SPX and INDU: Near-term Options and the Key Levels

Tuesday continued the somewhat complex sideways move that began at 2005 a week ago, and while there are a lot of options still on the table, there are now some clear levels to watch.


Let's get right to it via the SPX 2-minute chart.  My personal trading really pressed me for time on this update, but I've nevertheless detailed the options in detail (in a detailed fashion), along with the qualifiers for each option on the chart below:

Instead of reiterating all that on the 15-minute chart, I'm simply showing a representation of the conventional impulsive rally for wave (5).  This should not be construed as an "endorsement" of that count until SPX breaks 2011.

INDU presents an interesting pattern, one that should be watched in conjunction with SPX:

In conclusion, the market has left myriad options open, but the pattern allows us to put qualifiers on those options, and we should be able to narrow them down directly during today's session.  Trade safe.

SPX Update: Hey, I thought I Had Monday Nights Off?

On Friday, the market did basically nothing.  Friday's trading was about as exciting as eating a bowl full of unflavored Jello.*

*Jello is a registered trademark of the Jello corporation, but, as far as I know, the concept of "unflavored Jello" as the most boring food on earth is original.  Also, in Mexico, Jello would be pronounced "yellow," no matter what color it is.

Anyway, despite Friday's less-than-exciting session, I still spent a bunch of time looking at charts last night, before determining that there really isn't anything to add to the last update.  Technically, Monday is supposed to be one of my nights off from the updates anyway, so I'm just going to update the 15-minute SPX chart, reprint a paragraph from Friday's update (below), and type whatever else pops into my head.

From Friday:

It certainly appears that, at best, SPX is embarking on a fifth wave rally, so we may see a new all-time-high before a larger correction begins.  But even that isn't a given, as the extended fifth wave count discussed on Wednesday remains viable.  On Wednesday, I detailed that the extended fifth retrace would be expected to decline to 1984-90, then bounce back to retest the all-time-high before declining again (into the 1940's or beyond).  That retest could even take the form of a marginal new high, in the event of the b-wave of an expanded flat.

In conclusion, sometimes I regret having developed the expectation that all my updates have to end with "in conclusion," followed by some conclusion or other.  Frankly, I don't always feel like I have a conclusion.  But sometimes I do feel like I have a concussion, especially after listening to a speech that features Janet's yellin'. 

Sorry, what were we talking about again?

Oh yeah:  In concussion, there's not much to add from the last few updates, beyond the potential near-term structure noted on the 15-minute chart for a small nested third wave of wave 5.  In the event the rally is wave b of the more immediately bearish count, it would be need to complete fairly directly.  Trade safe. 

SPX and COMPQ: Giving the Bears Some Airtime

On Wednesday, I noted that the wave structure suggested the market was due for a correction toward a first target of SPX 1984-90, the upper edge of which was reached on Thursday.  We discussed two possible wave counts -- a small fourth wave vs. a larger extended fifth wave retrace.  Both counts remain viable.

I generally don't like top calling in bull markets unless I have really clear signals, like we did last month -- but as of what's in the charts right now, it's very tempting to call an impending top here.

Let's start with the SPX 15-minute chart.  It certainly appears that, at best, SPX is embarking on a fifth wave rally, so we may see a new all-time-high before a larger correction begins.  But even that isn't a given, as the extended fifth wave count discussed on Wednesday remains viable.  On Wednesday, I detailed that the extended fifth retrace would be expected to decline to 1984-90, then bounce back to retest the all-time-high before declining again (into the 1940's or beyond).  That retest could even take the form of a marginal new high, in the event of the b-wave of an expanded flat.

The more bullish count isn't shown here, but would be that the wave labeled as green 5 only marks wave i of 5 -- that option would stretch wave 5 into a larger rally.  I'm handicapping that option at the moment, so will discuss it in more detail in a future update as and if it becomes appropriate.

The blue up-sloping channel on the chart below represents the first warning zone for bulls.

The SPX 2-hour chart adds additional perspective.

The NasDUCK also has enough waves in place for a complete rally:

In conclusion, bulls still have the long-term trend in their favor, but signs are suggesting that an intermediate trend reversal may be drawing near.  Given what's in the charts as of today, anyway, it appears that upside reward is becoming overshadowed by downside risk.  Of course, the market always reserves the right to do something unexpected and morph all this into a more bullish wave structure, and I'm never closed to that sort of option and won't fight it if it happens -- but if that were to happen, we should be able to catch up with it fairly quickly, and adjust on-the-fly in real-time.  Trade safe.

