SPX, NYA, INDU: Market Doing Its Best to "Sell" the Bull Case

Last update suggested there was "more downside to come," and yesterday indeed saw a second leg down to new lows.  The near-term picture gets a little tricky again now, because, as we'll see on the charts, the market has left itself the option for this to be a completed corrective decline.  That said, I'm not inclined to favor that -- although I can't give readers a technical reason for that suspicion.  Thus I've outlined the bull and bear options on the upcoming charts, and the levels that reveal which is correct.

Let's start with NYA, because it really went out of its way to build itself into the shape of the exact bull pattern that I warned about on Wednesday (an ending diagonal c-wave).  The option for a diagonal was revealed by the technical price structure that was already visible as of Tuesday's close, so the fact that NYA went on to seemingly-complete that exact pattern does give me pause for the bear case, but I'm still favoring it unless the market can sustain a breakout.

Essentially, even though the market revealed its "diagonal intentions" on Tuesday, then went on to complete that pattern on Wednesday and Thursday, I'm still modestly inclined to believe that pattern is a fake.  So: either I'm being stubborn, or my subconscious is picking up on something in the pattern that's tipping the market's hand toward the bears (even though I can't quite put my finger on it)... we'll know soon enough!

Next is INDU -- same deal here:

Finally, SPX:

In conclusion, INDU's decline is impulsive, although NYA shows how that impulsive decline could be a bullish C-wave.  SPX is trying to look like a completed ABC decline.  Everything in the pattern is designed to make bulls more bullish and to scare away bears -- but, for whatever reason, I'm not buying it.  Maybe I'm wrong, and we'll rally straight on to new highs; this is a very tricky pattern, because it does "look" bullish on the surface -- so, for that reason, I'd suggest only low-risk entries for bears who are inclined to trade against it.  Trading, at its essence, boils down to calculated risks, and not all of them will win; thus it's important to consider the other side of the trade, and to keep losses manageable.  Trade safe. 

SPX, NYA, INDU: More Downside to Come?

Monday and Tuesday made for interesting sessions, inasmuch as we finally had a truly clean, complete-looking five wave rally into Friday's close, and Monday and Tuesday saw the rally stall and reverse.  A week ago, I wrote that we were finally into price territory where I was willing to commit to the assumption that "the top is closer than the bottom," and I'm sticking to that call until such time as the market suggests otherwise.

Incidentally, a week prior to that (on March 23), I warned that the rally was likely running out of steam and that the market was entering chop zone territory.  SPX had closed at 2049.80 when I wrote that warning... and here we are two full weeks later with price only having moved a net of -4 points (yesterday closed at 2045.17), so I believe we can put that call in the "plus column."

So what next?

Well, combined with the warning indicators I've discussed over the past couple weeks, we do finally have a potentially-complete five-wave rally structure (as noted Monday) -- and, perhaps more importantly, we have a downward reversal after the apparent fifth wave completed.  While we don't yet have a large impulsive decline, the wave structure does suggest that the downward wave is incomplete, so a larger decline wave could yet materialize. 

Overall, we have mounting evidence that the trend may finally be turning back toward the bears' favor.

Let's take a look at the charts, starting with SPX.  Presuming we're dealing with at least an ABC down, then 2000-2010 is reasonable.  This next statement is a little ahead of the near-term structure (which hasn't confirmed a larger impulsive decline), but if we just saw the end of the preferred intermediate count's C-wave, then the next target is south of 1810.

Next is INDU, which, unlike SPX, has broken both its uptrend lines:

Finally, NYA is the one potential fly in the ointment for bears, in that it did not provide a clear top.  The top in NYA is muddy because it could be a b-wave -- but if it is, then it is either building an ending diagonal for the C-wave (we'd know this because it would bottom directly), or gearing up for a significant C-wave decline.  I'm more inclined to think it's the latter IF this is a c-wave decline (as opposed to the start of a new impulsive decline).

The short version of all that:  If NYA fails to bottom fairly directly, then even the bullish count suggests a decent decline before it's all said and done.

