SPX and INDU: Upside Targets Reached; Is it Time to Short Yet?

Since January 14, I've been talking about a complex expanded flat, which was expected to produce a confusing "double-whipsaw" -- first, at the lows, then later, at the highs.  After developing a very unusual basing pattern, SPX finally launched into a stronger rally, and yesterday it reached its first upside target of 2064+. 

The pattern at the lows is very difficult to reconcile cleanly, which is going to make it a little challenging to predict the price point of the exact top.  And that's probably the way it needs to be, since expanded flats are not supposed to be so predictable that you're able to call them a week earlier, and two major turns in advance.

I do have a few inflection zones we can watch for reversals, and I'll get to those momentarily.  First, let's take a look at INDU's chart.  INDU has not yet broken its previous swing high, which it should normally do under the typical expectations of the current pattern.

Because of the odd nature of the beginning of this rally, the blue path is more of a guideline than a road map (unless I just happen to have counted that early mess flawlessly -- which is probably unlikely).

Let's also quickly revisit Tuesday's explanatory INDU chart.  I haven't updated any of the annotations since then -- this is more for the benefit of readers who missed it the first time around:

The fact that INDU hasn't yet made a new high leads me to suspect that SPX probably has further upside remaining.  Additionally, hourly RSI confirmed the 2064 high in SPX, and more often than not, that means we'll need at least one divergent high (price higher, RSI lower) before we see a more significant top.

Finally, the SPX 30-minute chart highlights the upside inflection zones.  These currently appear to be the most probable zones where the expected downside reversal could begin.  In a perfect world, we'll also see a downward impulse wave form as a confirmational clue.

In conclusion, there's been no material change to the picture; in fact, everything that's happened so far was expected to happen.  Keep in mind that this is a c-wave rally, and the goal of c-wave rallies is to convince everyone that the trend has changed back to up.  This means it may grind higher for a few sessions in order to help flip the sentiment of the majority back to bullish.  It may also try to make us doubt that it's ever going to reverse -- so prepare to feel confused and paralyzed at the top.  

I do have to mention that, technically, 2064 is all that was required from this pattern, so there is at least a slight chance that the pattern is complete.  Due to issues mentioned, that appears to be an underdog, but if we begin to see downward impulse waves, then we'll look more closely at that option.

And, taking a look at the other side of the trade, since nothing's perfect: In the event that SPX makes new all-time highs, then we'll have to start considering more bullish options, though the first option in that event would still be bearish (a b-wave could make a new all-time high, but would still revisit the lows -- and that would be the first default count in the event 2094 is broken).  New all-time highs continue to appear less probable. 

Ultimately, this is still expected to be a sucker rally, and therefore an excellent short opportunity.  Trade safe.

This Counter-trend Rally Should Be Short-Lived; Here's Why

On January 14, I outlined why I thought the decline would continue a bit lower before finding a bottom and launching into a strong counter-trend rally.  I continue to believe this rally will present the best short opportunity this market has seen in a long time.  Let's discuss why.

First off, let's establish whether this Elliott Wave stuff has any validity.  As my veteran readers know, I was long-term bullish on equities on the very first trading day of 2013.  By February 8, 2013, I'd calculated (and published) two long-term targets for the S&P 500: my first target was 1750 +/-; my second target was  2170 +/- .  I mention this not to toot my own horn, but so that newer readers understand that I am not a perma-bear.

(If you're new to Elliott Wave, it may help to visit my primer on the subject:  Understanding Elliott Wave Theory)

I've been employing Elliott Wave since the 90's, and I learned a long time ago: It only works to the degree that you can take your ego out of the picture.  The second you lose your objectivity, you'll begin to warp the charts into whatever you personally want to see, and you'll stop seeing what's really there.  And once you stop seeing what's truly there, you're no longer analyzing the market, you're simply projecting your own hopes or fears onto a price chart. 

Time and again, I've watched analysts succumb to bias, to the detriment of not only themselves, but of their readers/subscribers.  Thus I do my best to analyze and trade what I see, as opposed to trying to get the market to follow along with my personal agenda.  To me, the challenge lies mainly in determining what the wave structures actually are; and the fact is, sometimes they're incredibly hard to interpret.  At those times, any of us can make mistakes, so my analysis is far from perfect.

But I do try to keep it unbiased as much as humanly possible.

Back to the point: I remained long-term bullish for the majority of the past couple years, but more recently, on November 17, 2014, I published the following preferred count for the S&P 500 (SPX):

  
As we can see, Elliott Wave has performed pretty well, considering that projection was published more than two months ago.  I refined those projections in real-time, and remained bullish until the end of December.  Let's take a look at the updated chart, which features additional trend channels, and a whole bunch of clutter in the form of historical annotations.

