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Friday, December 5, 2014

SPX and COMPQ: SPX Validates Preferred Count; Here Are the Next Key Levels


On Wednesday, SPX validated the preferred count and made a new all-time high, good for a quick 23 points of profit.  Bears are getting very restless with the seemingly-endless rally that's been underway since October.  There are real fundamental concerns underpinning this restlessness: Oil is down 38% since June, the yen has continued to collapse, the dollar has continued to rally, and the economy has continued to be sluggish.

The issue, of course, is that we can't time the market using fundamentals -- all we can really do with fundamentals is frustrate and head-trip ourselves.  Think about how well fundamentals have worked for timing since, say, 2009.  Or think about how well they've worked during this rally.  Are the fundamentals significantly different than they were a month ago?  Not really.

Meanwhile, as we've examined here since October, the charts have yet to signal a meaningful top.  The technical approach vs. fundamental approach is working just fine -- so, as always, everyone is advised to forget about whatever is making headlines in the current news cycle (barring a true black swan event, of course!).

I think it's important to ignore news, because news tends to bias our expectations.  We hear something bad and say, "Oh, man, no WAY the market can rally with that going on!"  And then when it rallies anyway, we start to feel like we're obviously smarter than the market, since (we think) we know why it "shouldn't" be rallying.

And at that point, things get dangerous for us as traders -- because we become emotionally attached to certain outcomes from the market.  We become emotionally invested in those outcomes, partially because the realization of our hypothesized outcome would (ultimately, eventually, one day!) prove that we were, indeed, smarter than the stupid market.  We were right all along!  Back pats all around, and another round of government cheese for everyone!  Because we're probably broke from being so darned smart that we fought the market tooth and nail the entire time it was going against us.

So forget about the news.  To some degree, forget about the fundamentals, too.  Let the charts tell you when the world is finally getting wise -- because they will tell you.  Or they'll at least tell you that the possibility is there, if X and Y qualifiers are met.  Maybe you won't hit the exact turn perfectly to the penny.  So what?  What's 20, 30, 40 points, relative to a major turn?

With that out of the way, let's look at the charts.  First up is the SPX 30-minute chart. The option of a complex fourth wave remains on the table, but will not be considered further unless/until the market sustains trade below 2066.  The alternate count shown here is for yesterday's high to have marked wave (v) of an ending diagonal (shown as black "alt: (5)), and this is another reason for longs to be cautious below 2066.



Next is the 5-minute SPX chart.  Bear options begin to open up below 2066:


Finally, there is a fly in the ointment right now, and that's COMPQ.  COMPQ's decline appears to be impulsive, and unlike SPX and INDU, it has not made a new high since then.  This is one of the main reasons I'm continuing to give consideration to the possibility of a complex fourth wave in SPX, and also cannot eliminate the SPX alternate count from consideration.



In conclusion, trade below SPX 2066 does not guarantee a bearish resolution, but there is enough doubt across markets that such an occurrence would probably at least call for some near-term caution from bulls.  Conversely, as long as 2066 holds, bulls are golden for the time being.  Trade safe.

Wednesday, December 3, 2014

SPX, INDU, BKX: SPX Captures Targets, INDU Validates Preferred Count -- What Next?


Last update expected that the decline would prove to be corrective -- and by Tuesday, INDU had already made a new all-time-high, which validated the preferred count in that index.

SPX did not make a new all-time high, but did capture its preferred 2047-53 target zone, and subsequently generated a 19-point bounce.  No matter what happens from here, it's hard to complain about that outcome.

The question now is whether ALL OF wave (4) is complete.  Fourth waves are known for their complexity and unpredictability, so we have to stay alert to the possibility of a complex fourth.  This is best illustrated via INDU, as an immediate reversal lower from here would strongly suggest an expanded flat.  I'm going to keep the complex fourth as the alternate count for now, but this is a bit like saying, "I prefer the next roulette spin to land on black," since there's no law or rule that grants a simple fourth wave a serious edge over a more complex wave.

