for the rally to be entirely complete, but there's potential for an expanded flat (shown as the blue (A)/(B)/(C)) for one more push up to a marginal new high.

Since it's a Fed day, one option is an early drop in red (4), followed by an "announcement pop" toward red (5), followed by a reversal (the first directional move out of the Fed announcement is often a fake).  Again, though, there are already enough waves for a complete structure, so there may be no "pop" forthcoming.

So that's the long-term and the near-term; now we'll look at the SPX chart for a middle view:

In conclusion, the equities market faces substantial resistance near current levels, and high-beta indices and the long bond are both still warning that caution is warranted in blue chips.  If SPX and INDU can sustain a breakout through resistance, I will of course respect that development accordingly -- but until then, this is a "show me" market.  So while I'm not full-on bearish here, I'm presently inclined to think bears probably have better prospects.  Trade safe.

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Update to US Equities and US Bonds: The Big Picture Implications Behind the Market's Current Inflection Point

Elliott Wave Theory is based on the concept that markets are not random, but instead follow patterns that are fractal in nature. Markets often seem to move in a structured way, and those patterns replicate themselves across all time frames.  There are times when patterns stand out on the larger time frames, and the market thus broadcasts its intentions for the weeks or months to come; one recent example of this comes from the update of March 31, when I noted that the pattern suggested the market would break out in a head-fake rally, and then whipsaw.  Other times, the larger patterns are a bit more veiled and only the near-term patterns stand out (such as last Wednesday).

Since the market is of a fractal nature, we can anticipate what it's going to do if we can identify the fractal that's forming.  At times we can do that, but ultimately, it's a probability game, and none of us can identify every single fractal in advance.  Which means there's potential danger in overstepping our bounds at the moments when things aren't clear.

Many years ago, when I first started trading, I followed a subscription service that was almost always "quite certain" of what the market would do next.  They rarely offered alternate possibilities to their subscribers, and things were generally discussed in the cut-and-dried tone of "here's what the market's going to do next, and here's why we're perfectly sure of it."  Yet despite their very certain-sounding approach, they were frequently wrong.  By a huge margin.  I've come to believe that some analysts take the "sure-sounding" approach not because they're actually sure, but because it impresses people.

After all, if you're going to pull in new subscribers for your market newsletter, you'd better at least sound like you have a handle on things -- right?  As humans, this is often how we choose people, and this approach works for certain physical things, because most macro physical things are not probabilistic (it isn't until we get down to the quantum level that we encounter probabilities).  Since we exist in a physical world, we become conditioned toward thinking of things as concrete.  For example, a car either "is" or it "isn't."  So we expect concrete statements from people, and we take our car to the mechanic who sounds like he knows what he's doing.  Then later, we gladly pay the $495 he charged us to "rebuild the solenoid linkage distributor," plus the $186 for a "brand new starter belt."  The problem is, the market doesn't work that way (neither does your car, incidentally -- but your mechanic might!). 

Personally, I'd rather try to help people protect and expand their capital than impress them with tough-sounding talk.  Which is one reason why (largely as a result of my early trading experiences) I almost never ignore alternate possibilities in these updates.  Granted, there have been a rare few occasions when the future seemed so clear that I did ignore alternate potentials -- but I think my public track record on those occasions is pretty close to 100%, so my judgment there isn't too terrible.

Anyway, since the market is fractal in nature, we try to anticipate the future based on the expected form of the completed fractal.  And, obviously, when we don't know what fractal the market is trying to form, we have nothing to base anticipation upon.  At those times, I watch the zones that I call "inflection points."  This term is probably best explained with an example:  If the market forms one five-wave decline in the course of a session, I now know that probability suggests another five-wave decline will form and take the market to new lows.

Two five-wave declines makes a corrective ABC fractal, while three five-wave declines makes an impulse wave.  So, the first five-wave decline tells me to expect at least one more -- but what I may or may not know yet is whether to expect two more declines.  Thus once the market has competed two five-wave declines, that represents an inflection point.  If the market only wanted to form a corrective ABC, then it will bottom after that second five-wave move is complete.  Sometimes we know the market is intending an ABC based on the larger fractal, and sometimes we know it's intending to form an impulsive decline.  But when the larger fractal is unclear (or low probability), then inflection points should be treated with additional respect.

Presently, I feel the larger fractal is a bit unclear.  I know lots of folks are "quite certain" they know what it is, and undoubtedly some of those folks will end up being right.  Personally, I intend to take this market one session at a time for the moment.

