SPX, RUT, CVX, WLSH Updates: Last Update Was the Bear View; Now Let's Poke Holes in It

In Thursday's update, I built up the bear case; for today's update, we're going to try to poke some holes in it -- and within all that, we'll look at some targets which fit both.

Since I covered the bear case in quite a bit of detail on Thursday, today I'm going to spend the majority of the article focussing on the alternate count and the merits therein.

It is simply not possible to see out around every bend in the market ahead of time, so the approach I take is to try to anticipate potential patterns before they occur, and then see how the market responds to validate or invalidate those potentials.  This alternate count is one of those attempts, and I think it's a very viable possibility.

The first key to remember is that tops are not supposed to be recognizable until after they've passed.  They are supposed to trap a lot of buyers on the wrong side, and they're supposed to blow out a lot of bears in the process (by whipsawing them) -- so that there's fuel for the first round of selling.  Some level of ambiguity is to be expected here. 

I've personally always found important bottoms to be relatively easy to call, at least the majority of the time -- but major tops are usually confusing places where the market becomes a bit schizophrenic and throws off a lot of false signals in both directions.  As we examine the charts today, we can see some of those signals present. 

I'm going to lead with the Wilshire 5000 chart to illustrate what I'm talking about.  Long-time readers will immediately notice that this count looks a bit weird.  It considers the option that wave 1 of (iii) was the extended wave, and the annotations explain the merits of this interpretation.  I really like how it lines up all the 2-4 trendlines present throughout the first wave. 

This chart took a long time, with liberal usage of the "delete" key, but it still remains the alternate count for now.

Let's continue running with the alternate count for a moment and look at some of the targets for SPX under the terms of that count.  The middle target of a 2.618 extension currently appears the most probable, but we'll have to re-examine as the wave unfolds. 

Here's what the alternate count would look like for the bigger picture.  I like that it would create a better-looking major top pattern and blow out all the bears who join the fray too late.  Note that the alternate count is not long-term bullish, it simply suggests a new high to complete the pattern.

RUT is giving similar targets for the alternate count.  RUT has also cracked its major uptrend line, which isn't bullish -- but it's not unusual for one to see this happen a few times as an early warning signal before the final top hits.

Let's throw this next chart into the mix, where my somewhat recently-discovered red cycle predicts a low near April 23, plus or minus a few days.  This could fit the terms of either count quite well.

So those are some of the things I'm watching here.  The final top may be in, but there are still an appropriate number of question marks surrounding that conclusion.  Next, let's look at the preferred count in more detail.

The first chart is a simple analog, and shows that RUT may be building a similar fractal to its last major top.

The next chart shows the SPX short-term targets, which work under the terms of either count.  It's possible that Monday's decline will mark the fifth wave of the total decline (black), but I view it as quite a bit more probable that it is actually wave (3) of 3 (blue).  1380 is the first target under the blue count, 1360 is the second.  The chart talks about watching momentum for confirmation.

The target of 1350 shown earlier as the alternate count 2.618 extension would work quite well with the short-term interpretation, which is reading this as a nest of 1's and 2's.  Because there were no violations of the previous 1 and 2, an extended fifth wave is also valid.  The final target for an extended fifth would be 1342-1345.   

Finally, an update on CVX.  There are two ways to look at CVX here -- there's the hard math conservative way, which says a bottom is close.  Then there's the gut instinct way (my approach), based on experience.  I'm going to show both views here, but conservative traders may want to opt for the conservative approach and take profits more quickly.  Until I see the market open, there's literally nothing backing my read but my gut.  

CVX has been a big hit overall, and the trade is already about 6% in profit since I first called attention to it on March 18 -- so there's no need to get overly greedy... but at the same time, one never wants to leave a bunch of money on the table.  I haven't called a bottom in CVX yet because I haven't seen one. 

If CVX opens Monday down significantly and momentum confirms, then it's likely that my "gut instinct" view is correct and the question becomes whether to take profits near 101 or simply move stops and push for the lower target.  If CVX is showing divergences in momentum on the open, then one may wish to opt for the very conservative "wave 5 almost over" approach and take profits quicker.

There is also an even more bearish interpretation which says that 3 and 4 are another 1 and 2.  We'll reassess this chart as needed.

In conclusion, referring back to the larger view of the market, there are two main possibilities, both quite viable.  There are bearish signals across other markets, which may indicate the market made a long-term top -- but there is enough ambiguity to give me quite a bit of pause, and I feel it's prudent to let the market dictate further before trying to draw definite conclusions.

As I expressed heading into Thursday's close, both short-term patterns expect lower prices directly.  The 1350 +/- zone currently seems to be a pretty good final target for both counts, but traders should definitely exercise good trade management until the pattern unfolds a bit further and allows more accurate targeting.  We'll reassess all this as the move develops.  Trade safe.