SPX and Dow Updates: Barron's Does Their Best to Reawaken the Bear Market

The media is giving mixed messages lately.  On one hand, we have Barron's weekend cover story, predicting Dow 15,000.  This suggests the bullish sentiment is getting more over-blown, and it's amazing how many times covers like this have marked intermediate market tops throughout history.  In this particular case, though, Dow 15,000 isn't really that far away, considering the Industrials closed at 12,801 on Friday.  So maybe the cover isn't that big a deal.

And on the other hand, we have the mainstream media acting like Friday's close of a whopping 10 points lower (for the S&P 500 (SPX)) was the beginning of the end, and that we'd all be better off investing in Pokemon cards.  Actually, come to think of it, that's not a bad idea.  My daughter already has a huge collection, so I've got an insider edge; plus I wouldn't have to worry about Bernanke trying to queer the Pokemon market. 

Anyway, the media spent a lot of time harping on the fact that Friday was the worst day the market's had all year, etc..  So, it's hard to draw any kind of solid conclusions from this stuff: is the media overly bullish or overly bearish?  And besides, it's not like we're going to base our trading decisions on the headlines.

Anyway, the fact that the media jumped all over this little decline like it was the end of the world should be troubling to bears.  Really, the way sentiment works in general is a bit hilarious.  On Friday, suddenly Greece was an issue again -- even though it's been a problem that we've known about for at least a couple of years.  But Friday, it was a problem again.  It's a problem, then it's not, then it is, then it's not again -- seemingly forever.  This is why we don't trade on news -- and I believe news is noise.

Media fluff not withstanding, the challenge I was facing on Thursday hasn't really changed.  The indicators have all reached extreme levels that have been concurrent with market tops in the past -- but the wave counts still lead me to believe the market has a little more upside left in it yet.  However, the wave counts aren't necessarily pointing to a lot of upside -- in fact, Friday's decline pulled the low end of the SPX target zone down to 1358, which is only a few points above the prior high.

So, whether the exact top is in or not, the preponderance of evidence suggests a top of some kind is very close.  Let's review some of the indicators, as well as some new evidence, and then look at the wave counts.

The first piece of new evidence that the rally might be running out of steam is the Dow Transportation Average (TRAN).  The Trannies have now broken the up-sloping trend line from the October lows, and have also formed a negative divergence with the Dow Jones Industrials (INDU).  The Industrials made a new high, while the Trannies didn't.  Under Dow Theory, the two averages must confirm each other -- if they don't, it suggests a trend change is coming.  The last non-confirmation was in July 2011, but it was reversed (Trannies made a new high, INDU didn't).  Chart below.

Regarding other indicators, I'm not going to post every chart again, since I've posted all of them in previous columns -- but here's a quick review of some heavy-hitter indicators that have triggered recently, which are all typical at market tops:

1)  The Nasdaq total volume ratio has reached extreme levels.
2)  That Nasdaq article also contains my weekly top study, which suggests a top in sight.
3)  The Bullish Percent Index hit historic highs at the beginning of the month. 
4)  My proprietary top and bottom indicator fired a sell signal on Wednesday.

And of course, there are other problems for the market, such as the 4 unfilled gaps well beneath current prices, and the persistent overly-bullish sentiment.

So, those are the arguments in favor of the rally ending soon.  The question, of course, is whether it has ended already, or has a little more upside left -- or whether it will continue to blow through these indicators after a brief pause.  I think it's unlikely that the rally can keep stretching everything to further extremes without at least a modest correction first.  The shape of that decline should give us some clues as to whether that decline will turn into a rout, or if it will just be a correction with more rally to come.

In any case, we're getting ahead of ourselves.  It continues to bother me that bears are as excited as they are, since it seems almost too easy.  Of course, this is coming on the back of a brutal rally, but still -- top picking usually isn't so obvious that everyone and their mother can do it.

So onto the wave counts, which suggest to me that there's a little more upside left in this thing -- probably not much, mind you, but maybe enough to add some confusion to the picture here.  The first chart is the SPX 10-minute, which is starting to get a bit cluttered.  Quite frankly, you have only yourselves to blame for the clutter. I already know this stuff, so it's not like I spend all night cluttering up these charts to avoid helping out with the dishes. 

Anyway, the alternate count in black goes with the idea that wave 5 is over and some sort of top is in -- but the preferred count believes there's still a little more upside left.

It's a pretty tough call.  As I mentioned, Friday's move pulled down the projection for wave 5, so the minimum target would be 1358.  The maximum target could also exceed the 1365 level -- depending on the structure of any forthcoming rally, it could point that projection higher.  If the alternate count is correct, then the first target on the downside is 1300-1310. 

Trade above the recent highs would rule out the alternate count; trade beneath 1321 would rule out the preferred count.

Next is the SPX 5-minute chart.  Friday's market traded right into the wave iv target box and began reversing.  This chart shows the count in a bit more detail.

The final chart is the Dow Jones Industrials (INDU).  This count is slightly different than the SPX, and I want to share this chart to illustrate the fact that, assuming the count is correct, fourth waves can be tricky and no one can really predict whether the market will head straight up to wave 5 or meander sideways first.  I've annotated the sideways possibility in gray. 

I'm not crazy about the ending diagonal for wave 3 shown on this chart.  It's an ugly and overly-complex diagonal -- but it's hard to envision that wave as anything else other than perhaps the double zigzag b-wave of an expanded or running flat.  I'll let you do your own annotations for that one.  ;)

In conclusion, despite the bear euphoria -- in fact, partially because of the bear euphoria -- I suspect there may be at least one last surprise left in this rally.  My first target is 1358-1365, however that could stretch higher depending on the form taken by any rally.  In either case, the preponderance of evidence strongly suggests a top of some kind may be very close at hand -- and if the wave count is right, it should be sooner rather than later.  However, once again, until the trendlines are broken, the rally should continue to be given the benefit of the doubt .  Trade safe.

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