In conclusion, while we don't yet have confirmation of a larger turn, the evidence continues mounting in favor of the bear case.  Barring an almost-immediate reversal (to complete a bullish diagonal in NYA), we're likely to head lower over the coming sessions.  Trade safe.

SPX, INDU Updates: A Bit of Elliott Wave Edumacashun

Last update covered the near-term key bearish overlaps in considerable detail -- but on Friday, neither SPX nor INDU overlapped their key levels, which kept the uptrend intact for the time being.  After re-reading Friday's update, I was a little bugged with myself for not explaining WHY I had those levels as key overlaps (and thus why I had the alternate count as a b-wave into the high) because it probably would have been helpful to readers who are not well-versed in Elliott Wave.

I sometimes forget to explain information that I take for granted -- and odds are good that I'll do that again at some point -- so I'm going to provide a few educational paragraphs now so that readers have the benefit of this knowledge for the NEXT time I forget to detail a 1-4 overlap.

Let's go back to Friday's INDU chart for educational purposes (first chart, directly below).  On this chart, we can see that, leading into the recent highs, I have red 1 and red 2 labeled... but no red 3, 4, and 5.  We can also see the black "alt: b" at the peak.  There are no red 3, 4, and 5 because I didn't see those subdivisions present in the wave structure -- so I presumed that one of the following must be true:

1.  I had missed red 4, and it was hidden in the wave structure;
2.  Or we only had 3-waves into the high -- no 4th or 5th wave would indicate a b-wave high (b-waves are 3 wave moves), hence the "alt: b."
3.  Or red 4 was still unfolding, with red 5 to come.

Options 2 and 3 were the reason I focused on the key overlaps as the "first step for bears" and suggested readers watch those levels closely:  A key overlap at the red 1 peak would have eliminated option 3 above and thus left only options 1 and 2 in play.  This is such a basic tenet of Elliott Wave (wave 4 cannot overlap the price territory of wave 1) that I often fail to even mention it, but I should probably have discussed option 3 in more detail, because knowledge of that rule provided a low-risk long entry for anyone who was willing to treat the opening decline as part of a fourth wave.

(Incidentally, the above options detail part of the value of Elliott Wave: It allows you to build logic-driven market models -- by identifying the key levels that act as lines of demarcation between bull and bear waves, you can develop "if/then" statements for a move.)

Now let's take a look at the updated chart:

In my opinion, bears should probably be glad that the wave made a new high, because if Friday HAD overlapped the key levels, then we'd have been faced with the specter of a b-wave into the high (b-wave highs/lows are never the final wave in a move, and indicate that said high/low will be broken in the future).

SPX also held its key overlap:

Interestingly, NYA did NOT hold its key overlap, but it also did not make a new high.  There are thus several options on the table for NYA, including the possibility of an ending diagonal -- but it also leaves open the potential for a bunch of garbage moves over the coming sessions, so I'm going to give it another session or two to allow me to eliminate some of the many options there.

In conclusion, SPX and INDU both held their key overlaps, so bears are still in limbo.  It now appears there are finally enough waves in place for a complete rally, but there's nothing yet to rule out options such as a fifth wave extension, etc., so "enough waves" does not necessarily guarantee an immediate end to a move.  From a near-term perspective, we still have no impulsive declines, or anything indicating a concrete turn.  Trade safe.

SPX, INDU, NYA: Bears Could End the Rally Here -- but Bulls Still Have an Out

In the last update, I wrote that I was finally willing to make the assumption that "the top is closer than the bottom," followed by a bunch of caveats.  Today we're going to look at a few signals that might suggest the trend has shifted to down, at least for the near-term, and possibly for the bigger picture.  But first, I've got some good news and some bad news for bulls.

The good news is that the economy added 215,000 jobs in March (subject to revision -- all government statistics are allowed the slight margin of error of plus or minus 100%).  This means the unemployment rate is only 5%!  Lots of new McDonald's(es) ("McDonaldi"? What's the plural?) are hiring fry cooks, and any skilled laborers who need cash registers that feature ACTUAL PICTURES OF THE ITEM BEING ORDERED because they can't read or perform basic math, due to the limitations of only having a total of 10 fingers.  The other option for people who are bad at math is to go to work for the Bureau of Labor Statistics -- but word is they're overstaffed, having just hired 215,000 new workers in March.  

