SPX and NDX Updates: Last Call for Bears!

Sometime over the next week or so, you may remember this article and decide that I'm crazy (assuming you haven't already).  The market's job over the near future is to convince you that the rally will go on forever, so you may start to think of me as an idiot perma-bear.  I'm not... well, I'm not a perma-bear, anyway; I suppose idiot is debatable. 

The market continues to gyrate wildly, almost like it's trying to compete for a spot on "Dancing with the Stars."  Projections are getting smashed more frequently than watermelons at a Gallagher show.

So what's going on?

If we are indeed approaching a major top, the market's number one priority right now is to keep everyone as confused as possible.  If the market makes its intentions clear, there will be nobody left to take the other side of the trade. Besides, if anticipating the market were easy, the money would be so simple that there wouldn't be anyone left to actually work at these publicly-traded companies.

Tops aren't obvious until they're fading from view in the rear-view mirror.  At that point, people look back and think, "Man, I wish I'd sold back then!"

If you've read my articles, you know I happen to be bearish right now, based on chart analysis, and on the conditions I see in the world.  Doesn't mean I'm right -- in fact, a big part of me hopes I'm wrong.  I would love to see a bull market driven by genuine fundamentals (in other words, not a QE Pretend Bull Market) arise here and shake off the crummy economy; and the housing market; and the demographics of the huge over-sized baby boomer generation reaching retirement; and the potential European meltdown; and the fact that our government is buried in debt up to its eyeballs; and all the other stuff.  That would make me very happy. 

But I don't see it.  So I'm bearish.  Are you?  Now is the time to decide, because the market will try to confuse you in the coming days.  The news will be good, hope will be flowing, and the market will rally.  To quote Hunter S. Thomson: "A lot of people got off the boat in those days.  But not me... and not Nixon."  The market always wants you to jump off the boat just in time to get eaten by a shark.  If this is a major top, there will be bear shakedowns... and there will be temptations to jump in long at exactly the wrong time.  Brace yourselves for it.

(If you're new to these discussions, my long-term outlook and a brief summary of Elliott Wave Theory can be found in this article.)

The alternative, of course, is that I'm completely wrong and this is a baby bull.  Maybe I'm the one about to get eaten by a shark... time will tell.  But the charts aren't giving me any conclusive reason to believe that yet; and if they do, I'll be the first one to start calling for a new bull (well, maybe not the first one: the perma-bulls take that trophy -- but you know what I mean).

Here is what the charts are presenting.  Exhibit A is the Nasdaq 100 (NDX), fresh off its recent win on "Dancing with the Charts."  I've said it before: the NDX is very close to its 2011 high. and if it breaks through, we have to start considering more bullish scenarios.  So -- if the bear case holds water -- the NDX needs to find a way to confuse the bears as it finishes this wave; but it needs to confuse without actually rallying too much higher.

Monday, I initially called for higher prices heading into Tuesday, because I saw what looked like a three-wave move up from the 2274 low.  Based on the larger structure, that meant we still needed a fourth and fifth wave.  They never came.  We instead headed straight down at Tuesday's open.  So Tuesday, I figured we had a failed fifth wave and the rally was done.  Survey says: buzzzzz!  Wrong answer again.  (Unless you've charted Elliott Wave, you can't really appreciate how difficult it can be to project in real-time some days -- especially at major tops and bottoms, where the market's goal is maximum confusion.)

On Wednesday, we get what looks like a three-wave move down, and then the market starts rallying again.  Ah, now it's starting to make sense:  my initial impression of a three-wave rally into Monday was correct (well, maybe, read on).  So now the chart shows a three-wave rally, and a three-wave decline.  Anybody know what structure ends a rally with a series of three-wave moves?  Show of hands... yes, you sir, in the back.  No, it's not called a "dimorphous linkage distributor."  It's called an ending diagonal.  I may be starting to sound like the Ending Diagonal Salesman here, continually touting the virtues of an ending diagonal forming at this juncture and how it could save the bears -- but the chart says what the chart says.  Here's the chart:

  
Take a look at the move from blue 4 to blue (i).  It doesn't take a Master Elliottician to see that's a clear three-wave move; to see it doesn't even require a particularly good set of glasses.  It does take a willingness to look at the charts objectively, though.

