SPX Update: Another Proprietary Indicator Suggests Caution

On Friday, the market rallied up into the lower end of the Wave 5 target zone, but the short term charts seem to suggest a bit more upside still to come for Tuesday.  Theoretically, this should be the last wave of this rally before a meaningful correction, and it appears likely that it will probably reach the high end of the target zone, in the range of 1370-1380 SPX, with an outside shot at 1385.

Once again, though, I'd like to remind everyone that the trend must be given the benefit of the doubt until proven otherwise.  Since December, every time this rally has reached a possible reversal zone it's bounced around a bit and then plowed right through it.  The central bank activity, particularly the activity of the LTRO's from the European Central Bank, have continually skewed the technicals and made analysis exceptionally challenging.

The technical indicators have been nothing more than twigs trying to divert a flood of liquidity. 

Speaking of indicators, another one of my proprietary indictors has issued a sell signal, and I'm going to share the details of this one with you.  This indicator measures the price ratio of the Nasdaq 100 (NDX) to the Dow Jones Utility Average (UTIL).  This indicator effectively measures the level of "risk on" trading present in the market.  When the ratio gets high, it means investors are piling into the high-beta NDX stocks while ignoring the more conservative utilities.

Since the demise of the NDX "superbubble" years (1999-2001, RIP), this indicator has worked very well, with a 75% win rate on sell signals.  On the chart below, the SPX is in the bottom panel.

It's somewhat amazing how many indicators are now reaching levels comparable to those reached at the 2011 top.  It will be quite interesting to see how this all looks in hindsight.  These are indeed interesting times, with the unprecedented level of worldwide government intervention creating something of a paradox.  Obviously, the central banks wouldn't need to intervene at all if the world was in good shape -- so the fundamental backdrop is clearly bearish.  However, the fact that they're throwing tons of money around trying to fix all these problems has, paradoxically, created a bullish environment for equities.

At some point, one would think that these imbalances will need to revert to the mean -- but they can persist much longer than seems reasonable.  As I've said before, my personal twist on Keynes observation is, "The market can remain insolvent a lot longer than you can stay rational." 

The next chart is the S&P 500 (SPX), which seems to be completing the fifth and final wave of this leg of the rally.  The charts currently indicate that a correction from these levels could take the market back into the range of the high 1200's to low 1300's.  Those levels will of course change if no correction materializes here.

In any case, that's in the future -- at present, there are several good arguments favoring the fifth wave interpretation, including the complexity of the previous wave(s).  Fourth waves are notoriously challenging, and on the 5-minute chart, we can see how much back and forth noise was produced since February 8.

The next chart is the 10-minute SPX chart, which shows all the math toward arriving at the conclusion that this is the fifth wave up.

The final chart simply illustrates some of the trend lines and channels on the Dow Jones Industrials (INDU).  It also highlights the first crack that's appeared in the trend.

In conclusion, this does appear to be the fifth wave up we've been looking for since February 9.  The one minute charts suggest 1370-1380 as the target zone... but the trend remains intact, and I continue to suggest not front-running a turn by anyone but the nimblest traders.  This rally has produced upside surprise after upside surprise, so all we can do at this point is be alert to the possible reversal zones, and see if the prices validate them by breaking down from the trend -- or not. 

The 2011 print high of 1370 should present next resistance, though I continue to believe that the market wants to break that 2011 high.  We'll see if that's all it wants to accomplish for now, and if sellers finally decide to make a stand in this zone.  Trade safe.

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