Anyway, now the bad news is:  The unemployment rate is only 5%!  This type of news used to be good, way back in the days when fundamentals had some impact on liquidity (a good economy might lead to excess liquidity, which was good for the market), but these days, good news is discouraging to a market that's wholly dependent on the Federal Reserve to fund every rally.

With that out of the way, let's get to the charts.

Last week, I very-slightly favored the idea that the market needed one more small wave up to complete a five-wave rally, and thus complete wave C of a large ABC expanded flat off the 1810 print low.  Since then, we did get another minor new high, and the market reversed as if on cue.  The chart below shows the first level for bears to claim, and the first expected targets in that event:

 

NYA discusses the option that the pending decline could be part of an expanded flat:

 Finally, INDU discusses that it may be time to shift bias to near-term bearish:

In conclusion, there are finally enough waves in place for a complete rally -- so, presuming that the red dashed line on the above charts is overlapped, we have to consider the possibility that the entire rally is over.  Bulls have left themselves an out in the form of an expanded flat, which would make a lovely head-trip for everyone, since it would lead to a perceived breakdown, followed by a whipsaw and a new high (a perceived breakOUT) -- but that new high could very well mark the "true" end of (5), and thus reverse lower again.

In either case, since there are enough waves for a complete rally, bulls will want to be cautious heading forward, and may want to adopt the attitude that I recommended for bears until recently (i.e. -- "watch and wait, until there's an impulsive turn").  While the onus to "prove" a reversal has been on the bears since the rally bottomed at 1810, things may finally be shifting back into their favor -- IF they can sustain a breakdown at the red lines noted above.  Trade safe. 

SPX, INDU, NYA: Still Pointed Higher, but...

Last update's ever-so-slightly preferred count expected that the bottom was in for wave (4), and that a new high would be forthcoming in wave (5).  On Tuesday, Janet Yellen came out and said that the Fed is getting skittish about raising rates aggressively, and basically took the idea of an April rate hike off the table.  This leaves investors looking toward June, but of course, June is probably too close to the election for anyone to actually expect the Fed to raise rates then -- so, for all intents and purposes, Yellen just indicated there won't be any rate hikes until the end of 2016 at the absolute earliest.  And even then, THAT rate hike would only happen if everything looks super-incredibly-peachy, or if a Republican is elected, whichever comes first.

The market reacted as it usually does to any official proclamations that the Fed's Spiking of the Proverbial Punch Bowl will continue:  Prices rallied sharply, as shorts tripped all over each other trying to get out of the way of the inevitable "Rally Caused by Shorts Tripping All Over Each Other while Trying to Get Out of Their Own Way." (Unlike longs, shorts tend to be their own worst enemy.)

And thus it appears the ever-so-slightly preferred near-term count is in the process of coming to pass, which is good, because it means I pointed my readers in the right direction, and that's always the primary goal I try to accomplish with these updates.  It's also good because it means I don't have to adjust the charts much for today's update -- although I will also update one of the intermediate charts.

First is the Dow Jones Industrial Average 30-minute chart:

Next is NYA -- Monday's alternate "or 1" will be off the table north of 10,248.

Finally, an update to the intermediate SPX chart.  Since the market reached its downside target zones (way back in January), I've been warning that the position of this rally was extremely ambiguous in the bigger picture, and that it could run a lot farther than bears were expecting.  We're now getting into price territory that satisfies that potential.  One count I've been considering since the rally began was the potential that the low at 1810 SPX was a high degree B-wave, with the current rally as a high-degree C-wave (and this is why I haven't been anxious to short into this wave).  That count is shown in black below:

In conclusion, we're finally into price territory where I'm willing to make the assumption that "the top is closer than the bottom," but let's sum this up to keep ourselves grounded:

1.  SPX has not yet given any signs of a turn, which means higher prices (including a run to 2116+) are still very much on the table (a nice final "this is never gonna end!" fifth wave rally always makes great icing on the cake).

2.  I am front-running in my assumptions, so I cannot stress this enough:  We do not yet have an impulsive turn -- so 50 SPX points up from here is not out of the question.