I have drawn-in some gray lines and a red wedge to give an idea of the form it may take.  Until we see where wave (iii) tops and wave (iv) bottoms, this illustration is just a guestimate, though.  The market could move fast here, or it could meander around a bit, to convince people that the lows are in for the year... I can't predict that.  But this diagonal satisfies many of the requirements of the time: confuse the bears; finish off wave C; keep wave C below 2438.44.  And, more importantly, it explains the three-wave rally.  There are creative ways to count the rally as a five-wave move; they do require a little more imagination, but they're possible.  So the chance still exists that the high is in already.

Either way, the final top must be very close on the NDX, if the bear market is to remain a bear market. 

If 2438.44 is taken out, all bets are off and this count has to be scrapped... along with the bear market.  If the high is taken out, it doesn't mean we won't go lower again someday, but it does mean that the entire count up to this point is wrong and the NDX is not in Minor (1) and (2) -- and there's potentially even a huge bull market on the horizon.  2438.44 continues to be critical to the bear case.

In the S&P 500 (SPX), I've actually been looking for an ending diagonal for a week now.  At times, it seems to materialize into existence and then, moments later, vanishes into the ether... only to reappear somewhere else.  Maybe it's due to the proximity of Halloween: the ghost diagonal.  Anyway, I think I may have started looking for it a bit early.  It's possible that the wave (iii) label is actually wave (i).  In fact, I view this as likely, based on the NDX... and the fact that shifting the wave 4 position allows the SPX to reach up to tag the head and shoulders neckline. 

You may recall that Elliott rules state that wave three cannot be the shortest wave.  Since wave three is already shorter than wave one, wave five must be even shorter still.  Now, the following assumes my count is correct, of course, but wave three's length was 82.84 points and wave four bottomed at 1197.34 -- so that puts a hard cap on this fifth wave of 1280.18.  That allows it to tag the head and shoulders neckline, and even overshoot it by a hair to suck in the last buyers before reversing.  Here it is on the sixty minute chart:

The chart above reflects the shift in my preferred count for the ending diagonal; in other words, the chart above is the view I am favoring.  I have also updated the 10 minute SPX chart we've been watching with the preferred labeling.  The old count is still shown in gray, so that readers have a reference point: wave (v) of this count would go where the blue (iii) is.  After Wednesday's price action, the old count is still possible, but I am no longer favoring it.  However, again my view remains that the top is much closer than the bottom here. 

Please please please note that the gray ending diagonal lines as drawn are purely hypothetical, wave (iii) could top anywhere south of 1280.18.

Also notice how well the simple support and resistance lines I drew worked.  The market bottomed right at first support and topped right at first resistance.  Sometimes, when the market confuses the Elliott Wave counts, traditional technical analysis can save the day.

I haven't presented a Dow chart in this article, but the hard cap there is 12,093.50. 

Any violations of the hard caps listed for the NDX, SPX, or Dow would mean that my preferred counts are wrong. 

And there are certainly other interpretations of the wave structure.  Many Elliotticians are labeling my wave 4 as wave B, which allows for much higher prices.  I don't prefer this interpretation for a series of reasons:

1) The NDX would almost certainly exceed its 2011 high under their counts.
2) The strength and tenacity of the rally to 1220 was too strong for an A wave.
3) The targets under my count line up with the key levels: the NDX yearly high and the SPX head and shoulders neckline -- and the Dow's hard cap is about 1% above its 200 day moving average.
4) My preferred count is NOT what most are expecting... which I think makes it more likely.

So these are the levels to watch.  If the market holds below these key levels, the prospect of a crash in the next few weeks to months looms large (understand that Minor (3) down will likely start off as a series of lower highs/lower lows, sharply lower, but not an insta-crash).  If the market breaks through these levels, the NDX starts signalling there may be a new bull market in the cards.  The coming days will probably be filled with news noise, and there will be confusion and gnashing of teeth on the bear side.  Personally, I'm still bearish and will remain so until objectively proven wrong by the NDX.  I'm looking for a major top soon -- now I'm just trying to nail down exactly where it will be.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com