The upshot is that if there is another wave down immediately, then it will likely be a high-probability long play, because Monday/Tuesday's rally doesn't count well as a complete impulse just yet.


The main reason I'm preferring the roulette wheel to land on black for INDU is BKX.  BKX has overlapped its wave A low, and that means two things:

1.  It's probably an ABC decline.
2.  In the event it's not, then another wave down here could be very technically damaging.  Which doesn't really fit INDU's pattern for another wave down.  I suppose it's always possible for BKX to collapse as INDU is making new highs, but that seems rather unlikely.

I have to mention that because BKX has not yet overlapped the first wave in its current decline, there is still the potential for a marginal new low here -- it's just hard to see that happening with this current pattern.


And thus we come to SPX, which, as noted, captured its preferred target zone dead-center and rallied.  In fact, all I really had to do to complete this chart was move the c/(4) label about an eighth of an inch to the right (or 3.1750 mm, for our European readers)  Of course, accuracy of targets does not guarantee that the fourth wave thesis was correct, because I use a variety of tools to arrive at targets -- but it should at least have guaranteed a profit for nimble traders either way.

Due to the nature of fourth waves, and the lingering alternate count, I've noted the next potential targets in the event 2049 fails.


The main thing bothering me for equities at this juncture is that oil has fallen so far, so quickly.  This impacts some of the largest individual components of the major indices (such as Exxon and Chevron), and further impacts the banks who service those companies.  This can have a bit of a domino effect, and it remains to be seen if the price of oil will stabilize.  Interestingly, this could ultimately become one of the catalysts for the thesis I put forth in October that the current rally is a high-degree fifth wave, with a significant correction to follow.

Be that as it may, the charts still suggest we probably haven't seen an intermediate-term top just yet -- but they also suggest we may finally be getting close, at least in terms of price.  In a perfect world, I'd still like to see BKX, RUT, and NYA make new highs before it's all said and done, in order to complete fifth waves across the board.  In the meantime, in the event the market has more tricks up its sleeve, the first step for bears directly from here would be a breakdown at 2049 SPX.  Trade safe.

Monday, December 1, 2014

SPX, RUT, INDU: Bears Want to Know if We're There Yet, Bulls Want to Know if "Santa Rally" Will Appear in the Title


Let me start off by saying that I hope everyone had a good holiday weekend!  I apologize for the title's verbosity, but I was required by the Stock Market Writers Guild to put the term "Santa Rally" into the first title of a December article.  I don't pay those annual Guild dues for nothing!

Last update again called attention to the 2075 target from October, and SPX finally reached that price point... and reversed.  Bears want to know if this is it, so let's take a look at the evidence.  We'll start with a long-term daily chart of SPX:

 
I know this isn't what bears want to hear, but RSI history suggests this probably isn't the final top -- however, some backing and filling from this zone would be quite reasonable.

On the 30-minute SPX chart, I've adjusted the speculative wave count again.  I realize that I was previously looking for a top in the 2075 zone, and it appears we'll indeed get one -- but after studying all the available evidence (not shown, read: 50,000 other charts), I presently have some doubts as to 2075 being THE top.  That could always change as the structure develops, but a fourth wave looks like the more likely culprit at the moment.


Next up is a look at RUT, which probably still needs a new high to be complete.  This could suggest the fabled Santa Rally, which (and try to follow along here) the market has had every single year, except for the years it hasn't.


Next is INDU's daily chart, which I annotated so many hours ago that I no longer have any idea what it says.  Let's upload it and find out..! 

Awesome, it looks like it agrees with these other charts.


INDU's 5-minute chart notes a couple potential near-term targets (continued, next page):

Wednesday, November 26, 2014

Happy Thanksgiving


I will not be publishing an update for Wednesday (and probably not for Friday either) in order to enjoy the Thanksgiving holiday with my family. 

