SPX and Dow Update: Stocks at a Critical Inflection Point

Here's what I know for certain:  there's a big move coming.  

With the new high on Friday, stocks have reached a critical inflection point which could drastically change the expectations and projections going forward.  Since the rally began, I have been anticipating a moderate-to-deep B-wave retracement.  If we don't reverse before reaching the price levels outlined below, that prior expectation will be nullified.

In Elliott Wave, you must evolve your counts as the market dictates.  Just as in life, you must actively change with the changes, or be left behind.  Some Elliotticians find a count and stick to it, no matter what the market is telling them... in fact, this is a much easier approach for the technician as he can chart much more quickly each day.  If this is the approach you are looking for, then my updates are probably not a good fit for you.

My approach is to continually challenge my assumptions each and every day, as new price information becomes available. I then report my findings here.  I will strive to communicate when my previous interpretation was wrong, and when the assumptions have changed.

The short-term wave structure presented to us by the S&P 500 (SPX) and other indices has been a challenge to decipher.  My best guess, which I presented in the last two updates, was that we had completed wave 4 as a sideways correction and were due one more lunge to new highs, which would then whipsaw.  I am still favoring this interpretation.  However, time and price are running out for the market to honor this.

The good news is, the drop-dead level for this count is not too far away.  I have charted many different indices this weekend in the search for greater clarity.  After studying countless charts, I believe the Dow may hold the key to deciphering this move.  See chart below:

The best thing about the Dow is that it's very close to the knockout level for this count.  Due to the length of the third wave, and the rule under Elliott Theory that the third wave cannot be the shortest wave, the knockout level for this count is 11,993 (11,992.37 to be precise).  Thus, we should have a definitive answer on this count in short order. 

The Dow has completed five clear waves to the upside, so the move up could end at any time... but, based on the one-minute charts, I am anticipating a little more upside to complete the move.  Futures are down slighly as I write this, so it remains to be seen.  We know which levels to watch on the upside; here are some concrete things to watch for on the downside:  a move below the bottom line of the red trendchannel would be the solid warning of a trend change, and a move below the blue Wave 1 high would be complete confirmation.

The updated SPX chart is shown below.  The labeling on this chart is slightly different than the Dow, and shows a potential ending diagonal, which I first proposed on Wednesday.  The ending diagonal may or may not hold true.  If we were to label this chart in a similar fashion to the Dow (see gray "alt: 4" annotation), then the ending diagonal becomes unnecessary.

So that's my preferred interpretation.  I am still expecting a whipsaw here, but the charts are far from definitive -- which is pretty much always the case at tops and bottoms.  However, in the event that I'm wrong, I feel it's important to show an alternate, more bullish interpretation.

The more bullish interpretation would be that we already completed the B-wave.  This is certainly technically possible, but the structure just doesn't look right to me, based on the smallest waveforms... however, the possibility can't be confirmed or ruled out yet.  The chart below is the bullish alternate labeling for the SPX:

    
It's probably safe to say that, at this point, most traders believe this rally is going to continue.  And it well may.  But at this moment, based on my best interpretation of the wave structure, I continue to be of the opinion that this is a fake-out. 

As I said earlier, though, the good news is the answer isn't far away.  If we trade above 11,992.37 on the Dow, then my prediction of a whipsaw will be off the table, and I will have to give weight to the more bullish alternate count. 

The charts are telling us there's a big move coming.  Since we know the levels to watch, the next few sessions should hold the answer as to which direction that move will be.

(**Please note there was a typo in Friday's article regarding the Russell 2000 (RUT): the text states that 731 should contain any rallies in the RUT based on the count shown on the chart; it should read 739.)

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