3.  Again, readers need to understand that I'm warning ahead of the game (and, of course, could always be completely wrong), which means bears may be able to continue to afford a degree of patience because... 

4.  Until we see an impulsive turn, the trend at all degrees remains up. 

5.  The broader point I'm trying to make is that I would take the next impulsive decline seriously (when it arrives), because it has potential to mark a significant turn. 

Trade safe.

INDU and NYA: Near-term Focus

No material change from last update:  Equities are significantly overbought, thus I'd be surprised if the market moves markedly higher from here in the near future.  That said, another smallish wave up to mark a fifth and final rally leg wouldn't be surprising.

Since we've been looking at intermediate charts for a while, we're just going to look at near-term charts today.  On INDU's chart below, we can see that there are enough waves for a complete (C)-wave rally, but a final fifth wave would also fit the pattern just fine:

INDU's chart is a little scary for bears, because there are no overlaps at all, which leaves open much more bullish potentials than I'm favoring -- however, NYA helps assuage some of those fears, since it has overlapped its most recent relative highs:

In conclusion, I'll end where I began:  I'd be surprised if the market rallies significantly from here, but one more small leg higher would fit the pattern just fine.  (It's a very tough call as to whether the rally still needs a fifth wave or not.)  If bears can force a sustained breakdown of Thursday's low immediately, then we are either looking at a more complex fourth wave, or the start of a meaningful turn.  In either case, as outlined in the last update, it does appear that the rally is about due for a breather.  Trade safe.

SPX and INDU: Chop Zone Approaching?

One of the biggest errors we can make as traders is to assume that the market will always go up or down.  (What did he just say?)  What I mean is that "sideways" is the Most Frequently Overlooked Option by traders.

Nobody likes a sideways market, because they tend to be difficult to make money in, so we deal with that inconvenience by imagining there will never again be another sideways market.  Unfortunately, we can't make things go away by pretending they don't exist, unless they're already figments of our imagination and never existed in the first place!  The market, of course, isn't a figment of our imaginations -- technically, it's a figment of Ben Bernanke's imagination, which leaves the rest of us powerless to influence it.

Anyway, my point, if I remember correctly, is that after a strongly-trending market, we should be on alert for the market to go into sideways cycling mode.  And along those lines:  While bears tend to fear that market tops occur suddenly and without warning (this is an irrational fear that bears suffer despite all evidence to the contrary), tops are usually preceded by a cycling wave.  So, while the "exact" top sometimes occurs without warning, there is almost always a secondary high that follows after the initial decline.  And that secondary high is, more often than not, the "safer" entry, because it involves less guesswork and provides clearer stop levels.

The chart below illustrates what I'm talking about.  RSI has now reached levels that, in the past, have been associated with sideways markets and/or market tops.  Do note that RSI is not a "pinpoint" indicator, so these cycling/topping moves can begin from modestly higher prices than we're currently at -- but what we do not see on the chart (below) are any moves where RSI reached current levels and the market continued significantly higher without at least a pause/consolidation.

Also note that there is only one instance on the chart below where RSI surpassed 70 and there was an immediate top followed by a steep decline (once in 9 instances).  The reason for this type of action is best understood with the concept of inertia -- a strong rally typically has residual momentum, so it doesn't usually stop on a dime and reverse.  There are usually buyers waiting to buy the first decent dip, so it first slows its residual momentum by chopping sideways, then it reverses its direction and momentum (if it's a top, that is).  Not always -- but usually.
 

Further contributing to the idea that we may be nearing some sideways movement is the previous price action.  We can see on the SPX chart below that current price levels have repeatedly developed into chop zones for the past year and a half:

In conclusion, RSI suggests we may be nearing a sideways market and/or a topping point, and that it's unlikely the market will continue significantly higher (note this is relative, so even 50 points up from here would not be "significantly higher" relative to the size of the overall wave) without at least a consolidation occurring first.  It also bears mention that -- just going on the odds -- most times that RSI reaches 70, price still has a bit more rallying to do.  Thus keep in mind that my warnings may be a tad premature -- but I always look to see what might be coming before I try to cross The Street.  Trade safe.