I don't always know how the market will react to an inflection point, but I'm generally reasonably accurate in identifying those points.  So, all that to say:  Until the bigger picture clarifies more, I'll continue to note the near-term inflection points (those places where turns become higher-probability), but until something jumps out at me, I'll leave it up to the reader as to what to do with that information.  If one is bullish, then one could wait for declines to reach inflection points before going long; and if one is bearish, one can wait for rallies to reach inflection points before going short.

I discussed all this at length because the market has reached its next inflection point.  Below is the chart of the NYSE Composite (NYA) which illustrates this very well:

In prior updates, I've discussed the bond market and how I feel that the long bond is going to rally further over the intermediate term -- and that makes me wonder if there is trouble on the horizon for equities.  Ultimately, though, I do have to respect that the equities market is not inseparably linked from the bond market -- and, even if it were, I could always be wrong about the long bond.  The chart below is the US 30-year Treasury Bond (USB):

SPX has reached an inflection point similar to NYA.  1884 SPX looked like a "no-brainer" short to me, which is why I was near-term bearish last week; however, the risk/reward equation is different at today's prices -- and if one is inclined to take long positions, then this inflection zone is a place to consider that.

In conclusion, if the market was trying to form an ABC decline, then odds are reasonable that it's complete (or nearly so), which would mean a resumption of the rally.  If the decline continues more than a little further, then that would be a clue -- one which may indicate that bears are in control of the intermediate time frames.  The next few sessions should thus be enlightening.  Trade safe.

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The Long Bond vs. US Equities: Is One of These Markets Lying?

Wednesday's update ended with the conclusion that I was "near-term bearish with a chance of bigger thunderstorms."  The S&P 500 (SPX) failed to make a new high in the two sessions since that update, so the "near-term bearish" call was a hit; today we'll look at some of the key levels which should help indicate if those "bigger thunderstorms" are going to show up or blow over.

Let's talk about the bull case first, which is pretty simple:

1.  It's a bull market.
2.  Virtually all the major equities markets are still within long-term technical uptrends.
3.  It's a bull market.

Now for the bear case.  I monitor anecdotal sentiment with some frequency, and one thing that should bear consideration is the about-face so many traders have done from bearish to bullish in such a short time.  Many traders were extremely bearish at the recent bottom, as I wrote about at length back on April 15:

Bears may want to stay on their toes right now, because the charts have reached a technical inflection point, and it's significant.  Here I'm going to briefly digress from the technical discussion, but I'll return to it in a moment.

Digression: The herd is getting awfully bearish lately.  I've seen more "crash" articles show up over the past week than I have in a long time.  What's troublesome for bears isn't that these articles are being written, it's that they're being read.  Admittedly, this is very anecdotal -- but I write about this stuff, so I've picked up a thing or two over the years regarding mass sentiment and the popularity of articles.  Thus the current popularity of crash-type articles bothers me a bit because, from the perspective of market timing, the majority rarely read hardcore bear articles when they "should" -- instead, when they should be reading bear articles, they read bull articles; or articles about flowers and cute fluffy kittens (not necessarily in that order).  They usually want bear articles right before a bounce is due.

As noted, many of those same traders are now very bullish -- right as the market is hitting intermediate resistance.  I've been observing sentiment throughout this entire bull market, and this is the fastest I've seen sentiment reverse with this level of conviction.  I assume it's because, at this point, "bullish" has become a Pavlovian response for traders.  The market has recovered from each and every prior decline (that's what bull markets do, after all), so traders are finally programmed to expect it.  It's interesting to me because, in the instances prior to this, the market has recovered by climbing the proverbial "wall of worry," and has rallied into heavy trader skepticism.  It seems that this time, it's rallying into hope.  People are literally scared to be bearish -- and that's the type of mentality we see near tops (at bottoms, it's the same thing in reverse: folks are scared to be bullish).  I, of course, can't promise that the market is building a top, and I remain open to both bull and bear possibilities at the moment.  But here again, I felt it worth discussing.

One of the charts that continues to keep me on my toes in equities is the 30-year bond (USB).  The long bond has recently broken out over resistance and, barring an immediate whipsaw, looks to be headed toward my February targets.  Sometimes when bonds turn bullish, equities turn bearish, so this chart leads me to wonder if there will be a shake-up in equities in the reasonably near future.

As noted last update, SPX is at an inflection point, where it has to decide if it wants a five-wave rally, or if it's already completed a three-wave rally.  Though not shown on the chart, keep in mind that fourth waves are often complex, and a fourth wave could continue modestly lower without creating any technical issues.  I suspect there's more downside in store, at least for the near-term.

