SPX, OEX, BKX, and NYA: More Evidence the Rally is Overextended

The market has been in a holding pattern (also known as a chop zone) for the last couple weeks, illustrated well by BKX:

Some readers who are still learning Elliott Wave have asked about the qualifications for these waves, so the strict rules for a ZZZZZZZ wave are as follows:

1. The market MUST follow the most boring path imaginable.  Interesting moves invalidate the pattern.
2. Wave Z CANNOT be longer than Wave Z.   Although this seems self-evident, it is not.
3. Wave Z, on the other hand, can never be the shortest wave. Except during a full moon, and on weekdays whose names end in the letter Y.
4. The cheese stands alone.

On a more serious note, let's look at a few degrees of trend, starting with the near-term via NYA:

OEX may provide an additional clue, and suggests that there may still be more near-term downside coming:

SPX remains materially unchanged, but now there seem to be some near-term clues in other markets that indicate the path I suggested last week (toward at least the red "?") may come to fruition:

Bigger picture, BKX held the key level that I discussed at the end of June.  From an intermediate perspective, that's still the level bears need to get things going in a more significant manner:

In conclusion, last update talked about the message of VIX, and how it suggested the rally was overextended.  The current near-term pattern in OEX also seems to suggest that at least a near-term decline is pending.  Thus, barring a sustained breakout over the all-time highs in OEX, it appears that the next near-term move -- after this morning's opening pop completes -- is reasonably likely to be in the downward direction (although OEX is the canary, this directional move should apply to the broad market -- again, though, if OEX sustains trade over its all-time high, then we have to rethink that and simply accept the recent pattern as some lower-probability non-evident bull wave).

On a personal note, this may be my last update for about a week or so.  My family and I are in the middle of a move, and the next week to two weeks are going to be quite busy for us.  Time and internet connections allowing, I may try to sneak an update in here or there, but I can't be certain ahead of time if that will be possible.  At the absolute latest, things should return to normal near mid-August.  So, until the next update:  Trade safe.

VIX Suggests Rally Growing Over-Extended -- plus Gold at Three Degrees of Trend

There's very little to add to Friday's update regarding equities (please refer back to Friday's charts if needed), so in an effort to provide some "added value" to my readers, we're going to take a look at a chart I haven't updated in a LONG time:  Gold.

On the chart below, I discuss three degrees of trend in gold, and the apparent position of this market relative to each degree:

The chart below is most relevant to VIX -- but VIX is often relevant to equities.  This chart suggests VIX is bottoming, which by extension suggests that the rally in equities is probably getting over-extended:

In conclusion, while bulls could always continue powering forward indefinitely, it does appear that, while a bit more near-term upside isn't out of the question, the rally will soon be due for a pull-back.  Again, do keep in mind that there will almost certainly be buy opportunities again at some point in the future -- so don't get too focused on the (presumed) pending pull-back as the be-all-end-all.  Trade safe.

SPX, NYA, Oil: "So You're Telling Me There's a Chance..."

Last update highlighted NYA, and noted that the pattern suggested at least a near-term pause/decline was forthcoming after the next bounce, and that call turned out well.  Below is the updated chart:

As noted previously, SPX's recent rally bears some of the hallmarks of an extended fifth -- and there are now enough waves in place for the rally to be complete or nearly so, IF it's an extended fifth.  As also noted previously, if the rally is a third wave instead of a fifth, then we still need another decent rally leg.  I'm slightly more inclined to think it's an extended fifth -- but if that's the case, at worst, it could only support one more pretty minor high.  Any more than that, and bears really have no choice but to stand aside, or risk significant damage.

Also of note, oil has held the top I called back in early June.  So far, anyway.  Given that my oil calls are into a near-flawless streak that's measured in years, this is the point at which I ask myself if I should ONLY be trading oil and the heck with everything else...

In conclusion, if the recent rally was an extended fifth, then we may be on the verge of a reasonable decline, to at least back-test the 2100 zone.  Bears do need to remain cautious if the rally pushes much over recent highs, though, because there's no way to rule out the possibility of a third wave (as discussed above).  Trade safe.

