SPX and INDU: Why There's No Need to Front-Run Tops

"In theory, there's no difference between theory and practice.  But in practice, there is."  -- Yogi Berra

In today's update, we're going to focus on one difference between theory and practice.  As an analyst, my job is to talk about what I see as possible or likely.  As a trader, my job is to protect and grow my capital.  Often those two disciplines find harmony -- but sometimes they are very different things.

I'm going to reprint a few things I've written in the forum recently (with a few minor edits):

My main thought is that we are in uncharted market waters right now... i.e. -- there are no clear levels to act against. You are correct that we could just as easily run up another 100 points.

The last few important tops have announced themselves rather clearly in advance, in my opinion. I suspect the next one will as well. Until then, shorts (for me, anyway) continue to be spec trades and I'm quick to exit for a profit if I can (which has been most of the time, luckily!).

Basically, the way I view it is this: If you're a bear against a market like this, then simply treat every decline like an ABC until proven otherwise. Sure, you might miss the 5th wave down if that decline turns into a 5-wave impulse... but then you can get short again on the larger 2/B wave rally -- and you can then enter that trade with more conviction. Missing a fifth wave decline beats the heck out of taking continual losses all the way up, hoping to front-run that first impulsive decline, which, for all anyone knows, might not begin until 2170 SPX.

I don't know where this market will top right now. There are some inflection points on deck, but right now, we can't give those better than 50/50 odds. And I do know this: Since 2011, whenever I have had any doubt as to the wave count, the bulls have won every time. The tops, on the other hand, have been pretty clear. So, if that same thing holds true now, then "no clear top" means the bull run may well continue until such a time as there is a clear top. 

Along with those thoughts, I'd like to share a chart that underscores the above points:

This is one area where there's a difference between theory and practice.  In theory, we can try to anticipate exactly where an intermediate wave will end.  In practice, there is really no need to. (I assume it goes without saying that I'm focusing on intermediate tops here.  Short-term trades and scalps are approached differently.)

As we can see on the above chart, there's really no practical need to even attempt to front-run intermediate tops.  There's an old trader expression:  "They don't ring a bell at the top."  Of course, that's true (they actually use a buzzer), but in my experience, few tops occur without at least some some hints and signals that there's a decent possibility that a top is forming.  For example, all the decent tops of the entire year have led me to state publicly that I believed a top was forming, well-before the declines kicked into gear.  And a key accompanying point is:  All these tops have given me multiple opportunities to talk about them while they were forming -- so it wasn't like it happened overnight and took anyone by surprise.

So my recommendation (which is NOT trading advice, of course) is:  If you're a bear looking for an intermediate trade, then at least wait until there are some signs of a top.  Once some of the precursors start falling into place, then you can place your bets -- and possibly still lose money, because the precursors of a top do not, or course, guarantee a top.

Think of it this way:  If you want to catch fish, then you first go to a body of water where there are fish... then, if it looks promising once you get there, you cast your line in.  Maybe you'll catch some fish, maybe you won't.  But you don't try casting your line into random places, like into your bathtub, or into a tree, or into an Ethan Allen furniture store.  If you just randomly cast your line every single time you think of fish, you'll only end up with a lot of broken and/or lost equipment.  Yes, I know -- maybe there's a fish in that furniture store.  A huge fish!  Maybe even... oh my goodness... maybe even the new world record for Largest Fish Ever Caught in a Furniture Store!  Anything's possible!

But, still... it probably would be more productive to at least wait until there is a reasonable possibility of catching fish before casting one's line.  And in the case of intermediate tops, we can even take it one step further (I can't stop my brain now, it's still running with this analogy):  We can identify a possible "fish location" ahead of time ("X price level"), and then we can even scout the waters once we get there, because tops take time.  So, once the market starts to give off topping patterns and signals, it's the equivalent of visually confirming that there, indeed, are fish present in the water.  That still doesn't guarantee that we'll catch one, but the odds are a heckuva lot better than they would be casting our lines randomly.

From a practical standpoint, here's what it sounds like when I think there's a good chance there are fish in the water for bears (this is a real-life example, reprinted from September 22, 2014):

In conclusion, everything appears to be in place for bears to have a shot at taking over the market for a while (except for the all-important trend, of course).  Basically, bears have the precursors, and the market has effectively reached most of the intermediate upside target zones.  Near-term, Friday's decline appeared impulsive, so for the near-term at least, I'm expecting lower prices.  As the pattern develops, we'll begin to get a clearer picture as to whether a more significant turn has indeed occurred.

