SPX and Oil Update: The Market Appears to Have Finally Reached the Tipping Point

Who remembers Sniglets from HBO's series, Not Necessarily the News?  Sniglets are words that should be in the dictionary, but aren't.  One that sticks with me from my youth, and which comes to mind now, is:

Pielibrium - n. The point at which the crust on a wedge of pie outweighs the filling and tips it over.

I believe this historically over-bought market has finally reached the point of pielibrium, and I'll elaborate on some of the reasons for this belief in a moment. 

First, a quick update on silver, sans chart, for anyone who missed the chart yesterday:  I personally closed all silver longs yesterday shortly after the open, with the cross of price back beneath the 30.72 pivot.  (This level was called out on yesterday's premarket chart.)  Silver appears to have new lows on the horizon.  This was also one of the "hints" the market was giving yesterday, warning of further equity weakness.

Those of you who follow along in the intraday comments section know that right at the close yesterday, I called for a gap down open today.  I'm going to share my short term chart, show you what my read of that chart is/was, and why I made that call (below).

Next, a wider view, and the projected target range if this is wave 5 of (i).  The more aggressively bearish view would have this as a nest of 1's and 2's. 

It is important to note that 1386.87 is still the first confirmation level for bears, and it has not been broken yet.  So I'm a bit ahead of the market with this update, since this update is decidedly bearish.  There are still bullish potentials out there, but I am ignoring them at the moment.  I think the time has finally come. 

Perhaps a bit aggressive, since I'm projecting a major trend change is about to unfold.  Oh well... if it blows up, it wouldn't be the first time I've had to eat crow.  ;)

Readers should be aware that projecting trend-changes before confirmation is very high risk.

Next a wider view, showing the key trendlines, which appear ripe to fall on Thursday.  It will be interesting to see if the market closes inside or outside the (ii) (iv) trendline.  The sketched-in portion is simply a rough idea at this point, not a projection.

Next, I want to put up the big picture chart.  A few readers have asked about this lately, and it is still my long-term projection that the 2009 lows will ultimately be broken.  I do wish to stress that there is nothing even approaching confirmation yet; and a lot can happen between now and the bottom to stretch out the B wave even further.  The chart below assumes the most immediately bearish outcome -- and while that outcome is certainly quite possible, I am not yet assuming this to be the case.

I also want to revisit an oil chart I posted back in February.  Oil has now whipsawed back beneath its breakout level and has broken its intermediate uptrend.  The chart appears quite bearish at the moment.  This weakness is being echoed by many other commodities, including gold and silver.

Now for a quick discussion regarding my thinking behind the psychology of all this. 

The pattern had two main options heading into Thanksgiving of 2011.  One option was an immediate bearish resolution (which appeared to be unfolding according to plan), and the other was to turn the 2011 decline into an (x) wave.  Ben and friends stepped up at just the right moment to blow-up the bearish pattern, and the market has been running with it ever since.

We've reached another inflection point.  While it currently appears unlikely, there could still be a bit more upside here -- that would be okay for the bear view.  But one way or another, it does appear that the market is at an inflection point of intermediate proportions.  While it's been a tough turn to nail, one can't help but find it interesting that the waves counted out just about perfectly to line up with the market's recent Fed-motivated Moment of Recognition that no new stimulus appears to be forthcoming.

Elliott Wave is largely based around psychology, and it does appear that psychology is now shifting/about to shift.  The stock market is an unusual mechanism.  I'm going to use Apple as an example here, but really you could use almost any stock.

Why does anyone buy 1 share of Apple stock for $600?  Before you give the quick and easy answer, think about it for a moment.  You don't need it; it's not going to keep you alive.  I can see paying $600 for an apple, if you were completely out of food, starving, and stuck crossing the desert -- but $600 for a piece of paper? 

It isn't the newly-announced dividend, because it would take about 60 years just to break even -- certainly not a wise exchange.  If I asked you to lend me $600, and told you I'd pay you back $10 a year for the next 60 years, would you do it?  Doubtful. 

And yes, if you owned enough of these pieces of paper, you could exchange them for a stake in the company, but you're not going to do that, and neither am I.  (By the way, if you're rich enough to buy a controlling stake in Apple, I expect some serious donations pouring in today!)

No, the only reason you buy Apple for $600 is because you think that, later on, you can sell it to someone else for $700.  Or $1,001.  Or whatever -- but you think you can sell it for more.  There is no other genuine reason to buy stock. 

Want to test this theory?  Try this simple mental exercise.  If you had a crystal ball and knew with certainty that a year from now Apple would be selling for $300, would you still buy it for $600 today?  Of course not.  Conversely, if you knew that the new TV or laptop you desperately wanted to buy today would be worth half what you paid for it in a year (which is probably the actual case), you would still buy it.  Because a TV, or a laptop -- or anything tangible -- has value which is granted through its use.  Stock does not.

Wall Street has convinced people that it's "investing" but it's more speculation than anything.  So you are buying it on the speculation that someone else will pay more for it down the line. 

This is why stocks move as they do, in buying and selling panics. 

"This stock's going up, oh my gosh, I'd better buy it before Andy does, so I can sell mine to Andy for more!" 

"Uh oh, the stock's going down now, I'd better sell it while people are still willing to buy the damn thing!"

Stocks move as they do as a result of the fact that, deep down, every "investor" knows that the value of stocks is largely arbitrary.  When it begins to be perceived that "greater fool" buyers are in shorter supply, the smart money starts dumping.  This starts to drive prices down, but the average "investor" keeps buying these dips, thinking there are still "greater fools" out there... and not realizing that they themselves are the greater fool.  It reminds me of the quote immortalized in the movie Rounders, regarding poker:  "If you can't spot the sucker in your first half hour at the table, then you are the sucker."

Eventually, the average investor realizes that the market is in a down trend, and then they start dumping -- and when that happens, you get a bear market.

We've had an ongoing buying panic because of the perception that, essentially, the Fed would be the ultimate greater fool.  And to a big degree, that has been true.  Stocks don't rise and fall based on the economy, they rise and fall based solely on liquidity.  While it's true that a good economy often means a liquid market and vice-versa -- that liquidity is only a by-product of the economy.  In other words, stocks can be driven indirectly by the economy, but not directly; the economy by itself is not the causation.  Many traders miss this key point.

So what we've had is an ongoing liquidity flood, which has in turn backed the psychology of speculation, which has in turn led to the Rally from Hell.  But now it is suddenly being perceived that this liquidity will go away.  Whether that will actually be the case, or whether Ben will pull another rabbit out of his butt remains to be seen.  Obviously, we can only play the hand we're dealt right now; we can't see the future. 

My contention is that without the Fed, this market will not hold up.  Especially right now, when it's as over-bought as a market can be, at long-term resistance, and loaded with negative divergences.  This means that if there are no more "greater fools," the exit doors should get jammed quickly.  Couple that with the fact that the wave patterns have reached a probable completion point, and you get the potential for a serious decline.  Given the pattern right now, an intermediate decline is the high probability outcome.

It is important to recall that Ben could step in a month from now and change the pattern again.  He could add another (x) wave, or numerous other things.  We'll deal with that if and when we come to it.

It does seem, though, that at some point imbalances ultimately need to be reconciled.  Much like the housing market collapse; bubbles can only stay inflated for so long.  Eventually the forces of nature, or inevitable human error, bring the imbalances back to the mean.  And right now, I think it's likely that this massive rebalancing is on the verge of beginning.  Trade safe.