Equities and Bonds: Bond Target Captured; SPX Approaches Its Next Target

Before I get into any market analysis in this update, I feel the need to briefly note the obvious: it's been a while since I've been able to write an update.  I apologize to my readers for the long hiatus; I've had difficult family issues recently, which were sapping the majority of my time and energy.  But things may finally be evening out a bit, so hopefully I can return to my regular schedule in the near future. 

With that out of the way, let's take a look at the market.  The first thing worth noting is that the 30-year Treasury Bond (USB) did ultimately capture my 138 target from February 20.  Almost immediately after it captured the target, it reversed.  And as of this moment, it's testing its 50 day moving average.  With the target capture, I'm now neutral on the long bond:  If the rally was an ABC fourth wave, then it's likely complete or nearly so, and new lows are possible from here.  On the bullish side of the coin, if the rally develops into a five-wave impulsive structure, then we'll consider the possibility that the end of 2103 marked a long-term bottom.

Moving on to equities, the last couple updates in May noted some if/then equations for the S&P 500 (SPX).  As noted on the chart below:

1.  On 5/23/14:  Sustained trade north of the blue trend line would suggests a trip to the red trend line (captured).
2.  On 5/30/14:  Sustained trade north of the red trend line would suggest a target of 1978-89 (high of 1963 so far).

While a larger fourth wave could sneak its way in here (blue "Bull (4)"), as long as support holds, then we should probably give the benefit of the doubt to bulls for the next correction to be bought higher and into the target zone, if the target zone isn't captured more directly.

The Nasdaq Composite made new highs recently, and has thus officially validated the intermediate preferred count of April 7.  I presently don't have a strong opinion about how much higher wave V will carry, though current evidence suggests more upside is probable.  The worst scenario for bears here would be if the wave I have labeled as a leading diagonal (from 2010 to 2013) was instead a nest of first and second waves (as mentioned on the chart).

In conclusion, the long bond captured February's target, so I no longer see a clear trade there -- we'll simply have to wait for more information, and for the next trade to emerge.  Regarding equities, I ended my last update (May 30) with this sentence: 


"...in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again."

That's where we stand at the moment.  For the time being anyway, the bull market continues; and until bears put a dent in the long-term technical picture, there's no point fighting the tape.  Equities may be close to entering a fourth wave correction, but present evidence suggests that further upside is likely to follow that correction.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

Update Schedule

Just wanted to drop in briefly to let readers know that the rumors of my death have been greatly exaggerated.  In actuality, I have been dealing with a very difficult family situation for the past week and a half.  I'm hoping to be able to return to a regular schedule at some point next week.

I apologize for any inconvenience this has caused.  Thanks for your understanding.

How Will Equities React to This Long-Term Resistance Zone?

The S&P 500 (SPX) made new all-time-highs since the last update, thereby invalidating the preferred count.  On the plus side, we were looking for a bottom when the market bottomed, and the new highs weren't too far past the upside target zone -- so things could have been worse, and there were only about 10-14 points of "whoops" involved.

Interesting to note that SPX seems to be leading many of the major indices these days.  The Dow Jones Industrial Average (INDU) has not yet made new all-time highs.  And the Russell 2000 (RUT), Nasdaq Composite (COMPQ), Philadelphia Bank Index (BKX), et al are all still trading well below their respective all-time-highs.

Before we look at the intraday charts, let's take a look at a long-term monthly chart of the S&P 500 (SPX).  This chart notes an interesting long-term resistance line, which SPX is bumping into again:

On the two-hour chart, we can see the red trend line I've talked about since March is essentially the same trend line shown on the monthly chart above:

INDU's chart argues that the current rally should probably be viewed as, at best, a fifth wave, and that may bode poorly for the market's chances at clearing long-term resistance on this attempt.  While the black count is labeled as the "or" count, at this point it should probably be viewed as (at least) equal in odds to the blue count.

In conclusion, while SPX has broken though near-term resistance, it is still within a very-long-term resistance zone, so it will be interesting to see how it reacts to that.  Support doesn't always support, and resistance doesn't always resist -- if anything worked every time, then trading would be the easiest job on the planet.  But more times than not, the market does indeed react to support and resistance, so bulls should probably stay on their toes heading forward.  Conversely, in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

SPX and NYA: Is the Current Equities Rally the End of the Road -- or the Start of a New Move?

It's funny how, even when the market does what we think it will, it always does its best to convince us that it's going to do more.  The rally has modestly exceeded my expectations, but (of course) now it wants us to believe that it's headed "to infinity and beyond."  And maybe it is, one can never say for sure.  But, so far, the market has done a pretty darn good job of following the roadmap I outlined a week ago (Friday, May 16), when I wrote:

I suspect [the recent sharp decline] may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.


In the wake of that update, the S&P 500 (SPX) rallied to 1886, then reversed and retested the 1863-70 zone, then indeed reversed again into another rally leg (which has since exceeded the original 1888 target).  So, in essence, there have been no real surprises yet, and last Friday's roadmap captured roughly 40 SPX points of profit.

