SPX and NDX Update: So Far, So Good... and What to Look for Next

On Friday, I was a lone nut in the wilderness suggesting that there was a good chance Thursday's high marked the top.  After the action on Monday and Tuesday, all the sudden a lot of folks have piled on that bandwagon.  That makes me uncomfortable; I don't like crowded trades, and neither does the market. 

I'm not saying that the top call is wrong, just because there's a lot of people joining in now; in fact, quite the opposite: I'm still favoring it.  But the market never makes things too easy... so, sometime soon, we should expect a curve ball to throw everyone off the trail.  Tuesday played out largely as anticipated, so no big surprises there --  but I'm not completely sold on the structure the market has shown us so far.  I would really like to see at least a marginal new low to give this move down a more concrete five-wave structure.

The critical level we were watching to knock out the bullish alternate count -- 1197.34 on the S&P 500 (SPX) -- was not breached on Tuesday.  The current wave down is still a bit murky at present, and could be interpreted at least three different ways:

1)  It was waves 1, 2, and 3 with 4-up in process and 5-down to come.
2)  It was a complete wave with an extended fifth wave.
3)  It was an a-b-c corrective wave.

Of those three options, I like option 2 the least because, even though it's possible, it throws the structure way off balance and I don't like the "look" of it.  So, for the bear case here, I would really like to see at least a marginal new low for this move.  After that, I would expect to see a decent snap-back rally.

The bullish alternate count I suggested yesterday as an outside-shot wasn't weakened a bit by Tuesday's action.  The move down from Thursday's high counts very well as an a-b-c in its current form, which is why I would like to see a new low, preferably below 1197.34, to knock that count out.  If we don't get a new low, calling Thursday the top will remain a little bit inconclusive for the time being.

For this update, I have drawn up two radically different SPX charts.  Chart 1 (marked by the big red "1" -- no affiliation with the movie of the same name) shows my preferred view that Thursday was the top, and an estimation of how waves 4 and 5 might unfold if that's the case.  If you'll refer back to the three options listed above, this chart shows the first two of them.  Option 1 is illustrated by the blue lines and yellow target boxes: this is my preferred view, and what I would "like" to see take place in order to confirm my underlying assumptions that this is the start of a big leg down.  Option 2 is illustrated by the black lines and black "Alt: (i); Alt: (ii)" labels.

Two levels to watch are the 1230 area, above which favors the bulls; and the 1220 area, below which favors the bears.  These two areas have been pretty important battle grounds in the past, and on Tuesday the market just bounced back and forth between these levels all day, further highlighting their importance.

Chart 2 (marked by the big red "2" -- no affiliation with the less popular, direct-to-video sequel) illustrates the alternate count in clearer detail than I did yesterday.  It came to my attention that a number of readers basically had no clue what I was talking when I suggested an "expanding ending diagonal," so this has been drawn to help clarify.  It also shows how the decline could be counted as an a-b-c.  This count still holds at 20% odds for the time being, although with a little luck it'll get knocked out completely in the next few days.

The Nasdaq 100 (NDX) is in a similar position to the SPX.  I have only annotated one chart for the NDX, which illustrates my preferred count, since the two indices should trade in pretty similar fashions.  The NDX in particular looks to me like it needs a new low to complete the move and give more weight to the bear case.  Note the island reversal top, which is formed by the exhaustion gap up on the 27th, and the gap down yesterday.  Despite being fun to talk about, island reversals are, surprisingly, not very reliable patterns for marking trend changes -- so don't read too much into this one... yet.

Beyond the charts, we have the Fed due to announce a bit earlier than usual, at 12:30 EST today.  At 2:15 EST, Bernanke will hold his press conference detailing the Fed's plans, and might even suggest some innovative new ideas on how to further destroy America.  I continue to be of the opinion that there will be no QE3 at this point in time, but, regardless of what they reveal, the market often behaves unpredictably around Fed announcements.  After the last announcement, the market initially sold off very hard, then abruptly and strongly reversed, in a bear trap.  If we got a similar result here, that could form wave 5 to complete (i)-down, then reverse into wave ii-up. 

Either way, if you're planning on playing the Fed announcement, stay nimble... and trade safe.

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