SPX Update: A Gray Market

Last update was still expecting the wave pointed lower, and while we made a minor new low, we fell 12 points shy of the "ideal" target in the 2590's.  One look at the big picture chart revealed why:

That long-term trend line is likely a key level bulls need to hold going forward.  My first inclination is still that the most recent rally to "4" was corrective, but it remains a bit unclear, so I'm borderline neutral at this moment, with a very slight bearish lean.  I haven't updated the chart below because Stockcharts deletes all my annotations every time I attempt to:

If the rally since 2612 is corrective, then it may be very near completion, as there are roughly enough waves in place (would look better with a new high above 2676).  If it's not, of course, then it's not (profound, I know).

In conclusion, this is a challenging spot and one where understanding one's risk/reward is the critical factor in determining one's trades.  This simply isn't a clear-cut chart at the moment, so please take my "slight bearish lean" with a grain of salt.  Trade safe.

SPX Update: Last Update's Warning Proved Timely

Last update noted:

While this isn't a clear-cut pattern, we probably have to assume "bearish until proven otherwise," because the bull potentials of this type of pattern are somewhat limited. 

There's no material change since the prior update, except to note that the near-term pattern suggests a possible inflection point in the 2590's:

In conclusion, no material change.  Trade safe!

SPX Update: Bull Options Appear Limited

The market continued lower from Wednesday's noted inflection point, and while this isn't a clear-cut pattern, we probably have to assume "bearish until proven otherwise," because the bull potentials of this type of pattern are somewhat limited.  "Proven otherwise" would consist of a sustained breakout over 2718.

Do note that the most bearish long-term potential possible has us heading substantially below the black "or 5" on the chart above.  The most bearish potential would have the first leg of the decline as wave 1 of red C/3, and the bounce as 2 -- which would put 3 of C/3 on deck, which could even take us back into the 19XX price range.  That's merely a potential at this stage, but something bulls need to be aware of in the even there's a sustained breakdown at the A/1 low.

In conclusion, the only pattern that seems to fit all the pieces of the recent rally reasonably well is the aforementioned ending diagonal, which continues to suggest a rather direct trip below 2585.  We'll continue to assume as much unless/until we see some reason to doubt that -- the main signal being sustained trade north of 2718.  Trade safe.

SPX Update: Market Reacts to Inflection Point

Last update noted that the market had reached an inflection point (a zone where a reversal has a higher probability of occurring), and the market reacted to it.

The decline from the most recent swing high is three waves so far, but a sustained breakdown at yesterday's low would at least begin to suggest an impulsive decline from 2717.  An impulsive decline would suggest that the near-term trend had shifted to down, as one impulse typically begets at least one more of equal or greater length.  It would also keep the ending diagonal very much alive.  And keep in mind that diagonals typically retrace themselves in their entirety in 1/3 to 1/2 the amount of time they took to form:

Please note the wave degrees by color and that blue "or C" could still mark the bottom of red (B).  (We'll worry about that if/when we get there, though.)

In conclusion, we correctly identified the most recent inflection point, and the market has reacted to it, which leaves both options on the table.  Since wave 5 didn't quite break 2585 on its last attempt, which it should have, I continue to think the diagonal is a reasonable possibility.  The first step for bears would be a sustained breakdown at yesterday's low.  Trade safe.

SPX Update: Market Reaches Inflection Zone

Last update noted that the pattern seemed to require higher prices one way or another, and offered the following clues:

1.  If we break out over the red wedge on the chart above, bears will want to watch for a whipsaw to help confirm the diagonal. 

2.  If SPX were instead to break out and hold that breakout, then that would instead suggest the bull nest (option 1) and a very strong rally. 

As we can see on the chart below, SPX did not whipsaw the breakout, which was the signal for bears to stand aside for the moment.

In conclusion, we have now reached an inflection zone, where the ending diagonal could roar back to life if it so chooses.  This does not mean that it will, only that it has the option to, since the ending diagonal remains a potential until 2740, but will be invalidated north of 2740.  While a sustained breakout over 2740 does not invalidate all near-term bear patterns, if that happens, it would suggest that we should probably continue looking for the preferred count's long-anticipated trip north of 2801, at least until proven otherwise.  Trade safe.

SPX Update: Predicting the Unpredictability

Last Tuesday's update noted that SPX had likely cycled out of "Easy Mode" and entered a period of unpredictability:

Long-time readers know that a key tenet of my general trading thesis lies in the recognition that the market alternates between periods of predictability and periods of unpredictability.  We just cycled through a predictable phase, and now we've entered a less-predictable phase.

Since that update, SPX has been nothing but chop -- so, ironically, I suppose we can now say that we were able to "predict this pending unpredictability."  In trading, knowing when not to act (or at least when not to act aggressively) can be just as important as knowing when to act; and sometimes even more important.  After all, earning a profit is only half the challenge... protecting capital is the other half.

At the end of the day, protecting your account from a loss is really no different than earning a gain.  Imagine you have $100K in your account.  You take an ill-advised trade and lose $2000.  The next week, you make a solid trade and gain $2000.  What's the difference?  Because you're right back where you started.  And if you had never made the ill-advised trade, then you'd actually be ahead $2000.  Protecting yourself from that loss is the exact same thing as a winning trade in the end.

Trading, like most things in life, is all about balance.  There are times that are conducive to expanding one's account, and there are times that one must expect an environment of contraction.  During the times of contraction, the goal is to protect your account as much as possible, in order to give yourself the chance to be part of the next expansion phase.  There's nothing worse than seeing a great, near-sure-fire opportunity, but then having no capital free to take advantage of it.

Moving on to the charts, the market has eliminated the third option discussed last Tuesday.  It has behaved much like the second option:

Given the behavior of late, I'm somewhat inclined to think that we're either forming an ending diagonal as discussed -- though do note that black iv could, theoretically, already be complete.  If we simply drop toward 2600 immediately, then I'd be inclined to think that last week's high was probably a b-wave.  I say "if we drop... immediately" because if we're forming the diagonal, then it probably needs one more high before it drops.  Thus, ironically, bulls would have better chances would be if we dropped toward 2600 directly than if we rallied just a little higher before turning.  In that event, we would watch for an impulsive turn higher, then from there we might expect a rally back above last week's high (although this would have to be rigorously examined in real-time if/when it happens, due to the outside shot at a complete WXY rally).

In conclusion, the market still has several options, but there are clear tells to each option heading forward, as follows:

1.  If we break out over the red wedge on the chart above, bears will want to watch for a whipsaw to help confirm the diagonal. 

2.  If SPX were instead to break out and hold that breakout, then that would instead suggest the bull nest (option 1) and a very strong rally. 

3.  If we decline immediately, then our first inclination will be that last week's high is a b-wave.  That pattern would be near-term bearish, but then bullish for a break back above last week's high.

Trade safe.

Update Note

This has been an exceptionally busy week for me personally, so updates should return to normal next week.

Last update noted that it appeared we were entering a chop zone, which is what we did.  Option 3 from that update is off the table.  Beyond that, no material change.  Trade safe.