Happy Thanksgiving to all my readers!

Monday, November 24, 2014

SPX, BKX, IBM, and GOLD: Create Your Own Title Day!


Today is the much-anticipated Create Your Own Title Day! during which readers have the chance to create their own succinct yet attention-grabbing article title, since I'm drawing nothing but blanks.  Good luck!

No material change since Friday's update, despite hours of staring at charts and gnawing on Twizzlers.  Friday's wave (iii) target was 2070-2075, and SPX hit 2071.46 and reversed by 15 points.  Much as I dislike this market, it has been capturing and reacting to target zones for weeks.  We probably have to presume this is wave (iv) until proven otherwise, but the chart below talks about the zone where bulls might start to get cautious, which equates to roughly 2053:




There are a few markets that would really look better with new highs:  RUT is one such market (not shown), NYA is another and has gotten very close (also not shown), and BKX is another (shown below).

Perhaps ironically, at this point I think bears want to see those highs reached sooner rather than later.  I don't think bears want to see a deep correction this late in the game, because that would imply the rally to this point was only a massive first wave, with a huge third wave rally to follow.  That's not my preferred count, as I noted previously when I wrote:  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.  

Anyway, I accidentally clicked into the wrong chart-book as I was working last night, and ended up in a chart-book from 2012-2013.  This was interesting (note the bottom annotation from 1/8/13).  The BKX chart below hasn't been updated since 2013, so I brought it into the present since it's relevant to the above discussion.



Another interesting chart I stumbled across was IBM.  I first began leaning intermediate bearish on IBM back in September 2012.  I later published a couple updates on it in 2013, reaffirming my bearish stance, but it's been such a slow grind for so long that there was nothing terribly interesting to add after those updates.  I'm bringing it forward now because it's a great example of extended sideways/down topping action, and there are a few things traders can learn from this chart:



Finally, at the request of a reader, I'm going to update a chart that I haven't updated in a year and a half:  Gold.  I haven't updated this chart because there hasn't really been any need to.  Gold did finally capture my target from April 2013, so I guess it's worth updating in honor of that fact.  I added the green channel and some new notes:



In conclusion (for SPX) bulls will want to be cautious in the event of a sustained whipsaw at the red trend line as noted on the first chart.  And, as a bonus for readers who read the article (as opposed to just looking at the charts):  I actually think 2049-52 is probably the key support zone for SPX right now.  Markets sometimes get whippy near important support/resistance and see-saw around it to drive everyone batty, so we'll see how it plays.  Beyond that, bears should probably keep their fingers crossed that the rally continues more or less as it has until BKX, RUT, and NYA make new highs.  Trade safe.

Friday, November 21, 2014

SPX Update, and How the Market is Similar to a Hurricane

If you're a fundamental bull, you can skip the first few paragraphs, which are written primarily for fundamental bears.  I've noted below in caps where fundamental bulls should pick up again.

I think bears face a psychological challenge that bulls do not.  Bears tend to see what's wrong with the world -- and this can sometimes lead to a sort of righteous anger over perceived wrongdoing by the Powers That Be.  The problem is, while this anger might, in some cases, be completely justified, that kind of emotion just doesn't help a trader.

I think bears need to try and unplug from the bear emotions as best they can.  I've gone through a long arc as a trader, so I've been searching my own experiences for ways to help them do that.  Basically, for me, I started as a fundamental bull (back in the 90's).  At some point in the year 2000, I started waking up to some of the colder realities, and by 2001, I had become a fundamental bear.  At one point, I had a sort of righteous anger, too.  But over the years, I came to realize that emotion was hurting me as a trader, and eventually I unplugged from it.  I'm a fundamental bear, but that's not what I trade.  I try to think and trade like a bull when conditions dictate.

