US Equities Finally Reach the Decision Point

Last update expected the S&P 500 (SPX) would rally to new all-time-highs, and we didn't have to wait long for that expectation to prove out.  The market has finally entered the key upside inflection zone, so this is where things will get interesting (for the first time in a while -- thank goodness!).

In a perfect world, I'd like to see SPX head a bit higher -- but if this breakout is a head-fake, the market is going to want to throw a few more curve-balls in here, and the rally is likely to end abruptly and unexpectedly.  I've added a bull count to the chart below, and in the event of a sustained breakout through the upper red trend line, then we'll have to consider the potential that the last few months were a coiling pattern headed for the upper-1900's or beyond.  Until that breakout comes, though, bulls will want to avoid complacency in this inflection zone.

I've updated the near-term support/resistance chart below.  There are a couple confluences of support that should help offer clues as to the strength or weakness of the recent breakout.

I've also updated the NYSE Composite (NYA) because the pattern here gives us a near-term upside level to watch for clues of market strength.

In conclusion, the new all-time-highs in blue chips came as no surprise, and SPX is now sitting inside the key upside inflection zone of 1900-1920.  If it can push through this zone, then bulls will have something of an "all-clear" signal.  But as of yet, the breakout hasn't been substantial, and we're continuing to see weakness in beta indices -- so this is no place for complacency.  Trade safe.

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Did the Stock Market Just Tip Its Hand?

Lately the market has done its best to convince traders that there are probably easier ways to earn money, such as by selling a kidney, or by stealing the Mona Lisa.  For the last couple weeks, I haven't done much in the way of near-term projections, because I felt the market was near-term "un-projectable."  I have no regrets in that regard -- sometimes the best trades are the ones you don't take, and recognizing in advance when a market should be avoided can be valuable.

Today, though, we'll consider the possibility that something recognizable may be emerging from this mess, and we'll examine a potential near-term pattern (and variations thereof).  So, without further ado (adieu?), let's get right to the charts.

The first chart is the S&P 500 (SPX), which hints at a potential triangle in formation.  This also fits the recent whipsaw nature of the tape -- for comparison, the last triangle we encountered was in March.

Stepping out to the long-term view, we can see that if there's a near-term breakout, then SPX will encounter long-term resistance soon thereafter:

The NYSE Composite (NYA) is in a similar position to SPX (via a slightly different pattern), and has already completed enough rally waves to be complete:

In conclusion, the market still hasn't laid its cards on the table, but may be tipping its hand just a little bit here.  Keep in mind that if this is indeed a triangle, then it would mean that any breakouts will whipsaw in fairly short order, since triangles virtually always form as the penultimate wave.  Either way, bears still have a good shot at gaining traction over the intermediate term, so keep in mind that all near-term bullish bets are off below 1859 SPX.  Trade safe.

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Small Caps Still Trending Down While Blue Chips Grind Sideways

During the last few weeks, trading SPX has been the equivalent of playing a game of Whack-a-Mole, as it continues to head-fake its way to nowhere.  A few weeks ago, I wrote about why I felt this market called for patience, and nothing has changed since then -- ultimately, we have to respect that we're still stuck inside a three-month-long trading range.

Trading ranges frequently wreak havoc on trader psychology (and on trader accounts), and over the past few weeks I've watched some bears turn bullish, and some bulls turn bearish.  Traders often let their imaginations run wild inside trading ranges, as they grow more and more anxious waiting for the next directional break.  Of course, sometimes we want to ignore the fact that directional breaks may remain delayed for a long time, as the market reserves the right to continue grinding sideways for as long as it wants.

That said, I suspect we're finally getting close to a directional move.  In my perfect world, I'd still like to see a new all-time-high and a whipsaw, but this market is offering no guarantees right now.  The chart below is the S&P 500 (SPX), which has not yet broken this year's high.  Not shown is the NYSE Composite (NYA), which did break this year's high -- and that, coupled with the fact that we can count five waves up off the April lows, does require us to at least consider the possibility of a failed fifth wave without further highs (I alluded to this in the last update).

On an intermediate basis, the upper red trend line is still the key zone where more bullish potentials would begin gaining traction. 

The next chart is the 15-minute chart of SPX.  Because of the range-bound market, there's little in the way of key near-term levels right now -- pretty much everything is fair game within a range.  So, don't overplay these trend lines, since range-bound markets love to whipsaw.  It is worth noting that the uptrend from the April lows (red line) was broken recently, and SPX closed right on the back-test of that line.  Bears may try to make a stand and reject the advance here.

The Russell 2000 (RUT) has recently made a new low, and continues to look weak.  This suggests that "risk-on" is still absent from the current market.  It will be interesting to see if, at some point in the future, we look back on the SPX trading range as a giant distribution zone.

In conclusion, neither bulls nor bears have been able to get anything accomplished in SPX for the past few months -- but bears are getting things done in RUT and in some other high-beta markets.  Bond bulls are also getting things done in the long bond.  And, unless something changes, those are two of the reasons why I continue to suspect the balance of power may (also) shift to bears in blue chips over the coming weeks.  Trade safe.

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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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