SPX Update: Proprietary Indicator Suggests Long-Term Caution for Bulls

A contributor on my website called my attention to the fact that some readers "hear what they want to hear" when they read my articles.  I do tend to be verbose sometimes when I get going, so maybe some of the key concepts are getting lost in the shuffle.  As a result, I'm going to try to keep this article as succinct as possible... right after this detailed discussion regarding the reproductive cycle of the Western honeybee.

Sorry!  Just a little off-beat humor there, designed to lighten the mood and elicit outrage from entomologists.

To keep it really simple: I have not capitulated the entire bear case.  I'm not going to be on CNBC next week talking about how stocks are "undervalued" and how the market always goes up in the long run.  Those statements will be reserved for my appearances on talk radio. 

Of course I'm kidding again!  See how fun this column is?  Seriously, here's the simplest way to understand it:  I am short-term bullish and intermediate-term neutral.

As I attempted to outline yesterday, the shape of the next decline should help answer many of my questions as to whether that decline will turn out to be a buying opportunity or not -- hence my present neutral stance. 

The point I was trying to drive home, and have been trying to drive home for some time is "the trend is your friend." And until proven otherwise, the trend is still up. This isn't an opinion or a projection: it's simply a fact.  Hopefully that clears it up.

The market is still facing a fairly critical test at the 1350-1360 overhead resistance level.  So far, it's been unable to break through.  If it can't and 1321 is violated first, then all short-term bullish bets are off.

Yesterday I showed a more bullish big picture count, but at the same time, I tried my best to explain that the market still has myriad options.  Once the price action takes some options off the table, the big picture counts will come into better focus.  When we get to that chart, I'll try to better clarify what I believe the two main options currently are.  These two options are by no means the only options, though, and more info is simply needed from the market at this stage.

The first chart I'd like to share is missing a lot of data, since I'm only going to share the price portion of the chart.  This chart represents a conglomeration of several of my proprietary signal indicators; it took years to develop, and it's simply too darn good to put out on the internet for free.  It's exceptionally reliable at picking bottoms (only 2 buy signals all decade: March '09 and October '02), and it's reasonably good at picking tops as well, though it tends to be a little early.  I could tell you what all the different signal indicators consist of, but then I'd have to kill you.  And I simply don't have that kind of time. 

Yesterday, these combined indicators fired off the first topping signal in a year.

The chart below shows the S&P 500 (SPX).  The vertical red signal lines indicate top signal trigger points, the green lines indicate bottom signals.  One can see how exceptionally accurate this indicator has been over the years.  While it doesn't necessarily mean the market is going to top tomorrow (though it can), it does indicate that, at best, over the next 6 months the upside should be limited.

This indicator is a big red flag to those Elliotticians expecting an immediate massive new bull market (of which I have never been one).  This top indicator can trigger during bull markets, but even in 2004 and 2010, it indicated a large correction was forthcoming before further advances.  In 2007 and 2011, it was early, but did indicate that a major topping process had begun.

In all prior cases, the market made new lows within 2-3 months of the signal trigger.  So theoretically (assuming this indicator is still working, of which there is no guarantee) one could sell short tomorrow and cover in 2-3 months for a profit.  This is a powerful signal, and I believe it suggests extreme caution for folks considering a long term buy and hold approach at this juncture.  It would seem that, even in the event that a new bull has started, there may be a better entry point further down the road.

The next chart is the intermediate count for the SPX, and I have tried to add more clarity to the chart.  Neither I, nor anyone else, can predict for certain whether the next peak will mark all of wave (c) or only wave (iii) of (c).  At this moment, I am slightly favoring the view that it will mark (iii) of (c), with a correction to come, and another leg up still to come.  This view is largely based on the pending liquidity flood from the European Central Bank, which is due to be unleashed into the world on February 29.  If the coming peak marks wave (iii), then that would allow for a correction heading into the ECB date, and then another thrust upwards when the liquidity hits. 

The old saying regarding central banks is, "don't fight the Fed."  This saying was immortalized for bears in the 1959 Crickets song, "I fought the Fed and the... Fed won."  The same saying can also apply to the ECB, even though they don't have their own song yet.  The way things are going over there, they probably won't be in existence long enough to warrant a song.

Anyway, a trip below the red wave (i) peak would rule out further upside for that count.  I do expect a significant decline when wave (c) completes.

The next chart is the short-term SPX count, which suggests that the rally is still underway, with new highs in store.  There are reasonably good odds now that the coming peak will at least lead to a trade-able correction, if not the start of something more bearish.

I find the market's behavior around the upsloping red trend line fascinating.  I first called attention to that line over a week ago, and you can see that the market has continued to behave as if it's an important line.  Can't tell ya' why, but it is what it is.

The last chart is the short-term count for the Dow Jones Industrial Average (INDU).  It's slightly different than SPX, but similar.

In conclusion, there are five key points:

1)  The market is still below an important resistance level.  Going long before it's broken would be front-running, and the equivalent of going short back in December near 1200.  If that resistance level is broken, then the 2011 highs mark the next key resistance.

2)  The trend is your friend.  Once we see an hourly bar print beneath the short-term trend channel, and then some daily closes outside of the larger trend channels, we can have confidence in a meaningful trend change.  Until then, the trend is still up.

3)  I trust my work.  The fact that my proprietary indicator just fired off the first top signal in a year gives me high confidence that there will be no monstrous new bull market starting from these levels.  This doesn't rule out further upside over the near term, even into the 1400's, but this indicator hasn't failed yet.  Near term, the bulls could still run with the ball, but this indicator very strongly suggests that the bulls will run into trouble reasonably soon.   However, see point #2.

4)  I expect a significant decline when wave (c) completes. However, see point #2.

5)  Cash is a position too.

Trade safe.

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