SPX, Dow, and USD Updates: Signals Still Conflicted

There are a number of conflicting signals and potentials, and trying to assimilate all of them into an overarching market plan is a bit challenging at the moment.

On Friday, just about everything across markets was up:  equities, the Dollar, oil, gold, and bears' blood pressure.  Usually this type of action leads to a move down in equities the next day.

I should mention quickly, in regards to Friday's article and the counts shown therein:

• BKX blew up its preferred count as shown.
• SPX performed within expectation of the bullish ST count, and within acceptable tolerance of the bearish count.
• Dow performed as anticipated.

So, as I see it now, there are 3 main possibilities still on the table.  We'll discuss those, and some of the pros and cons of each.  First, let's take a look at the potentials. 

The first chart is the big picture SPX chart.  For the majority of February, I was favoring the red count on this chart.  At the last minute, some of the action and short-term patterns caused me to ever-so-slightly shift my preference to the gray count.  I may have been a bit premature, and probably should have waited for the short-term patterns to resolve before shifting my preference.  To be determined.

The three main possibilities are all shown on this next charts, as follows:

1. Wave (iv) is complete, and the market is now heading to new highs in wave (v).
2. Wave (iv) is partially complete, and there is another leg down to come before the market heads to new highs.
3. Wave (c) is entirely complete, meaning wave (iv) already happened and the 1378 print high will remain as the high for an intermediate trend change (shown in gray).

Zooming in a bit, and ignoring the gray (c) wave for a moment, the two likely wave (iv) counts are depicted below.

Of course, the SPX never tells the whole story, so let's look at some other charts.

One of the supporting cast members which could create problems for equities is the US Dollar, which looks like it may have put in an intermediate base at 78.  Over the past couple weeks, I've talked about the red trade trigger and corresponding target of 85-87 for the USD -- if it maintained closes above the red breakout level.  On Friday, the dollar hit this trigger level and put in a massive bounce.  Apparently, I'm not the only person watching that level.

If the dollar has put in a base, the action there is likely to put a cap on the equities rally -- so that tends to favor the gray count; or the idea that wave (v) won't be as large as expected.  Of course, whether the dollar holds this action remains to be seen.  Bernanke could emerge from his cave tomorrow and announce that the Fed is planning on selling sheets of uncut hundred dollar bills, intended for use as house insulation, for 89 cents apiece at Home Depot. 

They remain the fly in the ointment -- and if the Fed wants higher equities and a lower dollar, then they have lots of "tools" at their disposal, not the least of which is Bernanke himself.  It remains to be seen how the Once-In-a-Lifetime Greek Credit Event! going on right now at your local Greece dealer, will impact Bernanke's plans to annihilate our currency.

So the dollar charts look bullish for the moment, but I remain deeply distrustful of the Fed.  Probably exactly the type of sentiment the dollar needs to stay bullish.  We can go round and round with this reasoning -- which is the main reason I try to stick to the charts -- but in this world, the central banks are by far the biggest players, dwarfing even institutional investors, so ignore them at your peril. 

That's an awfully sad commentary on the state of things, by the way.

Anyway, back to the charts. 

The next chart is the Dow Industrials, and this is another chart that may argue for a less bullish long-term outcome.  This chart also creates at least a slight problem for the more bearish wave (iv) count (the green count in the 2nd SPX chart).  A material break of the uptrend since October would also break the rising wedge.  This suggests that the green wave (iv) count is probably less likely. 

Additionally, the short term Dow count of the recent rally still looks corrective to me, even after Friday's action. 

It looks more bullish on the SPX, but it's not unheard of for zigzags to look impulsive.  Below is the bullish way to count the SPX rally. 

I do still expect lower prices on Monday for either count.   Obviously, however, the market reserves the right to do the unexpected.  Below is a chart of the very short-term support and resistance levels for SPX.

Next is a chart I showed over the weekend, which highlights two promising trade triggers and an interesting "return to the scene of the crime."  This is quite common to see after a sustained trend: the break and subsequent back-test of the old trend line.  This chart looks near-term bearish to me, because the market basically stated that, as of Friday anyway, it has no interest in returning to the old trend.

Here are the trade triggers zoomed in a bit, so the levels are easier to see:

To summarize, over the very short term, I'm anticipating Monday will see lower prices.

Here are some other key points:

• Trade above 1378.04 will eliminate the most bearish possibility that (c) is complete -- and trade at that level would also already have the market into the zone where the 1408 target is active.
• The dollar looks bullish.  If it remains so, this suggests that upside for equities may be limited.
• The alternate wave (iv) count (green count) would complete a bearish rising wedge pattern on the Dow, and cause a break of the larger uptrend since October.  This makes that count somewhat less likely, in my opinion.  If I gave zero consideration to the Dow chart, I would say a 3-3-5 flat (in SPX; the Dow hasn't retraced deeply enough to qualify) might be playing out (the green count).

There are some nice trade triggers developing in SPX -- and these trade triggers should give some good clues about which count is playing out.  We may have a few more sessions of no-man's land first, though, especially if the preferred short term count is correct and the market heads down into 1353-1362.  There's now a big no-man's-land range between 1340 and 1378 that the market can race up and down in for a while if it wants to.  Trade safe.

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