Notice there were multiple signals at that time, such as: completed five-wave rallies, upside target captures, and at least one impulsive decline.  No trend breaks yet, but still a good spot for bears to take a shot.

Anyway, I hope I've conveyed the gist of what I'm trying to convey here.  If you're a counter-trend trader, there's really no need to get too far ahead of the market.

And I hope that was of some value to readers, because I just realized I spent way too much time on it!  So I'm going to have to let the charts and annotations speak for themselves for the remainder of this article.

First, INDU's long-term weekly chart shows bears may be in "last stand" territory:

INDU's daily chart:

INDU's near-term chart:

And SPX's near-term chart, which shows that we've fallen less than a point shy of the preferred target zone of 2035-42, but we do have a trend line break.

In conclusion, we may be wrapping up five-waves of rally, but this market continues to remain less-than-clear in that regard.  SPX did break its red trend line, but closed right on the back-test, so we don't know if that break will stick or not.  I do have to note that the rally from Friday's low does appear impulsive, so a new high wouldn't surprise me at all.  Either way, if there's any sort of significant reversal lurking in the cards soon, then, as discussed, we'll likely receive ample warning.  Trade safe.

SPX, INDU: SPX Targets Reached, INDU Targets Exceeded

During yesterday's session, SPX reached its next target zone (2028-31), so we'll see if that generates anything by way of reaction.  So far during this rally, there have been minor reversals at the pivot zones and targets I've noted along the way, but there still has been nothing in the way of a clear impulsive decline for bears to take seriously.  I keep hearing bears talk about how they're short, and I cringe a bit when I hear this, because, since this rally started, there has been nothing in the way of a concrete signal to short this market for more than a near-term trade.

Maybe that will change after today's session, who knows.  But there are times it's a high-probability trade to short a market, and there are times to either go long or stand aside -- and it's important to respect the difference.  Personally, I haven't been the World's Greatest Bull during this rally, but I certainly haven't been anything approaching bearish during the majority of this run-up.

So, for awareness sake, I have illustrated one bull count in a bit more detail on the chart below:

Near-term, the next targets were hit, and the count has two interpretations.  There are potentially enough waves in place for a complete five-wave structure.

INDU reached, and exceeded, its next target:

INDU's near-term chart below.  In the event the rising wedge has any validity, a breakdown could lead INDU a couple hundred points lower.

In conclusion, there has still been nothing in the way of a clear impulsive decline to indicate that bears are gaining control.  Maybe today will be the session that changes that -- but until it happens, we have to continue to respect the trend.  Trade safe.

SPX, NYMO: NYMO Reaching Extremes

On Friday, I noted that 2020-26 SPX was a potential target for the present wave -- and on Monday, SPX hit 2024 and reversed to 2001.  It's not entirely cut-and-dried whether the decline was an ABC correction or not -- but one thing that is very clear is that the rally up from 2001 was impulsive, and that presents us with some near-term target zones.

The five-minute chart published on Monday proved helpful, by correctly identifying, and calling attention to, the red trend channel -- SPX has since traveled from the top to the exact bottom of that channel.  I've noted the current near-term targets on this chart:

I'd like to again call attention to the McClellan Oscillator (NYMO).  Last time I called attention to this indicator was a week ago, but at that time, I didn't feel the rally was ready to roll over and noted that I felt NYMO (at that moment) was helping to confirm that the rally was probably wrapping up its fourth and fifth waves.  As I also wrote in that update:

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.   

So, will this rally be the exception that breaks the rule here, too?  Nothing is foolproof, but in my experience, extremes in NYMO are among the most reliable signals out there, as demonstrated by this (nearly) six-year historical chart -- and NYMO is finally reaching an extreme:

So, while I still feel that wave counts are speculative at the moment, here's my best-guess as to where we are in the current wave -- which includes the lingering potential that all of (1) (or 5) completed at 2024.