There's nothing new to add on the long-term SPX chart, but it's shown again for reference purposes:
 

In conclusion, nothing of intermediate significance has happened since the last update, so there's little to add in that regard.  I suspect there's more downside in store for at least the near-term, and a breakdown at 1870 does have the potential to generate bigger fireworks in SPX.  Trade safe.

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SPX, RUT, and NYA: "Risk On"? Not Quite Yet...

The S&P 500 (SPX) has continued to power higher, largely unabated, and has now reached the zone that qualifies as a retest of the all-time-high.  A lot of folks have now jumped back on the bull bandwagon, because, after all, it's a bull market.  However, there are still numerous markets showing that "risk-on" hasn't entirely returned to the menu yet.

Among other things, the high beta indices like the Russell 2000 (RUT) and Nasdaq Composite (COMPQ) are still lagging the blue chips.  The chart below shows RUT in the top panel (log scale) and SPX in the bottom panel:

Part of the "among other things" not shown in this update is the chart of the 30-year bond (USB), which is back-testing its recent breakout.  I remain bullish on the long bond for a trip toward 138.

SPX is retesting the all-time-high -- a "retest" of an intermediate level isn't an exact price, but is more of a price zone which extends slightly above and beneath the exact price.  SPX has also reached a specific resistance point at 1884.  At least a near-term correction from here would be pretty normal.  In the event there's no immediate correction and SPX breaks the all-time-high, then the red trend line is still the next pivotal resistance level.  Take a look at the long black trend line, which began back in May 2013, for an example of a similar pivotal level.
 

The NYSE Composite (NYA) is in a similar position, and the current price zone qualifies as the next big inflection point.  The last time I mentioned the market had reached an inflection point was on April 15, when it bottomed -- I was near-term bullish on that day, but in hindsight, was not bullish enough.  

In conclusion, there are essentially three stances one can take as an analyst: bullish, bearish, or neutral.  Neutral is probably the least popular with the crowd, because people naturally crave resolution (nobody likes it when an episode of their favorite TV show ends with "To be continued.")

But the reality is:  Some markets beg to be anticipated, some beg to be reacted to, and some beg for the patience of limiting oneself to only the lowest-risk entries in both directions.  The market has now reached another inflection point, which means it hasn't quite closed the book on either the bulls or the bears just yet.  I think bears have a good shot at turning the market here, at least for the near-term -- so, for the moment, just put me down as near-term bearish with "a chance of bigger thunderstorms."  Trade safe. 

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SPX, WLSH, Nasdaq: A Monkey Wrench in the Ointment

In the last update, I noted the market had entered something of a no-man's-land.  I also talked about the S&P 500 (SPX) level of 1873 as key resistance.  That level has not been claimed yet, and today we're going to look at another aspect of the argument.

Personally, there are times I don't like attempting to predict the market, because it's simply "too close to call," and I think getting too attached to outcomes at times like that can be dangerous.  Certain types of markets call for nimble trading and flexibility of opinion, and I think the current market qualifies.

As I've looked across markets, there are two charts that cast some doubt on any bull case.  One of these is the Wilshire 5000 (WLSH), which is basically the entire market represented in index form.  WLSH throws a wrench into the ointment (I enjoy mixing metaphors) for bulls because the recent low took the shape of a three wave decline, as shown below.  

On the other side of the coin, the Nasdaq Composite (COMPQ) captured the target I noted was most probable (back on April 7), then bounced off the 200 day moving average and the blue trend line that I scribbled on this chart a few months ago.  Bears have done what they set out to do here for a potential fourth wave, so further decline is not required -- though it's not yet clear if the decline is finished. 

Finally, the S&P 500 (SPX) chart.  Due to WLSH and a few other markets, I'm officially recanting 1873 as a key overlap.  I still think it's important resistance, but no longer believe that a brief break of that level would represent the end of the road for bears.

In conclusion, the market remains in a no-man's-land.  Sometimes markets are clear and high probability targets present themselves (as evidenced by five captured target zones so far this month), but other times, staying nimble is our best weapon against the market.  I'm slightly inclined to favor the bears on an intermediate basis, but this is as much an instinctive call as anything; with the market in its current position, one thing which won't serve either bulls or bears is complacency.  It is worth noting that I've observed some level of complacency on the bull side recently, so it will be interesting to see if the market chooses to address that in the near future.  Since it's unlikely the market will hang around current levels for long, a clearer picture is likely to emerge quite soon.  In the meantime, trade safe.

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