SPX and NYA Updates

On Sunday night, I ended up missing a flight, and trapped somewhere without a computer, so I was unable to publish an update for Monday.  Given what the market's done over the past couple sessions, it doesn't appear that it would have been a critical update anyway.

Let's get right to the charts and start with NYA, because it shows a specific near-term pattern:

On the bigger view, recall that I mentioned (on 7/15) that NYA could encounter resistance in this zone, which it has.  Whether this will prove to be more than short-term resistance remains to be seen:

Moving on to SPX, the question on everyone's mind (including mine) is:  Is the preferred count of the past few months dead?  I attempt to address that on the chart below:

In conclusion, this is one update where the charts pretty much say it all.  Trade safe.

Market Update: NYA, INDU, BKX

There's not much to add in today's update, except to note that the long-term target of SPX 2170, from February 2013, was effectively captured yesterday (I think we can call 2168.99 "close enough" for a target that was published when SPX was trading at 1512).  Sometimes those targets, give or take a few points, function as resistance zones.  Let's get right to the charts.

First is NYA:

Next is INDU:

And finally, a quick look at BKX:

In conclusion, we've reached a minor inflection point, but given the ferocity of the rally to date, and the very small price range yesterday, it's difficult to say yet if the market will react to it much more than it already has.  If there's an extended fifth in play, then SPX would be expected to roughly track INDU, and the comparable breakout/retrace zone for SPX is 2100-2120 (if this doesn't make sense immediately, then please read this in light of the comments on the INDU chart for context).  Trade safe.

Market Update: A Look Back, A Look Forward -- and Why the Market Always Wins in the End

SPX officially made new all-time-highs recently, so before going further, we need to address the implications there.

First off, let me preface this by stating that this is not going to be popular with bears.  I realize that a lot of my readers are bears, but nobody should be trading with the "hope" that the market does something to justify their underlying bias.  The only reason to trade is to try and be on the right side of the trade in order to earn a profit.  If a trader is doing anything besides that, then they might as well just pile up all their money in the backyard and set fire to it, since that would ultimately be more fulfilling.

Or, heck, give it to charity or something.

I mention this for a reason.  In mid-late 2012, I began to turn bullish; then, starting with my very first article in January 2013, I published a series of articles arguing that the market had just begun a massive rally.  I even published an article titled "A Survival Guide for Bears in a Bulls World" (I still think it's one of my better pieces; might be worth a reread).  In February 2013, I published my preferred long-term targets for SPX; my first target was SPX 1750, and my second target was SPX 2170 (chart below).

All of this is intended to present an important point:  In 2013, I lost a lot of bearish readers because of my bullish stance.  Some bears got mad about it, and went to look for other analysts who would back up their biases, of which there are never any shortage.  Not sure how all that worked out for them, but I do know how things worked out for the market. 

So, with that said, here are the implications of the recent price action:

For the past few months, I've talked about the rally off the February low as the probable C-wave of a larger B-wave.  A few times I addressed the fact that B-waves are allowed to break key prior levels (such as the all-time high).  The issue for bears right now is that a B-wave that breaks a prior high is ultimately going to come back to that high, no matter what happens next.  In other words, even if SPX were to drop 500 points next week, it would most likely recover shortly thereafter, and return to break current prices.

That's an important understanding, because it means that whatever happens in the foreseeable future -- even if we got a huge drop from here -- will most likely still be occurring within the context of a larger ongoing bull market.

So... that's what bears are up against here.  At present, their best hope appears to be for a big C-wave decline that amounts to a temporary victory for sellers.

At worst (for bears), they are up against a rally that is going to keep grinding higher, with only temporary reprieves, for quite a while.

The chart below outlines the situation (as it appears at this exact moment) in a lot of detail.  I used INDU because it did NOT make a new low at red b/bull:2, so the implications of its pattern are clearer -- and for that same reason (see chart) this is the market that has thus kept me somewhat skeptical for a while now.

In conclusion, this is a very difficult position for bears to be in.  If this rally is a bearish B-wave, then it may be nearing completion -- but as I mentioned at the beginning of the month, this is a very difficult type of wave to front run.  The best thing we can do from here is watch for clear signals of a turn, then take it one trade at a time from there.  Be aware that if the "incredulous" count shown above is underway (despite my skepticism), then bearish trades will only work on short time frames, and things will remain bullish for longer than probably seems reasonable.  In the event the bearish B-wave count is correct, then the C-wave will be significant enough that it should allow time for bears to get on board.   Trade safe.

