SPX, RUT, Apple, and Beard Updates: Why I'm Not in the Same Camp as Most Wavers Right Now

Beard Update

Ever since this article, where I discussed my ground-breaking decision to venture into the beard-bearing biosphere of Ben Bernanke (by not shaving), I have received e-mails from anxious readers demanding beard updates on an almost-hourly basis.  For example, this recent letter comes to me from Little Bobby of Arizona, TX:

Dear Mr. Logic,

Or should I call you Pretzel?  Whatever -- just please don't refer to me as "little" Bobby if you publish my letter.  I saw you did that to that other guy.  I am 6'8", a linebacker, and I have a really bad temper. 

Anyway, I'm currently working on my economics degree at Texas Arizona University in Arizona, TX, and I aspire to one day be Fed Chairman.  While I appreciate your market updates, I'm really more interested in updates on your beard.  I'm wondering if you think I should grow my beard immediately, or wait until after graduation?  Is there any downside? 

I'm thinking I should grow a beard now, and study the Great Depression.

Thanks for your help,

"Little" Bobby Spankle, Starting Linebacker, TAU

Well, Little Bobby, I'm glad you asked, because I've just been "itching" to provide an update on the beard.  Ha!  Itching!  Get it?  That's just a warm-up into some of the first-class humor I'll be providing throughout this entire paragraph.

I'm sorry to make light of your serious question.  I know I'm the envy of every man right now, sharing a beard with Bernanke... but, not surprisingly, there is a dark side to this beard.  For example, many days I wake up with an almost-uncontrollable urge to print money.  Barely a week ago, I awakened from a fugue state to discover I'd printed almost 20 million dollars using only my inkjet. 

Luckily, I've been able to control these urges by plastering Ford-era W.I.N. buttons ("Whip Inflation Now!") all across my workspace.

But there are other side effects.  Yesterday, I tried to call my wife "Cutie-pie," but it kept coming out "QE-pie."  Try as I might, I couldn't say anything else, and I found myself repeating it uncontrollably: "Hi QE-pie. Hi QE-pie!"  I felt like Leonardo DeCaprio at the end of the movie The Aviator. 

I'm telling you this as a warning, because today I realized what the problem was.  Initially, I had kept the beard close-cropped and above the neckline -- but over the past couple weeks, I'd gotten lazy.  When I looked in the mirror today, I saw that the beard had expanded completely unchecked and grown to an alarming thickness, not unlike Michael Moore.  It was now reaching down across my neck, threatening to overtake my throat and choke the sense out of me.  I also discovered about eight gray hairs. 

Its tranformation was nearly complete.  The beard was trying to take over my face, and if I didn't act quickly, it would soon claim my soul.

I sprung, or possibly "sprang," into action.  After subduing the beard with a hot towel and a hammer, I was able to gain the upper hand long enough to use my electric razor to trim off half an inch "across the beard."  After that, its control was weakened enough that I was able to use my Gillette to shave off the entire portion beneath my jawline. Enough beard remained that I still ran out of the bathroom and handed each of my kids a hundred dollar bill... but the urge to print money was gone!

Later, as I rinsed out the sink, I heard what sounded like hundreds of tiny, high-pitched voices chanting.  They were progressively fading in volume as they washed down the drain -- but as I shut off the faucet, I was just barely able to make out their faint words as the last whiskers spiralled down: "Crush the dollar!"

Actually, Little Bobby, I just remembered: you want to be Fed Chairman!  Forget everything I wrote... the beard is perfect for you.

Market Update

Moving onto the charts, the market has left a lot of potentials open, and I hope it doesn't get too confusing for readers.  I've spent literally the entire weekend trying to sort out one from the next, and I'm reasonably confident in both my short-term and longer term preferred counts. 

I have outlined the alternates because, despite all the time invested, there's never a guarantee that the preferred count's right.  And this is a game of inches right now -- so it's easy to see one or more alternate coming to town.

