SPX and RUT Update: Warnings that the Market Outlook May Be Changing

Yesterday the market reached the 1384 upside target  -- and it also ruled out some possibilities, which is actually quite helpful.  In fact, yesterday's charts are chock-full of new information I didn't have before -- so this has changed my outlook somewhat. 

I believe it's very important to assimilate new information from the market, and to allow yourself to be influenced by that information.  You have to be ready to turn on a dime, and the market rewards traders who are nimble and punishes those who aren't.

Prior to yesterday, RUT had an appearance that could be interpretted a number of different ways.  It has now clarified itself as an extended fifth wave.  Prior to yesterday, there was simply no way of knowing this with any certainty.

There are a number of possible outlook changes as a result of yesterday's action, and I'll try to cover those changes, along with some signals to watch for.

Readers will recall that my alternate short-term count for SPX was an extended fifth wave.  As a result of the RUT's action yesterday (and some other things), I've made this extended fifth the preferred count.  Readers would be wise to take heed of this possibility, because it does alter the expectations of what would usually happen next.

Let's start with RUT, and from there I'll cover the changes in more detail.  We'll also look at more bullish outcomes, because the market has declared that we should.

Note the blue lines on the chart, which is a rough representation of how things might go if the bear count is still in play -- more on that later.  It is exceptionally difficult to anticipate all the ins-and-outs of this kind of retracement with high accuracy from this position, so this is a best-guess rough guideline of what could happen.  This guideline will get more accurate over the coming sessions.

One of the other things I want to discuss regarding the above chart is this:  it bothers me more than a little (for the bear count) that, if not for the extended fifth wave, there would have been an almost-perfect c = a relationship between the two waves of the decline.  This might be an early-warning clue to the market's intentions, and until the market confirms an impulse in the downward direction (by making a new low), bears might consider being quick to take profits -- or at the very least: cautious in protecting them.  I know that I will be.

Anyone who went short near yesterday's target high of 1384 SPX should, at worst, be able to make a quick, small profit, or at least limit their risk substantially.  This illustrates the importance of having the patience to make proper entries, and of not jumping into the market at random.

Readers will recall the big picture alternate count that this decline was a larger wave (iv).  Closer to the top, I was somewhat fond of that count -- but after the strength of the decline, I became less fond of it. 

I think we have to go back to giving that count some very heavy weight for the time being, until the market more clearly reveals its intentions.  I'll discuss why in a moment, along with what I'll be watching -- but first, here's the refresher chart for that count:

There are several warning signs which have cropped up with yesterday's action -- enough signs that, at this exact moment, I am giving a lot of consideration to making the more bullish count into the preferred count.  The next session or two should give us some early indications to decide which outcome is more probable.

Let's take a look at the short-term SPX chart, which highlights the bear count(s), and then discuss what to watch for.  This is currently the preferred count.

Here are two things to watch:

1.  If the current wave declines a little bit, say to 1381-83 (which would be the first target for a bullish correction) or lower, then makes a new high before it overlaps 1374.71, then that will make the rally a 5-wave impulse.  This will be a strong warning that the bullish count could be in effect, and new highs become more likely.

2.  The inverse is true: if the SPX overlaps 1374.71 first, then it virtually "locks in" an a-b-c rally, which would suggest new lows are more likely.

So we'll watch and wait right here to see what happens next.  Neither of these things guarantees a bullish or bearish resolution, but they do make each resolution signifcantly more, or less, likely.

I'm going to wait for the market to give its answer, but it won't take much here for me to make the bullish count the preferred count.  There are a number of reasons for this, including this NDX chart (below).  Note that all the targets published on 4/2 were reached.

And then there's this NYA chart.  The NYA chart is labeled with the bullish count... because that's what fits best.

Readers will also recall that my target for a bottom in the more bullish count was SPX 1350-1356, as shown on the chart discussed in this article, published on April 8.  SPX's low was 1357 -- close enough.  While you're there, take a look at the RUT chart in that article and its targets for the bull count, which were also reached perfectly. 

Same goes for the Wilshire 5000 (WLSH).  In fact, let me bring that chart forward, completely unchanged except for the new price action.  Back on April 8, I drew in a "hypothetical channel" based on the shape of the rally -- look how well that "guess-timate" channel held up.

Other factors bears should consider: yesterday had strong breadth and market internals; and was also a strong accumulation day, which rarely happens at the exact high of a move.

For an example of what the bull count might look like over the short term, here's a look at how things could play out in the RUT for that count.  Expectations would be similar for SPX.

In conclusion, after examing all this new information (and trying to be as objective as possible), I've practically talked myself into making the bullish count the preferred count.  As I said earlier, though, let's give the market another session or two to give us just a little more to work from before we completely throw out the short term bear view.  There are several key signals to watch right here.

Even if the bear view is correct -- based on the expectations of an extended fifth wave retracement, a new high is the likely outcome before new lows. 

With the new info received from the market yesterday, I think bears need to stay very cautious and alert at this juncture.  Trade safe.