SPX Update: Chart Update and Random Thoughts

Thursday's update anticipated we would see another wave down in SPX before rallying higher, but it was not to be.  I'll be frank:  I feel like I haven't been that fooled by a near-term wave in a long time.  Although I did mention that "For whatever reason, there's something bothering me ever so slightly about the impulsive appearance of this decline, but I can't put my finger on it, so it may be nothing."  I essentially ignored whatever was bothering me, and ran with the idea that another near-term wave down was forthcoming.  As it turned out, I should not have ignored my gut.

Before the open on Thursday, I mentioned "the possibility 2108 marks a more meaningful top," but we knew shortly after Thursday's open that this was absolutely not to be.  Once 2109 was broken to the upside (albeit: barely) on Thursday, then we knew two things that we didn't know on Wednesday:

1.  Because there was no sustained breakout over 2109, Thursday's downside targets still had a shot -- IF we got an expanded flat.  I mentioned this on the chart, as follows:  "Sustained trade north of 2109 would call the downside targets into question, but not entirely eliminate them, due to expanded flat potential.  Nevertheless, bears should play it cautiously if 2109 is claimed."

2.  2109 was indeed claimed, meaning bears needed to be cautious from that point forward, because the break of 2109, however small, technically invalidated the possibility that the leg from 2108 down to 2074 was impulsive (impulsive waves cannot be retraced in excess of 100%, or they're not impulses).  

As it turned out, 2109 did function as near-term resistance, and bears were rewarded with a decent little decline, amounting to a 57% retrace of the prior rally wave (down to 2089).  This at least afforded anyone who shorted 2109 the chance to exit with a small profit, or the chance to move stops to break-even.

It pays to remember that C-waves are always corrective waves, and a corrective wave is always 100% a counter-trend play.  A counter-trend play at a high enough wave degree (for example:  the market's declines over the last year or so) can be very profitable.  At near-term time frames, though, counter-trend plays require traders to be very nimble.  One of the market's rules is that surprises are almost always in the same direction as the prevailing larger trend.  For that reason, I would advise newer traders to avoid near-term counter-trend plays entirely (not trading advice!), and to trade only in the direction of the larger trend.

Over the weekend, I published a few thoughts in our forum, which some members suggested I should share with the larger world, so here are the thoughts I posted:

(This began as a reply to "where will the next C-wave down begin?")

I know what you're asking and why you're asking it... but prefer not to try and anticipate where such waves will begin (at least, not as a trader; as an analyst, sometimes) -- as I said on the chart, I prefer not to front-run these types of moves unless there's a clear level to act against and/or an impulsive decline to act against. I'll identify some inflection points (the ATH and 2144ish being two), but we can't worry too much about "when will this end?" from here.

Here's one reason why: The first place you look for a C-wave to end is the 1.618 extension (presuming we're in C-up to be followed by a larger degree C-down)... but they can also end at 2.618 extensions, and nobody in their right mind wants to take that much drawdown. So, I might short the 1.618 extension with a tight stop, but I'm not going to keep holding if it runs through my stop. If it stops me, then I HAVE to wait for a clear impulse at SOME time frame before trying again. Otherwise I'm literally just trading randomly. And we all know how that always ends.

Here's another reason: What if it's not a C-wave? Even an 80% probability is still going 100% against you 20% of the time (yeah, I know: insert "Anchorman" clip here). So we have to account for the 20% by staying nimble and not stubborn -- otherwise 20% of the time we're just shorting into a bull move and we'll get murdered. That's why it's so important not to take the market personally. The BEST trades on the planet go 100% wrong sometimes, and they always will.

(Warning: TANGENT ALERT)

There's a time to cling to a position... for example: You get a great entry with a 3-point stop and the market drops, you don't take an exit -- then it makes a "bullish looking move," but stays below your stop. I might want to cling stubbornly unless and until my stop is hit. But that's ONLY if I got a good entry. I won't do that if my entry is bad -- because to cling stubbornly to a bad entry means devastation if the market goes against me. To my way of thinking, the rule is, if you take a bad entry, then you have to stay nimble. That's the price of admission on a bad entry. You have to let the market shake you if it wants. That's the trade-off, and I know that going in. If I get lucky, then the market runs in the right direction to support my bad entry and I end up in profit. If I get stopped, then I just have to wait for the pattern to tell me when there's a good entry point.