We'll come back to SPX in a minute.  I'd like to jump over to the Dow Jones Industrial Average Ordinary Mediocre (INDU) first, because this chart is the chart that clued us in to rally potential back on January 14.

The most noteworthy change to this chart is that Friday's failure at 17262 suggests that the remaining intermediate options are bearish or more bearish.  It's a challenge to find an intermediate bull count in this chart, and that's very unusual for me to say.  Literally the only bull count I can see would be if wave (3)/C truncated severely and completed at Friday's low -- but that's unusual, and would almost qualify as a "failed" c-wave.  In other words, that would be the exception, not the rule.

There's little to add since the update of January 15, but I have included a black alternate count, which would see a smaller expanded flat than previously anticipated.  Basically, if you're a bear, you might want to watch for the first five-wave impulsive declines as sign of a turn, because C-wave rallies (current rally) can be fast and unforgiving of counter-trend (meaning counter-trend to the C-wave) trade attempts.  Ultimately, this rally itself is expected to be counter-trend to the higher degree waves, of course.

On the INDU chart below, I've added significant detail to outline my thinking.  The pattern currently underway is expected to be an expanded flat.  In a bearish expanded flat, the (b)-wave low exceeds the start of the (a) wave; and the (c) wave high then breaks the high of the (a)-wave before reversing again to head back below the (b) wave low.  It's the ultimate double-whipsaw, slaughtering traders who use prior highs and lows for their stops or entries.  What's interesting about the current wave is that there appears to be an expanded flat within the expanded flat (the middle blue a-b-c that makes up the (b) wave).  This is one of my favorite patterns to trade, because it's fairly high probability.

It's worth noting that bears and bulls alike should stay alert to the possibility of a running flat, which would see wave (2)/B stall just short of the blue b-wave high.  The odds go to the expanded flat based on percentages, and because the market likes to fool the majority, but a running flat is always possible and simply cannot be predicted or ruled out.  Thus, as (and if) we approach 17,850+, stay very alert if there are any signs of an early turn.

Finally, let's examine the 1-minute SPX chart.  It's worth mentioning that SPX has a slightly different wave structure than INDU, in that it did not make a new high when INDU did -- so it's possible that SPX is in a slightly different wave count.  As noted on the first INDU chart as "alt. 2," there is another possibility here, and that's the more bearish option that the prior decline is a first wave.

For the moment, anyway, we have to give significant respect to that possibility.  Note the classic TA target for the prior basing pattern also lines up with the second Bear: 2 target zone. 

In conclusion, there's limited clarity in the near-term wave structure from which to draw a high-confidence reversal target, though the pattern does at least suggest further upside for the moment.  Hopefully the near-term charts will clarify further in the next session or two.  In the meantime, we do have some pending near-term inflection points, where we should at least stay alert to developing turns.  If the rally can make it through those, then, at best, I think bulls are done when the expanded flat noted on INDU is complete.

And regardless of which near-term path we take, the intermediate picture still appears decidedly bearish for the moment.  Trade safe.

SPX and INDU Updates

Ran a little short on time today, so I'm going to let the charts do all the talking.  I actually outlined the options in detail, along with some signals, on the 5-minute SPX chart.

Let's start with the INDU chart, since it's less cluttered.  Blue expanded flat count is still on the table:

The SPX 1-minute chart from yesterday, with the addition of a subdividing black 1 and black 2.  That count looks like a reasonably viable option at present.

And the SPX 5-minute chart, which covers the options/signals/targets in detail.  The preferred count (expanded flat, shown on INDU) isn't discussed on this chart, as that count is covered on the other charts -- and do note that none of the bear options become an issue as long as 1988 holds. 

I covered the bear options here for the sake of being thorough.

In conclusion, there are a lot of options for the near-term, but the intermediate term still remains decidedly bearish.  I'd still love to see the previously-discussed expanded flat play out (see yesterday's update if you missed it).  Trade safe!

Quick Update: High Probabily Short Op

ES (E-mini S&P) revealed last night that the market remains extremely volatile at the moment... 

So far, INDU and SPX have found some support where they needed to -- but in the event this is not an expanded flat and the third wave lower has already begun, then support will continue failing spectacularly.  Although SPX and INDU could both support one more modest low and still preserve the flat potentials, things start to get iffy if that happens, so, ideally, near-term bulls want to see yesterday's lows hold.

Basically, don't get too attached to the flat if (and only if) the market can't find support here, because third wave declines can become relentless and nobody wants to miss that.

From an intermediate standpoint, due to the three-wave move into new lows in SPX, any bounce to 2065ish should be viewed as an incredible selling opportunity (not trading advice!).