I'm also going to republish a chart from roughly a year and nine months ago (February 8, 2013) because, well, how often do you get to say "no material change" on a chart this old?  My long-term target of 2170 +/- is essentially unchanged, although another formula I employed (back then) arrived at 2100 +/-.  (500 points ago, though, 2100 vs. 2170 seemed pretty irrelevant.)  Hopefully we'll be able to narrow those targets down in real-time, assuming the market approaches those zones.

Intermediate-term, I'm undecided at present as to exactly how we get there.  As of yet, the rally has given no significant signs of abating -- but it has reached an inflection zone, and inflection zones always bring the potential of a reversal.  For the moment, anyway, that's about all that can be known.  Trade safe.

SPX and INDU: Still a Spec Market

There's been no material change in the outlook, so today I'd like to discuss one of the shortcomings of Elliott Wave.  Yes, you heard that right.  I've said many times in the past that it's important to know the limitations of your trading system, so today we'll look at one of those limitations.

Everything in the physical world has limitations, and we can run into serious trouble if we ignore that.  Imagine, for example, that your car was a Ferrari -- and you loved your car for its quick acceleration, great handling, fast top speeds, etc.  But simply because your car does so many things so well does not make it limitless.  If you let your passion for your car override your common sense, you might start to think your Ferrari could do anything and everything you asked of it.  Thus you would be in for a rude awakening, and some very costly repairs, when you decided to drive your Ferrari in the local mud bog competition.

Trading systems are really no different, and every system has its own limitations.  And since we'd all like to avoid "costly repairs" as traders, we are always best off acknowledging those limitations -- and avoiding the mud bog competitions.

So, the first chart I'd like to share is a historical chart of the SPX from November 2011 through May of 2012.  The annotations explain why I'm sharing this particular chart:

(Please note the typo -- "fo" should be "for."  I have not started speaking slang.)

Please note I'm not saying this current rally will play out exactly like the chart above -- I'm simply pointing out that, in this particular instance and as of this exact moment, we simply don't know.  For that reason, I think everyone would be wise to keep that chart in mind heading forward.

Particularly keep it in mind as you look at the wave count below.  Could SPX be completing five waves up and soon due for a deeper correction?  Sure it could, that's absolutely a possibility.  But as I wrote last Wednesday:

The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.   

Next is a simple trend line chart of SPX:

INDU's simple trend line chart:

And INDU's daily chart:

In conclusion, there's nothing to add down here that I haven't already said half a dozen times in as many ways over the past couple weeks.  Essentially:  This is still a speculative market -- treat it accordingly.  Trade safe.

SPX Update: Obligatory Halloween-related Title Goes Here

Today, of course, is Halloween, which means I'm required by law to make some stupid obligatory Halloween-related market comments about bears getting tricks and bulls getting treats, or about how bulls put the "jack" in "jack-o'-lantern" or something similar -- but I'll do no such thing in this column.  Come and get me, Stupid Obligatory Seasonal Comment Police! 

With futures up approximately 20,000 points as of the time of this writing, if nothing else, we can't say that this market didn't foreshadow this possibility.  I ended Wednesday's update with the following:

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- but this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.  We've only had one clear impulsive decline in this whole rally (last Thursday), and that did indeed point the way to an ABC decline on Friday, though it fell short of its targets.  The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.

Also on Wednesday, I had noted 1995-2000 as a potential target for the current wave sub-wave, with the warning that if a fourth and fifth wave were in the cards, that would not be the final high for this move.  SPX did hit the 1995-2000 target, and that generated a massive 12-point reversal (I initially wrote "massive" with the intent of being sarcastic, but, come to think of it: during this rally, 12 points of decline actually is a massive reversal) prior to this morning's futures ramp (yes, this is still the same sentence).

We're going to look at just two charts today, because, frankly, given the unusual nature of this rally, pretty much every wave count out there should probably be treated as speculative at best.  This goes back to what I've spoken about many times before:  know and respect the limitations of every system, and know your limitations as a trader. 

First up is the long-term chart.  Wave IV seems to have completed in the expected price zone, but was a bit short in terms of time.  This does allow for the technical possibility that it was a smaller degree fourth wave than most of us were expecting, which means the rally has the option to make new highs, then terminate abruptly and unexpectedly, thus catching bulls and bears alike completely off-guard.  I've explained this potential in more detail on the chart.