I realize it may be an uphill battle to convince my readers to put their emotions aside, because emotion sells.  Some subscription services even seem to encourage negative emotions, packaging fundamental bearishness with an almost-religious zeal.  I really feel this is hurting people more than it's helping.  It's one thing to be aware of what's going on; but it's entirely another to get emotional about, and/or pass judgment upon, the market.  I've written before about how there is no such thing as market morality.  In other words:  The market does what it does, there is no such thing as what it "should" or "should not" do.

Whatever the market does is what it should do.  What we think it should do is, in actuality, only right when it's right.

Think of it this way:  while the people behind the scenes may or may not be immoral, the market itself is never immoral -- it is amoral.  It's like a computer:  garbage in, garbage out.

As a human, sure: get emotional if you like, and take action about the injustices you feel strongly about:  Elect new leaders, seek to educate your friends, take whatever actions your conscience dictates.  But as a trader, the only goal is to try and figure out what the market is doing and play accordingly.  Removing judgment about what it "should" do helps one do that.  The market itself doesn't understand right or wrong, after all.  It's not a conscious entity that can be held accountable for its actions, it's more like a force of nature.

And if a hurricane is barreling down upon you, it does no good to stand on the beach and scream at the heavens that: "It's just not right that this hurricane will destroy so many homes!  This hurricane should die down soon, that would be the right thing for it to do!"  If you attempt this tactic, most likely you'll become another casualty of the hurricane.  If you think the hurricane is senseless, how much more senseless are your actions in the face of it?

If you think the market is senseless, how much more senseless to fight it?  Especially with judgments of what is "should" or "should not" do?  The market will do whatever it does.  We can either choose to try and profit from that, or we can stand on the beach screaming how "It just ain't right!" until we're swept out to sea by storm surge.

FUNDAMENTAL BULLS START READING HERE:

Everything is great!  And getting better all the time!  Look on the bright side: the glass isn't half empty, it's completely empty!  And that means we can fill it up with something great.  Like lemonade that we made from the lemons life handed us!  That would be just swell!  The central banks sure are wonderful, aren't they?  They're really showing us that there's absolutely nothing to worry about, which is why they're continuing all sorts of radical and unprecedented action right now.

Speaking of, I think it's interesting how we're seeing a massive coordinated effort by the world's central banks at the moment.  What's strangely "coincidental" about all the coordinated CB activity that keeps making headlines, almost daily now, is how I noted, back in October, that the October 2014 decline felt (to me) like the November 2011 decline. And of course, I noted shortly thereafter that the subsequent (current) rally also felt like the rally out of the November 2011 bottom.

I think this is extremely interesting because it now appears that November 2011 was the last time we saw this level of coordinated CB activity. I actually find this encouraging, because it tells me that the CB's are leaving some kind of tell on the charts. I haven't been able to consciously identify exactly what that tell was yet, but I know it has to be there, because I made my observations about the feel of the market well before all the central banks made their intentions public -- so it's apparent that I was picking up on something subconsciously.

Last update noted that the market appeared to be reaching an intermediate inflection zone.  The jury is still out on the intermediate term:


Near-term, futures are indicating that bears get the hose again (putting the lotion on their skin would probably not have prevented this, despite Buffalo Bill's claims to the contrary).





I'd also like to republish a chart that I published on November 3, because this rally could simply keep grinding higher against all apparent odds.  In my opinion, quick stabs continue to be the only attempts bears should make against a move like this, since counter-trend traders can very easily end up stranded in this type of market.  INDU chart not shown, but I have one still-viable count that targets 18,500 +/- for the current wave, so the potential for a move similar to the one below remains alive.



In conclusion, we have an intermediate inflection zone, but still have nothing in the way of a topping pattern, and the world's central banks seem to be committed to pumping the world full of liquidity.  And really, what else is there to say?  Have a great weekend, and trade safe.


