SPX, RUT, INDU Updates: No Material Change -- but Some New Discussion for Bears

Yesterday performed as expected in regards to a consolidation/correction.  This correction may be over, or it may have a bit more downside left.

Some readers asked about the possibility of a top being in place, so I'll address that in more detail in a bit.

Currently, it is assumed that a standard impulse move is unfolding.  If that is in fact the case, then the next wave up should show some strength and upwards acceleration.  If for some reason the next wave does not demonstate those characteristics, it will call into question the most bullish interpretations.  As I said yesterday, there is currently no reason to believe otherwise, but the market will let us know as the move matures.  I've drawn a few extra charts for you, to help readers understand what to look for.

The first chart is the "traditional" upward impulsive structure.  This is assumed to be the pattern unless the market says otherwise.

  

The next chart depicts a hypothetical ending diagonal and the rough form which could be taken by that type of structure.  Ending diagonals can be account killers, because there's a lot of whipsaw action, and over-aggressive traders on both sides end up getting burned.  Again, there's nothing to suggest this is unfolding, but "forewarned is forearmed" as they say, so it pays to be aware of the potentials.

Several bears wanted to know if it's possible there's a top in place.  It is technically possible, because the key index which caused me to rule out certain potentials is the NYA, and the NYA has not made a new high yet.  Until it makes a new high, then more bearish possibilities remain open.

Below, I've annotated the NYA chart, and explained my reasoning as best I can within the confines of the chart.  I'll run down the bull/bear arguments quickly. 

In favor of the bull count:   

• The move down counts very nicely as an ABC correction.  The NYA decline is a stretch to count impulsively.
• The move up counts very nicely as a 5-wave impulse.
• There's an island reversal bottom in place. 

In favor of the bear count: 

• The NYA has thus far failed to make a new high.
• Anytime there's a retest of a previous high (or low), the potential exists for a turn.

Given the above evidence, I have to favor the bull count... but the market will tell us which is correct, with a break of one of the two invalidation levels. 

It is also possible that neither is correct, and that something unforeseeable is happening.  For example, the larger correction could stretch out into a more complex form, adding another abc series of down waves before rocketing upwards in wave (3) of (v).  Or the ending diagonal previously discussed could unfold.

If I had to break it into percentages, leaving out "other" for the moment, I would say: 70% bull count, 30% bear count.

  

  

NYA and INDU have similar forms, but the INDU does offer bears the option of counting the decline as an impulse, albeit an ugly one -- especially in contrast to the beautiful impulsive nature of the subsequent rally.

It would be wholly acceptable and normal for the bullish count to show some additional declines before further rally.  A "normal" 2nd wave retraces 38-62% of the prior wave.  I haven't put target boxes on these charts because the last leg of the rally failed to reach these targets at all, so I'm a bit gun-shy of this market.

Next, a broader view of the INDU, and a bullish trade trigger.

Next, the short-term SPX chart, which does highlight a form that has the appearance of a rising wedge.  This could possibly be the beginning of the ending diagonal previously discussed.  As I said earlier, if there's no upward acceleration if/when the recent swing highs are captured, then we'll start considering this potential in more depth.

And finally, the short-term RUT chart, which is showing the same basic pattern as most everything else.

In conclusion, the charts still appear weighted in the bulls favor.  Short term, there may be some more correction/consolidation in order first, but it does appear that higher highs will be along eventually.  Until the structure looks more complete, or until the bears start reclaiming some key levels (whichever comes first), I feel it's prudent to remain on a bullish footing.  Trade safe.