The 30-minute chart shows horizontal support/resistance zones.

In conclusion, there are many times I can look at a chart and say, "Oh yeah, the market's headed here, then here."  And sure, it's possible that the rally is now in its final fifth wave at micro degree -- but as I noted previously, this move has not behaved in the usual fashion, which means this is not the type of wave where you can make reversal calls with high probability

Technical analysis is based on the idea that the market will perform in a similar fashion to the way it's performed in the past -- but when you encounter extraordinary moves, they perform almost according to their own rules, and thus do not lend themselves terribly well to anticipation.  Recognizing and acknowledging that, as I covered in Wednesday's update, has value in its own right.

Happy Halloween!  Trade (and keep your kids) safe.

SPX, INDU, COMPQ, NYMO: FOMC Day; Oh the Joy

Last update noted that SPX had likely completed an ending diagonal, thus hinting that a correction to 1946 would unfold.  But this rally again threw a bit of a curveball, and the expected ABC decline instead developed into a shallow sideways triangle, thus giving bears very little relief (we'll look at this on the chart in a moment).

This has been an unusual rally, with virtually nothing in the way of pull-backs.  This is the type of move that simply feeds on itself:  Those who stayed strongly bearish near the 1820 low are eventually forced to cover into strength, which gives more fuel to the rally, which then causes more shorts to cover into strength, which gives more fuel to the rally, etc.  There's probably even a handful of people who are buying the market.

I've heard a few bears talking about thin volume in this rally, but generally speaking, volume is a red herring for bullish moves.  Bull markets don't need volume -- and I've watched many a bear burned with volume analysis during bull moves.  Bull markets only need more buyers than sellers; they don't need massive volume "confirming" the rallies.  Volume is always interesting to observe, but, in my experience, it's pretty useless as a predictive tool during these types of moves, and paying too much attention to it can actually do damage to a trader.

Let's take a look at the charts, starting with SPX 5-minute.  On the chart below, we can see how the last correction was a bear-burner, especially to any bears who were late to the party.

I should add that the chart notes 1995-2000 as a potential completion point for the current wave -- do note that this would not necessarily for the entire rally if gray iv and v are in play.

NYMO is getting into overbought territory, which usually means a rally wave is nearing completion.  This jives with the SPX count discussed on the 5-minute chart above.  Do note that "overbought" can always become "more overbought," so this indicator doesn't necessarily promise an immediate reversal, but it does help confirm my suspicion that the rally is now wrapping up its 4th and 5th waves.

COMPQ's chart clearly shows that this rally has been the most vicious rally in the entire 4 year history of this chart.

I still have nothing new to add since 10/22, when I noted that the anticipated ABC decline had effectively been confirmed as an ABC (ABC's are corrective waves, and corrective waves are always fully retraced to their point of origin).  Beyond that, I still have no new high-probability intermediate targets.

INDU also shows the viciousness of this rally, via the monthly candle -- which also shows just how rare these types of rallies are over decades of market history.

Today is, of course, the second day of a two-day FOMC meeting.  The Fed is expected to waffle-on about all the usual stuff that the Fed waffles on about, and the market is expected to react in its usual wild and whippy fashion.  My conclusion is that this market stinks for both bulls and bears.  If you're a bear, you've been beaten repeatedly by this rally.  If you're a bull, you were beaten repeatedly by the decline.

Personally, while I somewhat regret missing most of the rally, I'm thankful that I shifted into an essentially neutral stance immediately after SPX 1820, and warned readers that the decline could be complete and to stay nimble -- because that beats the heck out of the alternative of being stubbornly bearish the whole way up.

My conclusion, trade-wise at this moment, is that with a typical rally, I might think it was nearing completion -- but this rally has already clearly shown it's not a "typical" rally; therefore, we would be foolish to ignore that and attempt to treat it as we would a typical wave.  We've only had one clear impulsive decline in this whole rally (last Thursday), and that did indeed point the way to an ABC decline on Friday, though it fell short of its targets.  The next impulsive decline will thus be the first confirmative signal that helps point the way toward an end to the rally; until then, this rally has already shown us that most anything's possible.  Trade safe.

SPX Update, and a Few Notes about Elliott Wave

Before we look at the charts, I'd like to talk a little bit about using Elliott Wave in trading.  There are some key points that new traders sometimes miss -- but I've been employing Elliott Wave for so long that, at times, I forget that fact.

