SPX Update: Here We Go Again... Another First from this Rally

Yesterday was primarily a market "noise" day, as it traded within a range inside the key levels.  It does appear from yesterday's action that blue wave 5 is subdividing.  If that's indeed the case, there are two primary routes for this wave to take.  The first is that of a traditional impulse wave, which has been drawn into the chart below:

If the S&P 500 (SPX) takes the five-wave impulse route, it's likely that it will reach the original target zone of 1376-1378.  There is another possibility here, though: that of an ending diagonal, hypothetically shown below.

With only one wave complete so far, it's just not possible to know which option the market will choose, but I wanted to make readers alert to the possibility, since diagonals are nasty trading environments, loaded with choppy action and whipsaws.

If the diagonal plays out, the market will probably only reach the 1358-1365 area.  With the diagonal, watch for a marginal new high next and then rapidly dying momentum and a reversal back into the territory of wave (i).  If the rally off yesterday's lows forms what looks to be a 3-wave move and reverses, then we will begin anticipating that the diagonal is forming.

Now, both of the above counts are assuming that my preferred count of last week is in fact correct, and that the market is going to make a new high here.  As I mentioned some time ago, 1350-1360 was expected to be solid resistance, and so far it has been, with the market now working on its 6th attempt to try and penetrate this zone.

For this reason, I would again like to present the Dow Jones Industrials (INDU), because I believe this chart is a little cleaner -- and on the Dow, the key levels close-by.  There are two trade triggers cited on the chart, one above the market and one below the market.  Again, this could act as a guideline to help anticipate the moves of the SPX, in the event that my preferred count turns out to be wrong.

The final chart is the "here we go again" chart.  It's the Nasdaq to NYSE volume ratio.  For new readers, when investors are betting heavily on the riskier Nasdaq over the more conservative NYSE, it's indicative of extremely frothy bullish sentiment and often marks the blow-off phase of a rally.

And when investors get too bullish, it can indicate that there will soon be a shortage of buyers in the market.  Bullish investors have already bought in, on anticipation of higher prices -- so once everyone's bullish, there's nobody left to buy stocks, and the supply begins to exceed the demand; thus prices fall. 

This indicator triggered just a few days ago, on February 9, and has now triggered again for a second time.  Two triggers have never happened this close together.  So (as if we didn't already know this) sentiment is exceedingly bullish.  There is more record bullish sentiment info below the chart.

Small trader sentiment can also be garnered by examining Rydex funds, which are geared toward the ma and pop investors -- who are, of course, the least informed players in the market.  Typically ma and pop get their stock tips from the mainstream media, from "know it all" guys at work, from an annoying brother-in-law, and/or from a Ouija board. 

So the majority of the time, when very small investors get ultra-bullish or ultra-bearish, the move is almost over.  Your annoying brother-in-law (yeah, I've met him) doesn't tell you to buy something until it's already gone up $140, because then he can say he bought it "way back when." 

Anyway, to get an idea of just how rabidly bullish small investors are: a look at Rydex Nasdaq non-leveraged funds reveals that there is now $80 invested in the bull funds for every $1 invested in the bear funds (!).  This is a record extreme, and it illustrates that a ridiculous number of investors are betting on the bullish side of the trade.  In a normal market, this would be punished in a fashion that was -- to quote Dr. Detroit -- "most swift and horrible, I assure you."  But in this Happy Fun Land market that's being driven almost entirely by trillions of dollars left under brokers' pillows by the Central Bank Liquidity Fairy, it's hard to say how long these imbalances can continue. 

In conclusion, the expectation is that there are still higher prices to come.  At some point, the rally will have to turn, and the market is again near a zone where that turn has an above-average chance of happening.  If my wave counts are correct, and these indicators still mean anything, this should be the final leg before a meaningful correction.  But again, I don't suggest front-running this unprecedented Happy Fun Land Rally. 

In the meantime, the key levels outlined on the Dow chart should give some clues as to what's likely to happen next, and that chart provides some short term targets for both bulls and bears.  For those only inclined to be bears, a break of the lower trend line boundaries, followed by some hourly closes outside the boundaries, remain the key indicators to watch for a turn.  These trend lines are now extremely well established, so it's more likely that the next break will mean something.  Trade safe.

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