But if I take a bad entry and hold on "no matter what," I invariably get slaughtered. The losses are too big when I'm wrong. It's almost like the market intentionally punishes us when we lack discipline. But really, it's not the market punishing, it's just how life works.

So, we can do one, but not all, of the following:

1. wait for the right trades with discipline (and that means we MISS OUT on some trades)
2. take marginal trades if we stay ultra-nimble, or
3: cling to marginal trades stubbornly, and ultimately damage our accounts severely whenever the market goes against us, which it inevitably will at times.

The middle ground, and the hardest ground to stand on, is trying to jump in and partake of a move that looks good. To do this, one is by definition taking a less-than-perfect entry (ideally, at least, near a minor inflection point). But if one chooses to do that, then one has to realize that they're on shaky and potentially dangerous ground from the very beginning, and protect themselves accordingly. A bad entry and/or an ambiguous wave is the wrong time to be stubborn, unless you're fully prepared to take a massive loss.

A clear wave and a good entry is the only time I want to be stubborn.

So, to wrap it up, the rally ends when it ends. I'll try to get a good entry when that moment comes, but I won't fight it if I'm stopped. Because: What's a good entry against the current rally? 2130? 2144? 2200? 2500? We won't know for sure until it's in the rear-view mirror. That's why we have to find places to define our risk. Besides, we don't want to be in a mindset where we're exclusively looking for short entries -- maybe short is the wrong trade entirely. And we can't find what we're not looking for.

As an aside: The whole slate has to be wiped clean the minute you're stopped -- the next trade is not "another attempt to short this pig," it has to be thought of as an entirely new trade (albeit I sometimes even communicate in "taking another crack at a short/long" -- but I'm not thinking of it as a continuation trade, it's a new trade that happens to be in the same direction as the last trade). Otherwise one gets into a mindset of revenge trading and fighting the market. The market always wins that battle.

We have to start over from zero each time because we can't think clearly otherwise -- we can't spot new opportunities if we're only looking to find a slightly-different version of the "opportunity" we were just stopped on. Maybe the next trade we make should be a LONG entry, but we'll miss that if we're always thinking the next trade is just a "continuation" ("I'll short this pig again later!") of the prior trade that was stopped. Vice-versa for bulls -- that's why bulls tend to buy the whole way down, while bears tend to short the whole way up. It's all viewed (consciously or otherwise) as part of one giant trade with no end.

Each trade has to have a defined ending. Think of each trade as a roulette spin: The ball lands, the wheel stops spinning, the dealer collects money from the losers, and pays money to the winners. The next spin/the next trade is an entirely new bet. EVERYTHING that happened before that is gone, done, finished, over -- for better or for worse. If we approach the market any other way, then we end up in a game without end and no way to define our risk other than "losing it all or winning it all." Well, we'll never win it all. So that only leaves one option.

This ended up being a lot longer than I intended, and I ended up on a few more topics than I'd intended. Hopefully there's some random thought of value in there, but of course NONE OF THAT IS TRADING ADVICE.


Taking a look at the charts, the preferred intermediate count from July 1 showed 2121-2144 as the target, and that's been captured.  It looks likely that there's still more rally coming -- although, if this count is correct, this may amount to nothing more than a head-fake.  Keep in mind, though, that even if it is a head-fake, the market sometimes wants to make that convincing (and all that "convincing" entails -- maybe farther in price or "longer" (in time) than we hope) -- so watch for impulsive declines before getting too stubborn, and define your risk before entering:

In conclusion, the pending break of the all-time-high is a significant technical milestone, and means that everything that's unfolded over the past year is corrective.  In a perfect world, bears will have a shot at a decent intermediate counter-trend play, as shown on the chart above.  But keep in mind that, as of right now, anyway, any pending decline is expected to then resolve with even more all-time-highs.  In other words, as of this moment in time, the bull market still appears to be unfolding.  Trade safe.