The question now, of course, is whether this rally end of a correction, or the beginning of a new bull leg.  From a purely Elliott Wave perspective, unless and until bulls sustain trade above 1903, there is no compelling reason to treat this rally as anything other than a correction, and the preferred count remains unchanged.

   
When we study the above chart, it immediately calls to mind two questions:

1.  What is the mysterious black alternate ("alt.") count?
2.  Why do we have "hot water heaters" when hot water doesn't need to be heated?  (This second question isn't covered on the chart specifically, but it's implied.) 

The answer to both questions is the same:  As of this exact moment, there are no clear answers to either question -- at least not on the SPX chart.  So let's take a look at another index and see if there's more information to be gleaned elsewhere.  Below is a chart of the NYSE Composite (NYA), which is an effective representation of the entire New York Stock Exchange.  On the NYA chart, we can see the bullish wave potential a bit more clearly (still no help on the hot water heater thing, though):

The reason I haven't committed to this bullish count as the alternate on SPX is because we've been stuck in a trading range for longer than it takes a tadpole to turn into a frog (I'm guessing here; I have no idea what the life cycle of a tadpole is) and trading ranges can be very deceptive.  Thus, quite simply, if SPX sustains trade north of 1903, then we know what the wave isn't, but I'd like to see the form of any breakout before deciding what the wave actually is.  For now, it's enough to be aware that there is indeed significant bullish potential energy in the chart -- but until the conditions are met, it's something of a moot point.

Before going further, at the request of a reader, I'd like to briefly discuss a comment I made in passing in Monday's update, when I wrote:  "Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally.  (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)"

Yet I didn't discuss that on Wednesday, because Tuesday was a very mixed session, and although SPX did not make new lows, several other major indices did.  And that left Monday's original thesis inconclusive; so there was nothing to discuss on Wednesday (well, more specifically, there would have been too much to discuss on Wednesday, and it likely would have only confused many people).   Instead, for Wednesday's update, I was content to simply unravel the near-term waves and project that SPX was headed to 1888-92.  Ultimately, the preferred intermediate count was and is unchanged, so we'll wrap things up with the 15-minute SPX chart:

In conclusion, while the rally has slightly exceeded Wednesday's target of 1888-92, the preferred count is unchanged, and will remain so unless and until there's a bullish breakout.  Trade safe, and have a great weekend!

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

 

SPX, INDU, USB Updates: Market May Have Another Trick Up Its Sleeve

The market has been treating the preferred wave counts well over the past few weeks, and on Tuesday, the S&P 500 (SPX) dropped down into the 1863-70 zone, while the Dow Jones Industrial Average (INDU) made new lows.

The market has now reached a minor inflection zone, and I'm inclined to think we may see the double retrace rally I spoke about on Friday and Monday. 

While I think the intermediate term suggests this is a seller's market, the near-term is on the cusp, and there are two potential challenges for bears over the near-term:

1.  Yesterday's decline was only 3-wave in SPX, leaving open potential that the decline was corrective.

2.  The initial decline off the all-time high featured an extended fifth wave.  And extended fifths are usually followed by complex "double retrace" corrections -- thus, given the 3-wave decline yesterday, the double-retrace is still a very distinct possibility for the moment.

While we've stayed a step ahead of the action lately, this market has been hard on a lot of other traders -- by the time everyone thinks it should be bought, it should be sold; and by the time everyone thinks it should be sold, it should be bought.  While I suggested the market was a "solid sell" near 1882-88, I doubt the masses agreed.  But I'd be willing to bet they agree now -- and that might make this an ideal spot for a second rally leg toward 1888-92 (where everyone will think it's time to buy again... rinse and repeat).

I illustrated this double-retrace on Monday's chart, and so far the market has followed the projected path almost perfectly (all I had to do to update the chart was delete the line that price traded over).  It's a tough call right here, but I'm marginally inclined to give the bulls the near-term edge for that second rally leg.  The preferred near-term count would be challenged below 1868 -- if that happens we're likely to see new lows (and probably a whole lot more) more immediately.  Ultimately, new lows are expected either way.

I've also illustrated the near-term wave count in more detail on the INDU chart, and noted a key upside resistance zone  Additionally, I've illustrated the alternate intermediate-term count -- more on that after the chart.  (Also, red is the new black... or vice-versa... forgot to change the near-term alternate count to red!)

Finally, a quick update to the 30-year Treasury Bond (USB), which is now awfully close to February's target zone.  This is one of the reasons I'm giving consideration to the alternate bullish intermediate wave count in equities:  USB has rallied as expected, but blue chips haven't made much downward progress during this rally.

