Is Today's Market Going to Sucker You into the Wrong Side of the Trade?

What if, today or Monday, the S&P 500 (SPX) suddenly broke out of the trading range it's been in since August? 

Weak bears would likely cover their shorts immediately, and bulls would almost certainly add to their positions.

But what if the break-out was a fake-out? 

A false break to the upside here would certainly shift a lot of people to the wrong side of the trade, and as every trader knows, the market loves to do that.  Take a look at what happened on October 4th, when the market broke down out of the range, and then whipsawed right back into it:

 
Whipsaws almost always lead to strong moves in the opposite direction, because the technical breakout (or breakdown) causes traders to go long into a downtrend, or, conversely, to short into an uptrend.  In the case of October 4th, the higher the market moved after the whipsaw, the more bears were forced to cover... so the higher the market moved.  Rinse and repeat. 

Could a whipsaw happen in the opposite direction now?  Obviously, if it was really easy to predict, nobody would get caught on the wrong side of the trade.  I can tell you it is very possible right here... and I can also tell you that my readers weren't caught by surprise the last time it happened.  I had actually been warning about the possibility for weeks.

Yesterday, I suggested, hypothetically, that the market might form an ending diagonal here.  At the time, there was little in the charts to suggest the possibility.  After Thursday's action, there is:

There is, as yet, still no clear indication that this is happening; however, the potential is certainly there.  (I presented a detailed argument supporting this count in yesterday's article.)  A move above 1233 would be the first warning to be alert for the ending diagonal; trade above 1237 would be the second, and would activate an upside target of 1247, which is my current target under this count -- though it could end anywhere within the yellow target box shown on the chart.

The more conventional counts are shown below.  These are the counts being favored by most Elliotticians, which in my mind is actually an argument against them.  Under contrarian guidelines, the more people who are predicting a move, the less likely it becomes.  But at present, there's still nothing technically wrong with these counts.

Other than the ending diagonal update, there's been no material change in the SPX counts since yesterday. But because I value my readers, I also wanted to present another chart in this article. 

The Russell 2000 (RUT) actually presents an extremely clean chart -- much cleaner than either the SPX or the NDX.  On the chart, you can see a perfectly formed trendchannel off the October low (blue); that channel was broken yesterday.  You can also see that the sideways correction this week has formed another beautiful channel (red):

The rally on this chart counts very nicely as a 3-3-5 correction: red a-b-c to black (a); red a-b-c to black (b); red 1-2-3-4-5 to black (c), to complete red A.  The blue and red channels are the reason I've labeled this chart the way I have; the existence of these two separate channels argues that these are two separate waves.  If that's the case, this count probably argues against the ending diagonal formation on the SPX.

That said, it is not impossible that the green alternate labeling (1-2-3-4) is correct.  Under that labeling, the low yesterday would mark the bottom of green wave 4, and the RUT would now rally to a nominal new high in wave 5.  Despite the two channels, this is a real possiblity; fourth waves sometimes breakdown out of the primary channel, and then rally right back up into it. 

I am expecting the RUT will rally up to test the underside of the blue channel today, so what happens when it reaches the channel will be important for clarifying this count.  If the channel rejects the RUT's advance, then the red A wave label is probably correct.  If the RUT can instead rally back into the blue channel, and also rally above the red channel, then we are probably looking at the alternate count unfolding. 

And, if this happens, it also argues in favor of the ending diagonal on the SPX.

If the RUT breaks though those channels, it is probably on its way to a new high.  In the case that it does break the prior high of 713.36, then that will trigger an upside target of 722 for (what would be) green wave 5.  722 is my preferred target, and the rally has a maximum upside of 739.  Due to the length of the previous waves, 739 should act like a steel beam to contain the rally.

The gray dashed horizontal line just below the red channel is the knockout level for the alternate count. Any trade beneath 675.74 eliminates the green alternate count from consideration, and with it the prospect of immediate new highs.  Trade safe!