SPX, NYA: Correction Near?

Yesterday, SPX captured the 2004-2010 target zone.  Interestingly, the intraday high was 2005.04 -- and that makes this only the second time in history that the price of the S&P 500 has traded within 9 points of the year (in this case, 2014) that it's trading in.  The last time this happened was in the year 9 A.D., when SPX was trading at zero.

Rumor is that, even back then, certain permabear market services were sending out alerts to "go fully leveraged short" if the market "ever advances from zero and trades at any real number," with "stops at SPX 2000."  My understanding is that some of those subscribers' distant kin were finally stopped out this week, for a tragic loss of 1999.99 points.  It pays to consider both sides of the trade!

Anyway, we're finally into the zone where at least a minor correction would be reasonable -- though this type of thing is primarily for aggressive traders.  Even considering trying to catch a turn here is essentially front-running, since the up-sloping trend channel is still intact.

The question now is whether SPX has another fourth and fifth wave left to unwind, shown on the chart below as green 4 and 5.  I think it's reasonable to assume that it might, but I don't think it's a given.  In a moment, I'll share some more thoughts regarding both counts.

Let's skip over to the NYA, then come back to SPX.  NYA's chart is telling us one thing with high probability:  odds are good that the "final" all-time-high isn't in yet for SPX.  This is because NYA has a three-wave corrective decline, which means that correction should ultimately be retraced completely, to put NYA at new highs as well.  What NYA's chart is not telling us is how we get there -- we can make assumptions in this regard, but any assumptions are only that. 

The easy and obvious assumption would be that we have another fourth and fifth wave left to unwind, shown below in red.  Longer-term, that's probably what bears want to see happen, because it would mean this wave at least has a chance to complete relatively soon.  But there's still another possibility, and that's for the rally to have been part of an ongoing correction, such as a triangle (shown in black).

So, how do we sort one option from the other?  At this moment, we really can't.  Considering that there's still nothing in the way of a notable correction on the charts at present, there's very little info to parse in that regard.  Thus, we'll watch the shape of any pending correction:  If it appears to be an ABC into the red (4) zone, then we'll know to expect new highs to follow fairly directly; if it appears to be a five-wave impulsive decline, then we'll know to expect a deeper leg down.

If a deeper leg down were to unfold immediately, thus stopping NYA from reaching new highs, we would probably have to treat that as a significant buying opportunity, as that would suggest the rally in SPX was only wave 1 of a larger structure.  This is one reason why, earlier, I mentioned that bears probably want to see new highs more directly.

The main reason I'm considering the potential of a deeper correction is because SPX still has me considering the possibility that the rally from 1928 was all part of an extended fifth wave.  The blue path on the chart below would be the typical expected retrace if we're dealing with an extended fifth.  If SPX was not an extended fifth, then the first pending correction should be minor, and SPX has a shot at reaching Target 2 in the relatively near future.  Again, we'll simply have to watch the structure for signs of a three-wave or five-wave decline.

In conclusion:  near-term, the market has a decent chance of beginning at least a minor correction.  Intermediate-term, it's unlikely the final highs are in.  Longer-term, we may be close to wrapping up a large five-wave rally, in which case an appropriately large correction will ensue afterwards -- however, that still appears to be at least a few turns down the road, so probably not what we should be focused on just yet.  Trade safe.

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SPX and NYA: (Insert Witty yet Germane Title Here)

Yesterday turned into "one of those days," so I'm going to have to keep the update short on words in order to

(Editor's Note: Our apologies, but the author has already exceeded his word limit for the opening paragraph.)

Okay then, let's get right to the charts here!

Last update I placed a blue (3) at Thursday's high, because the micro count seemed to show a complete wave -- but my confidence was low.  It turned out that micro count was correct, which allowed me to pick up a few quick points on the short side for the C-wave of (4), and hopefully provided readers with a rough location (blue (4) on Friday's chart) for dip-buying.

We may or may not have another 4th and 5th wave left to unwind -- to be determined in real-time.

The SPX 2-hour chart shows one "out on a limb" count, which is dependent on whether the aforementioned additional 4th/5th wave needs to unwind.

As noted Friday, NYA still suggests higher prices for SPX:

In conclusion, as of right now, the trend remains up and the wave structures remains pointed higher.  As this wave unwinds, I'll use the micro count to help determine whether the market is likely to continue beyond the first target zone (assuming it's reached, of course) or not.  Trade safe.