In conclusion, the near-term is an extremely tight call here, but I'm inclined to give the edge to bulls for a second rally leg to complete a textbook double-retrace rally in the wake of the extended fifth wave decline.  But after that, I expect new lows will follow -- so the intermediate outlook is bearish.  In the event equities are unable to reclaim noted resistance, or in the event SPX sustains trade south of 1868, then the near-term outlook would also turn more immediately bearish.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

SPX and RUT: New Lows Still Expected

In Friday's update, we looked at some of the signs that bears may have more firepower.  In today's update, we'll also take a closer look at the near-term potentials for the S&P 500 (SPX).  Specifically, I'm going to elaborate on Friday's discussion regarding extended fifth waves.  On Friday, I wrote:

The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

SPX came within 1-point of the 1879-82 target on Friday, so let's take a look at a near-term chart of SPX for further illustration (more discussion after the chart):

When an extended fifth wave forms, we know to expect a retrace to wave iv of the extension, which has already happened.  This is usually followed by one or more retests of the wave-v low.  Then, after the retests, the rally will typically retrace to wave-ii of the extension (zone noted on the chart).

The alternate count, shown in black on the chart above, was also discussed on Friday:

The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

Both counts remain viable, and 1862 is the dividing line.  The key point is that, either way, I expect 1862 will break in fairly short order, so I'd be very cautious playing with longs here.  Right now, I view this as a market where I'd short the bounces, not buy the dips.  Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally.  (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)

For more perspective on the bigger picture, let's take a look at the two-hour SPX chart:

The Russell 2000 (RUT) is one of the markets that kept me skeptical of the recent new highs in SPX.  RUT is in an interesting position right now, because it appears to be coiling for a rapid move.  This is a market in which to stay extremely nimble, because the next move is likely going to punish anyone who hangs on "hoping" while on the wrong side of the trade.

In conclusion, barring a breakout over 1903, the charts presently suggest we should remain bearish on equities until there are signs of a meaningful low.  If 1862 SPX fails, watch for a drop to 1848-53, which would also be a potential reversal zone.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.

Equities and Bonds: Signs that Bears May Have More Firepower

In essentially every update I've written this month, I've noted that the S&P 500 (SPX) appeared likely to rally to new all-time highs, but that rally would be a head-fake breakout doomed to whipsaw.  It's probably fair to say that was a decent call, and my only concern at this point is that it seemed so incredibly obvious and it almost happened "too easy."  (That always makes me a little nervous.)  It's certainly too soon to say with certainty that we've seen an intermediate top, but with everything going according to plan, there's presently no reason to doubt that thesis either.

The simple solution is that bulls will need to sustain trade north of 1903 to cast doubt on the bear case; so until that happens, or until there are signs of a meaningful bottom, the bear case will remain favored.  Today we'll also take another look at some of the supporting players to the bear case for equities.

The first is the US 30-year Treasury Bond (USB).  On February 20, I wrote that I felt the long bond was on its way to 138-140 -- the funny thing is, at roughly the same time, nearly 100% of economists surveyed felt that bonds were heading lower.  So that's something to consider, for those folks who view technical analysis as some kind of pointless voodoo.

The long bond is still implying a shift toward risk off, and thus hints at the potential of continued trouble for equities.

Next up is a chart I haven't updated since mid-April -- this chart tracks the ratio of the iShares High Yeild Corporate Bond Fund (HYG) to the iShares Barclays 20+ Year Treasury Bond (TLT).  I use this as a measure of risk-on/risk-off:  When the ratio heads lower, it means risk-off, which is bad for equities.  In March, I mentioned that HYG:TLT had broken through the uptrend line that began in 2012, and felt that was a warning sign.  Now this ratio is breaking down from a pretty ominous-looking head and shoulders, and this could suggest more trouble on the horizon for risk assets.

Finally, the SPX chart, and I'm going to break down the time frames separately to avoid confusion.

Bigger picture, RSI suggests new lows are on the horizon for SPX one way or another -- so whether we rally near-term or not, I'd be surprised if 1862 isn't broken in the coming sessions.

Near-term, there are two ways to view the recent decline: 

1.  The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

2.  The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

If SPX sustains trade beneath 1862, then we're probably dealing with option 1.  If SPX sustains trade north of 1873, then option 2 has a decent shot.

Not shown on the above charts:  SPX recently tested the 50-day moving average for the third time in three weeks, and may thus be exhausting buyers in that zone.  If it tests the 50-dma a fourth time, then it's likely to break -- and that could spark a decent sell-off, since a fair number of traders use the 50-dma as a stop zone.  That hypothetical fits my expectation that SPX is completing wave 1 down, with the wave 2-up rally on deck -- to be followed by wave 3-down.  That third wave would coincide with a break of the 50-dma, which could provide selling fuel to power the decline.  The third wave is usually the longest and strongest of a move, so I like the overall setup.

In conclusion, while it's too early to confirm an intermediate top, everything has gone according to plan, so the preferred view will remain bearish on the bigger picture until such time as the market says we should consider other options.  Presently, the first thing bulls would need to accomplish is to sustain trade north of 1903 -- but since RSI confirmed the 1862 low, it appears unlikely that will happen immediately.  It instead looks likely that new lows are on the horizon one way or another.  And, as discussed, new lows will break the 50-dma, which could spark an extended sell-off.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic

Reprinted by permission; Copyright 2014 Minyanville Media, Inc.