The possibility of an (x) wave, while purely speculative, gives me a bit of pause in simply declaring the correction over without further consideration.  I could go the straight line route and pretend it's not a possibility, but I've seen these things happen too many times after extended fifth waves to blissfully ignore the potential.  Nevertheless, I do consider the (x) wave to be the underdog here.

The correction did form a complete a-b-c, and that's all it was required to do.  Trying to predict an (x) wave is akin to trying to prove the existence of dark matter -- there's little evidence for it before hand (except possibly in real-time, which no longer fits the dark matter metaphor... quit being so literal!).

At this point, I'm favoring the view that the (x) wave will probably not materialize, but I think it pays to be aware of the potential, because then bears get double credit, income-wise -- and at the same time lower their risk profile.

Of course, no one wants to leave money on the table if this is now the fifth wave decline.

So, the best odds at this stage will probably come from watching the red downtrend line shown on the charts below.  If the market sustains trade above that trendline, then it becomes more likely that the (x) wave is in play, and will go on to make new highs for the correction.  Luckily, this means that even the most passive swing trader who went short at the 1384 rally target presented last week should be able to guarantee a profit.  More aggressive traders can find other ways to lock-in profit.

Long-time readers know that I try to assimilate as many factors as possible into my analysis, to help sort one count from another.  To this end, the timing of a fifth wave (instead of an (x) wave) seems to fit well into the seasonality. 

Below is an excerpt from my friend Lee Adler.  In his Wall Street Examiner Professional Edition, he analyzes -- among other things -- tax data and the moves of the Treasury:

The markets get a gift in the coming week. Depending on how strong tax receipts are, the Treasury will pay down as much as $48 billion in expiring short term bills on Thursday. That’s cash that will come back to holders of the paper. They’ll have to put it somewhere. This is a normal feature of tax week, and some of that cash usually flows toward stocks. Tax receipts are looking a little stronger than last year, so that the paydown is likely to be substantial even if it isn’t quite $48 billion. That should be enough to put a bid under stocks by Thursday if not before as the dealers and other holders begin to anticipate this cash hitting their accounts on Thursday.

Last year the S&P gained about 56 points in the 7 days following tax day.

This would fit the fifth wave count extremely well, as it is likely to bottom this week -- and from there the market seems likely to embark on the larger 2nd wave retracement rally to match the seasonality.

Of note, this seasonality does also fit the bigger picture alternate count of the larger wave (iv) bottom, so this is yet another reason for bears to be cautious.

After studying the charts this weekend, and giving consideration to as much additional data as I could, I am favoring the fifth wave decline over the (x) wave and wave (iv)   Do remain alert to those potentials, though -- because the market often does the unexpected despite our best efforts. 

The chart below shows the preferred count as represented by the blue lines.  The pink count is the short term alternate.  The gray count is the 2nd alternate. 

Also be aware that if the b-wave low isn't broken by this wave down, bulls could launch an even stronger counter-attack... in other words, something even more bullish than anything shown below -- such as the larger wave (v) rally discussed later.

If the market continues down strongly at Monday's open, then the pink count above may actually be the correct short-term interpretation.  The chart below shows why I'm favoring the blue count, but I'm almost equally split on the two.  I'm favoring the blue count by maybe a 5-10% margin.

If the blue count is correct, it's difficult to gauge how much, if any, downside is left to that wave.  It would look better with some kind of correction and a slight new low -- but if one counts all the little squiggles, then there's already enough for it to be complete.

I'm not sure exactly where to place the assumed wave (2) target, because I'm not certain if (1) has bottomed.  Expect (2) to retrace between 40-60% of (1).  If a snap-back rally materially exceeds the 62% retrace, then we may be facing one of the alternate counts.

Now let's back off a little, and examine the larger time frame, to see how the market could find support soon, to match my expectaton that this is the fifth and final wave of the decline before a larger correction.

Next are the RUT charts, both short and long-term.  The 5-minute RUT chart contains critical data I want to discuss in more detail. 