As I see it, there are three main values to Elliott Wave:

1.  It allows us to identify inflection points in advance.
2.  It often allows us to identify trend changes -- sometimes even before the trend actually breaks.
3.  It allows us to find high-probability targets, including unconventional ones.


Let me draw a recent example, using the "three main values" outlined above: 

Months ago, Elliott Wave allowed me to identify the (then pending) inflection point near 1920 SPX (value #1).  We reached that inflection point, and the market reversed.  The impulsive decline from the high then allowed me to confirm that the trend was changing before the trend lines broke, and that the inflection point had likely generated a meaningful reversal (value #2).  I then used various formulas to arrive at a downside target of 1824-1833 SPX (value #3), which was subsequently captured.  I further used Elliott Wave to identify that the downside target represented another inflection point, one which could mark the bottom of a C-wave, thus ending the decline (value #1 again).

The trouble I see traders getting into, over and over again, is by not acknowledging that there are limitations to any and every system, including Elliott Wave.  Limitations must be respected.  One does not make money by pursuing fantasies, but by negotiating reality.

The fantasy is that we can somehow know every single move the market will make in advance.  The reality is that we cannot.

If we pursue the fantasy, then we'll take too many high-risk entries, we'll watch winning trades turn into losers, we'll hold on to losing trades for too long, and we'll just generally manage our risk poorly.  Once we accept reality, then we can trade accordingly -- which equates to trading more effectively and more profitably. 

So, let's also discuss a recent example of the limitations, and how those limitations must be acknowledged and respected:  When SPX bottomed at 1820, I immediately began mentioning that a potential ABC corrective decline could have completed in its entirety (an ABC would mean that new highs were on deck).  In the very first update I published after 1820 was hit, I wrote:

"At this point, wave (4) and (5) are suggested by the momentum, but not guaranteed by the pattern, as the very first five-wave decline after a bull market simply cannot be anticipated.  The preferred count got us to the 1824-33 target, after hitting the turn off the ATH perfectly.  Now it's time for at least some degree of humility."

I published no new official downside targets, but I did discuss how a fourth and fifth wave might develop.  Obviously, what I do as a trader is not the same as what I do as an analyst.  The primary difference between the two is that, while every move can be analyzed to some degree, not every move can or should be traded aggressively.  In other words, as an analyst, my job is to tell you what I'm seeing (or not seeing).  As a trader, my job is to make money (i.e.- protect and grow my capital).  And that means recognizing when a move is probable vs. when a move is speculative, and trading and protecting myself accordingly.

An example of a probable move is a wave that's expected to be wave C or 3 -- that's a "confirmed" impulsive trend wave, which is expected to follow the impulsive wave A or 1.  That type of move might be traded aggressively.

However, after that's complete, then we encounter limitations: Trading waves 4 and 5 of a move that is labeled C/3 should be considered speculative, since the very existence of the "C" label means that waves 4 and 5 are unknown variables. 


I'll come back to all this in another update in the near future, because I haven't shared nearly all my thoughts here yet.  But for now, I'll just leave you with one final thought to consider (which I'll also get back to in more detail in the future):  Not every good trade is profitable, and not every profitable trade is good.

Last update, I discussed that the market appeared to suggest that at least a minor top was near.  I published a downside target, and while we did get another small wave down as I anticipated, it failed the expectations of a standard c-wave, and fell a couple points shy of my first target.

As outlined Friday, the bigger picture signals still suggest a downward turn is near, though the degree of said turn is presently unknown.  In that regard, there's little to add to Friday's update, so please refer back to it if you missed it.

Shortly after Friday's close, I published the following 1-minute chart in my forum, and based on the futures action this morning, it appears this near-term count from Friday was/is correct.  The minimum downside expectation for this pattern would (normally) be 1946 +/-. 

A deeper retrace than 1946 seems more probable, but -- talk about front running! -- we basically ended Friday at the highs, so there's literally nothing in the way of a turn or downward wave structure to draw from yet.

In conclusion, the market is still within a turn zone, however, the degree of said turn is currently unknown.  I should be able to draw more conclusive targets as the wave structure develops.  Trade safe.