SPX Update: Crash Wave Still Unconfirmed; Fundamentals Still Bearish

While the crash wave setup remains "as good as it gets," the market has thus far stayed above the key levels I've outlined previously (1215 and 1190) which could actually spark a crash.  After Friday's rally, the market is now approaching the do-or-die level for these bear counts, and the market's short-term future will likely be determined by what happens on Monday and Tuesday.

Bulls received some potential "feel-good" news from Italy over the weekend, as Prime Minister Silvio Berlusconi announced his resignation on Saturday.  He was immediately approached by Greece, who, tired of being upstaged, asked him if he'd be willing to become their Prime Minister.  He allegedly accepted, but was immediately asked to resign. 

George Papandreou announced that he is available all month and, if needed, would be willing to resign from Italy, Spain, Portugal, and "any other European country that wants him."   

Italy officially approved an austerity package, which, in a dramatic and sweeping gesture, suggests that all citizens cut down their intake of Fettuccine Alfredo to "no more than four servings per week, unless it's really necessary."  Government officials voted themselves exempt from this rule.

Nothing here should be a huge surprise to the market, and it seems likely these events are priced in already.  We could see a case of "sell the news" next week. 

The silliness is: Berlusconi was not the real problem in Italy -- and how a "tip of the hat" to austerity will help a country whose debt is 120% of GDP and growing remains to be seen.  The problem seems to be one of debt vs. production, so unless Italy can actually get its economy to expand, there appears to be no retreat from inevitable default.  Italy's total debt is projected to hit $1.9 trillion Euro by year's end, which makes Italy just like The Titanic: "too big to bail."

People often boggle at macro-economics because the numbers are so huge, but it's really not very difficult to understand.  If you understand how to balance your checkbook and pay your bills, you have a pretty good start.  Imagine that you as an individual were earning $4000/month, but your bills were $4800/month.  To make up the extra $800 each month, you borrowed money by obtaining additional loans.  This might allow you to continue meeting your obligations for a time, but unless you can raise your income to meet the $800 shortfall each month, plus the new obligations you are incurring with additional borrowing, you will eventually be forced to default on your debt as the only solution.

This is the situation many countries now find themselves in.  To make things worse, their economies (their "jobs" using the individual example above) are shrinking, not expanding.  To go back to the example of personal finance, this would be the equivalent of you being forced to take a pay cut while your already-unmanageable debt was still growing.  Obviously, this would hasten your trip to the bankruptcy court; and the same is true of these countries.

Whether the stock market continues to take the irrational path of viewing this situation as somehow bullish remains to be seen.  There's an old expression: "The market can remain irrational a lot longer than you can remain solvent."

The charts continue to indicate that the market's next move should be lower -- however, Friday's action raised more questions than it answered, and the mask caused by Wednesday's gap down continues to present a challenge to the clarity of the counts. 

Before the open on Thursday, I warned bears not to get complacent and presented a possible ST bullish count.  This possibility has certainly gained some favor after the action on Friday (original chart shown below):

Compare that hypothetical chart with the current actual chart (below), and you can see why we are now forced to give this more weight as a possibility.  Another thing that adds some appeal to the alternate count shown in the chart above, and in black below, is the potential for a head-fake triangle breakout.  By now, every chartist on the planet has seen the potential triangle I talked about intra-day on Friday.  A head-fake would be a great final-confuser to the move, and ironically, a fake-out like that would actually strengthen the bear case -- as long as it stayed below 1292.66.

While it's certainly possible for the market to roll over directly at the open on Monday, the structure seems to need a little more upside, either to complete blue wave 2 within the blue target box (as shown, it may already be complete), or to complete red wave (ii) (shown by the black "Alt: (ii)" label). 

Sometimes, though, the futures will do the work of completing a pattern.  So the futures could rally at their open, hit the top line, and fall back down, leading to a negative cash open -- which could be the start of the roll-over.  A down-day that breaks 1245 would add confidence to the view that the rally has rolled over. 

It will be interesting to watch what happens here. 

Of course, the potential exists for an upside break to be more than a head fake.  While I continue to only give 20% odds to the bullish alternate counts, 20% still means they can't be ruled out, and the October 27 high remains the line in the sand.

I often compare trading to poker, and one of the examples I've used is Texas Hold 'Em.  Imagine you are dealt a pair of pocket aces -- your odds of beating someone who's holding 2-7 off-suit are fantastic.  Given those odds, you would be correct in playing that hand very aggressively against your opponent; however, that's no guarantee you'll win.  In fact, to the contrary, the odds actually guarantee that sometimes you'll lose.  In trading, that's why you must always take steps to protect yourself. 

Below is the "2-7 off-suit" count.  Whether this count will draw a miracle card on the river here remains to be seen.  This bullish count could stretch the rally up as high as the 1330's.

There is also another chart I feel obligated to share.  While I continue to view these bullish resolutions as unlikely, the market often does what it wants, so it is necessary to be aware of them and play accordingly.  This second bullish alternate is one that generally plays out in a recognizable fashion, and gives fair warning if it's underway.  This would be the option of a wave B triangle. 

If this is occurring, it usually plays out as a false breakdown from the triangle, in wave e (see chart), then whipsaws back up into the triangle and takes off upward in wave C.  It's generally a strong rally out of the whipsaw, much like we saw on October 4.  Be cautious of this, because you can see it when it happens, and there is no reason to get caught on the wrong side of a move like that (below). 

Wave e is completely unpredictable though, so there's no guarantee it will break down.  It could end as early as the mid-point of the triangle, as shown by the yellow target box -- if this scenario were to occur.

So the market has done its best to add confusion to the picture.  As I talked about on November 2:

I'm not saying that the top call is wrong [referring to October 27], just because there're 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.

Now we have the curve-ball from the market -- and the more bullish short-term possibilities, which have never been ruled out, still remain open.  So the question the market has refused to answer remains: is this just a curve ball, or something more?  The key levels to watch for validation of the bear case haven't changed: 1215 and 1190 below it. The key level to watch for the bull case is still the October 27 high.  While I remain in favor of the bearish counts by an 80% margin, deuce-seven off-suit is always out there lurking.  Trade safe.

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