Many Elliotticians whose work I respect are labeling the decline as ALL OF wave (i) down.  But based on the RUT, that count doesn't work.  This chart reveals exactly why I do a lot of market cross-studies before deciding on a count (I don't mind revealing my "secret" -- because my secret is simply hours and hours of additional hard work each day.  Anybody can do it!  Though to be fair, I imagine it's more difficult for people who have day jobs.).

This is also why I've prepared the battery of longer-term charts to help illustrate why the markets could find support very soon (if they haven't already).

The preferred count is shown in blue on the chart below.  The short-term alternate is shown in pink -- and again I'm only marginally favoring the blue short-term count over this count.  The intermediate term alternate (of either (iv) or (x)) is shown in black.

Long-term support is also nearby on RUT.

NYA likewise demonstrates why it could find support soon.  We looked at this pattern a few articles ago.

Same goes for the Nasdaq Composite.

Of course, the market's not entirely predictable at all times, and the more bearish potential that most wavers are favoring can't be completely eliminated.  Based on the patterns in RUT and others, I view the super-bearish potential as significantly less likely, but not impossible.

There are pretty good-looking head and shoulders patterns forming in many markets... I suspect, however, that another bounce is needed before that pattern is fully complete.  The INDU chart below shows why -- as it sits right now, the right shoulder would be very narrow relative to the left shoulder.  And, as discussed, the more immediately bearish count doesn't fit the wave structures across markets nearly as well.

Still something to be aware of, though I would assign low probability to it.  The more bearish alternate count is in black.

And of course, the more bullish side of that coin looks like the alternate in the chart below.  I don't think I've missed a short-term call in a couple weeks, and I always get a little worried for my readers after a long winning streak, because it tends to breed complacency.  The market isn't "supposed" to be perfectly predictable, and eventually I'll miss some calls -- that's just how it goes, so please make sure you take precautions in order to be protected whenever the misses come.

There are two big picture alternates shown below.  The first is that wave (i) bottomed already (low probability, for reasons discussed), and the second is that wave (iv) bottomed.  The wave (iv) count is still quite high risk to bears.

As I said earlier, this is a game of inches right now -- in other words, it wouldn't even take a big miss to see an alternate potential play out.

Finally, since Apple is "the Economy" these days, it does appear that Apple may have finally put in a top of some significance.

I've also added a quick and dirty US Dollar chart.  A triangle breakout in the dollar might suggest some hope in the more bearish equities counts -- if it occurs with conviction.  If the dollar can put together a strong rally, then that's likely to cap any equities rallies.  Of course, it has not broken out yet, and can always form another leg down before a breakout.  Or not breakout at all.  We'll factor this into the equities analysis if and when it occurs.

I've labeled the chart with a potential wave count, but my confidence in this count is marginal.

In conclusion, it does appear reasonably likely that there's one more decline to at least marginal new lows below 1357 still coming.  Again, the first SPX chart, and the first RUT chart show the preferred count in blue. 

With the short-term counts, I'm trying to sort fly droppings from pepper here, so it's probably more important to focus on the bigger picture than the 1-minute "is this (3) of 5, or (1) of 5?" charts I've presented alongside it.  I'm simply trying to help readers maximize their awareness and earnings. 

Looking at the big picture, one can see I'm not currently part of the mega-bearish camp that believes we're entering a larger third wave down.  I think this wave is close to a bottom, assuming of course that it didn't bottom at 1357.  Depending on the structure laid out by the market in the next few sessions, of course, my outlook may change.

As of this moment, however, I believe bears should exercise caution, because the assumption is that this will be the final decline before a larger snap-back rally.  The (x) wave adds confusion to the potentials, and should definitely be watched carefully.  The key levels to watch are the red trendlines, and the recent highs on SPX and RUT.  If the market makes it back above those levels, shorts should probably get out of the way for the time being -- especially with the possibility of the big picture alternate count taking us up to new highs in a larger wave (v).

But if the overall view is correct, there should be another 20-40 points of downside left on the SPX first.   Trade safe.