Wednesday, November 19, 2014

SPX, INDU Updates -- and Trader Psychology: How to Overcome "Fear of Missing Out"


At the end of this update, we're going to discuss a bit about trader psychology -- but first, the charts.  Last update maintained no material change in the near-term outlook from Friday, and that outlook ultimately proved to be correct:



In the bigger picture view, SPX is now in the vicinity of long-term resistance:



INDU is starting to look a bit tired, and needs to break out, and cleanly away, past the recent high to negate that look:



In conclusion, the rally has reached an inflection point in the form of long-term resistance.  Another small wave up isn't out of the question, and would, in fact, fit the micro pattern in SPX a bit better (though INDU is clearly questionable) -- however, on a larger basis, the risk/reward equation may finally be on the verge of tilting toward the bears.   Hopefully, bears have been patient enough to wait for this moment -- patience, after all, is a key virtue of successful trading.  Of course, patience doesn't always pay off -- after, all, not every inflection point will generate a reversal (or else they'd be called "reversal points"!).  Inflection points are simply zones where reversals become higher-probability.

However, despite the fact that patience doesn't always pay off, impatience does the reverse, and almost always loses capital.  Bears who have been impatient during this rally can probably vouch for the veracity of that statement -- and learn from it and consider it the cost of tuition.  The market can be a harsh teacher.  

In my experience, impatience is usually the result of anxiety.  Anxiety in trading usually results from fear of missing out on a move.  And fear of missing out is actually the result of an internal imbalance, because it is, at its root, a symptom of desperation.  We'll come back to this thought in a moment.

When I was a boy, my father used to tell me:  

Most people overestimate what they can accomplish in a year, but underestimate what they could accomplish in a decade. 

I believe this wisdom applies to trading in a very significant way.  If you can truly take the long view (and believe me, I know that's easier said than done!) on your trading, then you realize that over a decade there will be hundreds -- even thousands -- of potentially profitable moves.  And that knowledge makes it easier to accept that you're going to miss some of them.  At least, if you're a good trader, you'll miss some of them.  Bad traders will probably have a stake in every one of those moves (until they lose everything, anyway).

Why?

Because not every move is predictable.  Not every trade offers good risk/reward.  Not every market is tradeable.  Part of being a good trader is learning to come to terms with that, and being strong enough to say: "I'm not taking this trade, because it's garbage." 

This may be easier to truly drive home if we analogize it into terms other than trading.  Imagine you were a home-builder who built only custom homes.  As a home-builder, your livelihood doesn't depend simply on finding clients; it depends on finding qualified clients.  If you start building custom homes for every random person who walks in off the street and slaps $20 on the table, then you'll quickly find yourself bankrupt.  A key part of your success comes from your ability to properly qualify your clients -- so you have a lengthy set of criteria which determine whether you'll accept someone's business or not.  And you always determine this well-before you start building.

As a home-builder, you simply cannot afford to act purely out of anxiety over the future, because if you build houses for everyone who asks, then your capital will soon be entirely tied up.  And, of course, after those homes are completed, you'll find that many of your clients aren't paying off -- so you're not recouping your investment.  This could have been prevented by qualifying in advance and not building out of a sense of desperation.  Trading is no different.

Good traders will not have a stake in every move the market makes, because they are not entering random or long-shot trades based on anxiety and fear of missing out.  They are entering trades based on signals, patterns, risk/reward ratio, etc..  In other words, they are qualifying their trades in some meaningful way, just as a home-builder must qualify his clients.  And, ultimately, for the exact same reasons.

So, to go back to our talk of decades:  There are thousands of profitable moves coming.  Some of them will be tradeable; some of them will not.  Put analogically:  There are thousands of people lining up to buy one of your custom homes.  Some of them can afford your homes, some of them cannot.

Qualify them before you invest even one cent of your precious capital.

Dump the "fear of missing out," which stems from anxiety and desperation.  It's completely counter-productive and -- given the sheer unimaginable scope of pending future opportunity -- it's unrealistic anyway.  Trade safe.