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SPX, INDU, NYA Updates -- Plus the Purpose of Each Wave and Why the Market Isn't Random

As I was looking over the charts last night, I found myself having the same thought over and over:  Wow, is it tempting to get bullishly complacent here...

This smells like a fifth wave.  Fifth waves are the ultimate bastions of complacency.

In the first wave up of a bull market (talking larger wave degrees here -- daily, etc.), the majority are convinced it's not the start of anything -- they figure it's a counter-trend rally to the prior down trend and soon to collapse to new lows.

In the second wave down (which corrects the first wave), the majority believe the collapse has begun.  They continue to believe this even after the third wave up begins -- at first, they figure the third wave is "another" counter-trend rally.

So they short the third wave just when they should be buying.  It keeps powering higher, and their stops provide additional rally fuel.  Somewhere around the middle of the third wave, we hit "the point of recognition" for the masses, and they realize the trend is here to stay for a while.  There's a sudden "herd mentality" rush to jump on board, and that gives further fuel to the third wave.  These are some of the reasons third waves are usually the longest and most powerful waves.

After what seems like forever, the fourth wave correction comes along and confuses the heck out of everyone.  It knocks out the trend followers.  They jump back in.  It knocks them out again.  The permabears are convinced it's the start of a new collapse.  But the majority do not believe it's anything other than a correction -- and they're right.  During fourth waves, counter to "contrarian" philosophy, the majority sentiment is usually correct.  The job of a fourth wave is NOT to strike mortal terror into the masses (like the second wave did), it's to try and screw everyone up and make trading hard again (and fourth waves serve another purpose, which we'll discuss momentarily). 

Eventually, the fourth wave finally ends.  Wait, no, sorry -- just got the memo here, it's not over.  Maybe it's a triangle?  Ah, an expanded flat!  Okay we can move on to the next paragraph now. (Sorry -- just a little fourth wave humor there, for the Elliotticians in our audience.)

Finally the fourth wave ends and... wait, that was only wave A of the expanded flat!  Hang on...

Okay, whew, eventually the fourth wave ends (really!) and the market enters the fifth and final wave up.  By now, bulls are fat and happy.  Nothing can go wrong!  See, we're at new highs again, just like we told you idiot bears!  All dips should be bought going forward, forever and ever, amen.

Complacency reigns.

Bears, on the other hand, are sick of it.  They thought for sure that last fourth wave was the start of the end.  They're done.  No more shorting!  Ever.  It's a proven historical fact that more bears join monasteries during high-degree fifth waves than during any other wave.    

And this is one of the other jobs of fourth waves in a bull market: They condition traders to buy the dips.  By the time the big fifth wave rolls around, traders have become deeply conditioned by all the fourth waves that have unraveled at lower degrees over the recent months (or years) and which have culminated with new highs each and every time.

Think of where we are now -- every time bears think something is getting going on the downside, the market recovers.  Fourth wave at subminuette degree -- new highs!  Fourth wave at minuette degree -- new highs!  Fourth wave at minute degree -- new highs!!!  Etc.  There's been no end to the new highs.

See, all of this is necessary to ultimately create the psychology we encountered back in waves one and two.  Once the trend finally does change, no one will believe it anymore -- not even the handful of remaining bears.  Everyone will think it's another fourth wave "correction" -- right up until that big third wave down hits and wipes everyone out.

And then we rinse and repeat all of the above, but heading down instead of up (for a bear market or major bull correction).

This is a glimpse into what creates the patterns and fractals that make up Elliott Wave Theory.  It's not some crazy esoteric voodoo; it's simply a reflection of human nature.

The market isn't random -- because people aren't random.  They're irrational, yes -- but they're at least partially predictable in their irrationality.  If you walk into a crowded theater with something strapped to your chest that looks like a bomb, then walk up on center stage and threaten to detonate yourself, you will most assuredly get an irrational reaction.  But you will not get a truly random reaction.  In fact, given a few control studies, I'd be willing to bet that we could determine exactly what percentage of the audience would react irrationally and in what way (plus or minus a few percentage points).

(Please note I am NOT suggesting anyone attempt this.)

Individually, strangers are completely unpredictable.  Yet people have a finite range of reactions -- so if you obtain a large enough sample, you can predict -- with high accuracy -- what people in most any group will do in most any situation.  And you can then piece all that together into a pie chart (a finite and closed chart), with only a very small percentage of people falling outside the "normal" reaction ranges.  It might look something like this when you're all done:

 


People taken individually may seem to behave randomly; but collectively, we behave predictably.  People are funny that way.  As noted, this reality of human nature effectively allows us to predict what an entire group of people will do in almost any situation, minus a very small handful of outliers.  That's why they only need to poll a few thousand people to figure out how an entire country feels about an issue, instead of polling millions (or polling everyone).

