SPX Update: All Targets Hit -- Now What?

Yesterday was about as good a day as one can have in the "market projection" business.  Not only did my prediction for a new low below 1231 come to fruition, but the S&P 500 (SPX) even tagged the upper end of my target zone at 1227.  Additionally, the Euro hit the 1.309-1.322 target I published over a week ago, reaching a low of 1.316.  Now it gets a bit tricky again.

Those of you who've been following along know that there are two main counts still on the table.  The first is the immediately bearish count which maintains that the S&P 500's high of 1292 was a major top which will not be bested for a long time.  The second is a count with some short-term bullish potential, which believes that there is one more marginal new high still waiting out there in the not-too-distant future.  Yesterday did nothing to eliminate either count -- and, even worse (at least, for those of us who have to come up with something interesting to share with everybody each day), it made the short term outlook a bit hazy as well.  This is one of those times that another day or two of market action would be very helpful for clearing up the picture. 

So today's article is going to depart a bit from "the beaten market path" and instead focus on something completely different.  Instead of talking about trading, today we'll be discussing the virtues of using bright paint colors to liven up your living spaces!  Of course I'm kidding! 

Actually, let's take a minute and talk about QE3-- since once again all eyes are on the Fed meeting, and everyone (including Martha Stewart) is talking about QE3 again.

The last two times this came up, I opined that there would be no QE3.  I remain of this view for several reasons, most of which I've outlined previously, including this one:  In 2010, when the Fed announced QE2, they demonstrated that they have a pain threshold relative to the stock market -- and they showed us right where that level is. The Fed's pain threshold equates to the SPX 1000 mark, give or take fifty cents.

Additionally, due to political reasons, the Fed is not really able to be proactive; so it is reactionary instead -- and there simply is no clearly-defined crisis to react to at the present moment, at least not in the mind of the average American.  Beyond that, they've been able to accomplish their agenda by employing Virtual QE3, which is where the Fed governors run around talking about how QE3 is ready and waiting and, by golly, the greatest thing to happen in America since Ben Franklin invented fire.  (What do you mean, America didn't invent fire? Whatever.)  So far, this QE3 "dirty talk" has been enough to keep the bulls excited about the market.  So again, I would be shocked if they decided to launch it now.

Alright, on to the charts.  The first chart I'm presenting shows the bullish alternate count.  I'm showing this one first because it portrays a bigger picture look at the market and highlights some support/resistance zones.  Plus it's been a series of dead-on hits since November 20... so it continues to bear watching.

Even though the target zone (for both counts, actually) was hit on Monday, I am favoring some further new lows over the coming sessions.  But it's another challenging call here.  I'm using the wave structure which seems to be present in the E-mini futures (Symbol: ES) to make this call, since Monday was another big gap down and reveals nothing.  I dislike applying Elliott Wave to the futures markets, because the extreme leverage in futures tends to distort the charts.  

Let's zoom in to the one-minute chart, below.  It's possible that Monday's low was simply the third wave of a five wave structure, which would target 1220-1223 for the next bounce.  There are two other possibilities, though:

1)  Monday's low was the end of another first wave down and the rally into the end of day is part of a second wave.  This would target the 1190 area next.  If the move starts to accelerate after a break of Monday's low, look for this possibility to be unfolding.

2)  Monday's low was the bottom of the B wave of the alternate count (I give this low odds; I don't think Monday's low holds).

Too deep a retracement rally (above 1246 or so) would rule out the fourth wave, and narrow it down to the two options above.

It does appear that some more upside is needed to complete the current retracement rally.  The two areas to watch for clues that new lows are unlikely would be the down-sloping trendline on the first chart (in red) and the recent high of 1258.21.  If the trendline is broken, that would be the first clue of underlying strength, and if the 1258.21 high is broken, that would tend to favor the bullish alternate count and new highs.

Another reason I favor more downside in the coming sessions is that the Volatility Index (VIX), which generally trades inversely to the SPX, also traded down on Monday.  Over the past four years, this type of action has led to new lows (not necessarily immediately, but at some point in the coming few sessions) more than 70% of the time.  It also tends to presage a big move down, typically in the range of 2-3%.  This might argue for option 1 listed above: the 1-2 count.

Something else that bears mention is the fact that the market is still trading in a large range, the bottom of which is 1115.  The market has now run through practically every penny of this range at least ten times since August, and that type of trading tends to weaken support and resistance zones, which can lead to a phenomenon known as "range racing."

In conclusion, I remain very bearish over the long and medium term, and at present, I am still short-term bearish as well.  Fed meeting days can be quite volatile (as opposed to the mild volatility we've seen in the recent past -- ha ha), so expect some possible whipsaws.  Also, I would strongly suggest you consider repainting your living room.  Trade safe.

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