INDU found support just north of 17262, thus technically the potential of a third wave RALLY stays on the table, however, that seems rather unlikely given the failure of the red 1/A low in SPX, and I'm not even showing it on the chart anymore.

In conclusion, in a perfect world, bears would like to see a rally toward 2064+, because that would be a high-probability short op.  Meanwhile, the intermediate outlook remains decidedly bearish no matter which path we take.  Beyond that, there's not much to add down here.  Trade safe.

INDU, SPX: A Potential Complexity

Today's update will be short and sweet.  There's been no material change to the intermediate outlook, but the market has potentially created a new wrinkle for the near-term picture.

Below is the INDU chart, which shows the possibility that the market is creating a very complex expanded flat.  Because of INDU's new high yesterday, we have to respect this potential:

(Typo: black alt. count should show "alt. C")

The SPX chart contains some additional detail.  Monday's targets were reached, both to the upside and to the downside.

Beyond that, there's nothing much to add to the picture at the present moment.  If there's anything to add on Thursday, I may post a brief update tomorrow.  Trade safe.

SPX and BKX: Has the Second Leg of the Major Correction Begun?

In Friday's update, we discussed that SPX and BKX had reached their upside inflection points, and that both indices were potentially completing 3-wave corrective ABC rallies.  In Friday's session, the market began to decline shortly after the opening bell, thereby validating that near-term interpretation.

As I've outlined all month, the preferred count continues to believe that this is most likely the prelude to a larger decline:

 
Meanwhile the pattern suggests a near-term rally is an option.  In the event such a rally materializes, it would present an opportunity for reasonably low-risk shorts (Note: this is not trading advice!  Consult your broker, your banker, your doctor, your lawyer, and your mother-in-law before making any investment decisions.  Side effects may include frustration, nail-biting, insomnia, and the sudden urge to check your cell phone repeatedly.).

The bull count isn't dead yet, but a rally to 2057 +/- would present risk of approximately 8 points vs. potential reward of 100+ points (big picture, see first chart).  The more immediately bearish count is that (2)/B completed already at 2053.

Side Note:  It's worth mentioning that this pattern played out to perfection overnight in the E-mini S&P futures -- so futures may have already "done the work" for the cash market.  In the event that the market declines directly and sustains trade beneath 2038, then we should probably assume that wave (3)/C is already underway to the downside targets noted on the chart below.

Again, the bull count isn't dead yet, but one additional concern bears face is the potential of a complex double-retrace rally, shown in broad strokes via the Philadelphia Bank Index (BKX). 

In conclusion, intermediate-term, unless and until SPX reclaims 2065, we probably have to favor the view that a decline has begun to 1950-60 -- and beyond.  Trade safe.

SPX, BKX: Bulls Keep Hope Alive

Part of the value in Elliott Wave comes from properly identifying the market's inflection points.  It's not always possible to predict what will follow an inflection point, but those points do alert us to the possibility of reversals and trend changes.  Last update expected at least a near-term rally, and warned:

In other words, until blue 4 and 5 have been realized (thereby completing an even larger five-wave decline and thus suggesting a trend change at an even higher degree of trend), bears should be cautious at current levels.  If SPX is going to bottom on an intermediate basis, it's likely that this is the price zone from which that would occur.  So, put another way: If you're a die-hard bull, then this is finally where you place your bets.

The Philadelphia Bank Index (BKX) has already captured my first intermediate target, and again, that suggests this probably isn't the best time for bears to get greedy.  As the old saying goes, "Bulls make money, bears make money, pigs get slaughtered."

It remains to be seen if this recent inflection point will represent the beginning of a higher-degree trending wave, or if this is merely a counter-trend rally.  Thus far, there are not enough smaller waves present in the pattern to call it a major trend (it is not yet a five-wave impulsive rally, but is only three waves thus far) -- but, as I've stated previously, I'm not closed to the bull case, so I'll try to be as objective as possible in identifying if the rally becomes impulsive.  An impulsive rally would suggest that there will be at least one additional, sizeable wave higher.

The SPX chart below shows the current three-wave structure of the rally:

The Philadelphia Bank Index has already reached its minimum retrace target:

The 5-minute chart suggests the first decline was impulsive, so we should probably expect at least one more wave down (please note that I forgot to attach this chart to the original morning publication of this update):

In conclusion, bulls did what they needed to at Wednesday's inflection point, and generated a solid reversal.  They are now in the same position bears were in just a few sessions ago, and it's reasonably clear what they'll need to accomplish heading forward.  Do keep in mind this also means the current zone is one area where bears could retake control.  Call me stubborn, but until the bulls prove their case via the near-term waves, I'm still slightly inclined to favor the bears heading forward.  Once again, though, I'm not unequivocally married to that view -- it's just that it seems like it's a slightly-better fit to the the big picture charts.  Trade safe.