And this is why I find it plain silly when people think the market is random, and that Elliott Wave is some impossible theory.  Virtually nothing that involves the herd is truly random.

Anyway, I digress.  The point I started off to make was that the current market's sentiment feels like a fifth wave at higher degree.  That doesn't mean it can't run for a while, though.

Let's start off with NYA, which suggests SPX still has farther to run into new all-time-high territory:

The SPX 2 hour chart is shown below (the referenced fourth wave would be at micro degree -- see next chart).

 The SPX 15-minute chart shows a beautifully-defined channel:

INDU may provide an interesting clue about where we're headed.  Sure looks like a fifth wave here:

Another look at INDU's very-long-term wave count shows that it's possible we're closing in on the end of a massive B-wave rally, but I currently think it's a bit more likely that we'll need to unravel a much larger fourth and fifth wave before the end of the world.  In practice, though, we don't really need to know the answer to that question, and it's irrelevant at this moment.

All we need to do is identify the inflection point where the trend changes from up to down, like we did last month, and know when it's time to stop shorting and/or go long again, like we did this month.  Action is always taken in the present, so trying to determine very long-term wave counts is done primarily for context and to aid in alertness.

To bring up this chart in its full 2200 pixel glory, right mouse-click on the chart and select "open in new window."

In conclusion, we may be nearing a small fourth wave correction at micro degree (SPX 15-minute chart), but it presently appears unlikely that the rally is done for good.  NYA and INDU are both begging for new highs after their recent large ABC declines, so we have to continue to presume the larger trend remains up unless and until the market gives us reason not to.  Trade safe.

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SPX, INDU, COMPQ: It's an FOMC Day; Do You Know Where Your Chairman Is?

The big event today, of course, is the FOMC minutes.  FOMC minutes are always a big event for the market, since the Fed controls liquidity, and liquidity drives risk assets.  I've been a part of the trader subculture for so long now that I almost forget that the average person doesn't really care about the Fed -- and doesn't see them as connected to the stock market in any tangible way.  They think stocks go up or down based on superfluous irrelevancies like the economy and news.

By way of example, the other day, I had a relative point at a picture of someone who bore a vague resemblance to Ben Bernanke and ask me (and I quote):  "Isn't that guy the head of something?"

"You mean Ben Bernanke?"  I asked.  She nodded.  "Well, that's not him -- but he was Fed Chairman," I replied, "Now Janet Yellen runs the show."  That drew a blank stare.  I guess Yellen hasn't been in charge long enough to have made it into the mainstream yet.  We can thus surmise it'll probably be a few more years before the kids are carrying around Janet Yellen lunchboxes, and every pre-teen fan-girl is sporting the stylish Janet Yellen "white bowl filled with sour grapes" haircut.

Anyway, that doesn't have much to do with anything, but it's interesting to consider that while we'll be cued in to everything in the minutes tomorrow, the average person couldn't care less; doesn't recognize any relevancy; and will simply keep sending in their mutual fund contributions every month -- probably regardless of what happens at the Fed.

But for traders, FOMC days are often a wild ride.  Accordingly, I usually put up at least one long-term chart on FOMC days, because it sometimes helps to step back from the ticks, for purposes of maintaining more level emotions in trading.  We'll start off with the long-term SPX daily chart.

The near-term SPX chart has continued developing a somewhat odd-looking wave structure.  Afterwards we'll take a look at INDU and COMPQ for a couple interesting options.

COMPQ made new highs already, and thus validated last month's preferred IT count for that index.  One can conceivably count the rally there as five complete waves, but it's far from traditional to do so.  In blue is the more "expected" way to count this structure.

INDU's chart calls an interesting confluence to attention, and brings a little "fair and balanced" charting for the bears in our audience:

The old key resistance zones on INDU are now the first important support zones.

In conclusion, the market is near a minor inflection point, which seems appropriate for a Fed day.  SPX is only 10 points from the all-time high, and the zone around previous swing highs is often good for at least some degree of resistance, so this is an area in which longs should stay alert.  The near-term charts have continued developing into less-than-predictable waveforms, so trading support and resistance here may be the best option at the moment.  Trade safe. 

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