SPX and INDU: Going Out on a Limb for the Long-Term

As I looked over the charts this weekend, the one theme that kept repeating is that the total market is rather odd.  Maybe it's just impatience, but after a while, I felt like jumping up and shouting, "I've seen enough!  Squire, lock this market away in the dungeon!"  Then I realized that I have no squire, no dungeon, and no authority to lock this market away -- so I guess I'm stuck with continuing to try and interpret it.  (But I think I finally have my Christmas wish-list figured out!)

Anyway, I've decided I'm going to go out on a limb in today's update.  Some weeks ago, I referenced the possibility that the market had not yet seen the higher-degree fourth wave, but was instead in the midst of a smaller fifth wave rally.  This will be easier to understand if seen on a chart, so let's start there -- the count I just referenced is shown as black "or 3/4/5."  I'll continue climbing out on the limb after this chart.

 
The limb I'm going out on makes that the long-term preferred count.  Part of the reason I've decided that is discussed on the chart below:

What I keep coming back to is that this rally is probably too strong to be a first wave.  Therefore, it's either a third wave or a fifth wave -- and, wouldn't you know it, there's one count that just happens to fit that character perfectly.  In fact, the black count interprets it as the fifth wave of a third wave; and to me, that seems to best fit the nature of this rally.

No material change to the near-term, except to note that Friday's bounce exceeded Thursday's high, and that means that in the event 2030 breaks now, the downside expectation has to be adjusted to match a potential ABC where wave C could equal wave A (see red annotation below). 

INDU:

And finally, BKX came close to making the new low I was anticipating here, but has thus far fallen short by two pennies:

In conclusion, this market remains challenging for anyone who's not a "just buy every dip!" bull.  It's overbought on a number of metrics, but has thus far only undergone a sideways-up phase in response.  As I stated weeks ago, this is not the type of market where one can make reversal calls with high-probability, so I'm continuing to abstain from even attempting to do so.

In the bigger picture, I suspect what we've been seeing is too strong to be only a first wave, and thus suspect we're currently unwinding ALL OF wave 5 in one relentless bear-crushing wave.  So far, anyway, there have been no clear signs that it's over yet.  And that doesn't worry me:  I suspect we'll have a reasonable sense in real-time if and when that starts happening.  Trade safe.

SPX, BKX, NYMO: Market Continues Unusual Behavior

How strong has this rally been?  Weirdly-strong, that's how strong.  Take a look at the McClellan Oscillator (NYMO).  Current behavior does not match the behavior over the prior 3 years of bull market:

But, at least we can't be terribly surprised, as we identified the unusual nature of this rally relatively early, and its strength was written on the charts weeks ago.  Back on October 29, I wrote:

...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... this rally has shown us that most anything's possible.  

And on October 31:

...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. 



To which I'll add:  Treating an extraordinary market like it's an ordinary market would be akin to encountering a dog that's the size of a house, then arbitrarily assuming that humongous dog will behave just like any other dog, and trying to engage it in a game of fetch.  Maybe it will play fetch... or maybe it will just eat you.  There's really no way to know in advance -- but, personally, I'd rather not feed my capital to the dogs on moves that have already warned in advance that the usual high-probability-type plays are not likely to work.  There are plenty of times throughout any given year that the market behaves in a perfectly reasonable fashion, all it takes is the patience to wait for them. 

Anyway, in the last update I published a preferred count target for INDU of 17535-50, and INDU bottomed at 17536.17, then went on to make new highs.  For SPX, I published the target of 2029-31, and SPX found support at 2031.95.  I speculated that there was a chance wave (2) might begin, but the support at the c-wave targets prevented that option from going beyond the speculative stage.

I'm somewhat conflicted over the charts at the moment, partially because yesterday SPX did reach my next published upside target zone (the rising red trend line), and encountered at least some resistance there.  Please note the annotation in blue near the middle-right side of the chart.  As I've been stating since October, I really don't want readers to get too focused on the wave labels, because this entire wave remains borderline "uncountable."

When I become conflicted on one market, I look at others.  And while doing so, BKX was one chart that jumped out at me last night:

SPX's near-term chart doesn't necessarily agree with BKX, though.  As noted, the bear count shown in gray should probably be viewed as the underdog, given the prior trend.

In conclusion, 2030 appears to be the first important level for bulls to hold.  To the upside, the rising red trend line remains the first important resistance zone.  Trade safe.

SPX and INDU: Preferred Target Capture Results in Small Impulsive Decline

On Tuesday, SPX finally captured the preferred target zone of 2035-42, and formed a small impulsive decline down from 2041.  This suggests there should be at least one more leg down in store.

If all of wave red (5) of blue (1) has completed, then we may finally see a bit deeper correction.  At present, it also remains possible that red (5) will subdivide, shown below in gray -- this seems modestly less likely, but cannot yet be ruled out.

On the near-term chart, the targets which can be drawn from the micro structure (so far) are noted:

INDU also shows an apparent impulsive decline:

There's also an outside shot that the rally has completed a larger 5th wave, and will correct much deeper than shown, however, as yet, we have nothing to draw from to support that potential.  The first step would be a larger impulsive decline -- so until that forms, we're only going to keep that option in the back of our heads.

In conclusion, at the very least, one more small leg down is expected.  Ideally, I'd like to see a trip toward the 2001-2010 zone, but the market reserves the right to create a subdividing fifth wave as noted.  Regarding the intermediate term, there are two options open:

1.  The market is completing wave (1) of a much larger upleg.  This would make any pending decline wave (2) down, and lead to a strong rally in wave (3).
2.  The market is completing a fifth wave at higher degree.  This would result in a much deeper correction.

The best we can do at this stage is watch for a larger impulsive decline as the first warning that option 2 may be in play.  If that occurs, then we can determine odds on whether the market is embarking on something more than a second wave correction.  Trade safe.

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.