SPX and INDU Updates: It's Painfully Obvious What's Going to Happen Next... or is it?

The very short-term charts are still a mess.  Some personalities feel that an analyst should be able to have a strong opinion on the market at all times -- unfortunately, out here in the real world, that's simply not realistic or possible.  Sometimes I have a strong opinion, other times the market dictates a "wait and see" approach. 

Personalities who require a high degree of certainty and security are probably not cut out for trading, since the market is an oft-ambiguous place.  If you ask your broker, they will most likely tell you that they "don't try to time the market" so even the majority of brokers are afraid of trying to sort through the potentials.  It's not an easy gig.

Accordingly, I'm going to discuss what I feel reasonably confident in, and what currently appears ambiguous. 

Here's what I'm (almost) certain of:

1.  The market will make a new low beneath 1343.

However, there are two issues that I'm simply not certain of:

1.  Will the market make a new short-term high first (above 1365)?  (I view this as less likely, but not impossible.)

2.  Is the corrective rally from 1343 a fourth wave at low degree -- or actually the second wave at higher degree?  It appears to be a fourth wave, but that's not as clear-cut as some would like to make it.  Very muted second waves at this degree have been known to occur in extremely weak markets;  examine the 2011 mini-crash (below) for a recent case-study.

Before the open on Friday, I discussed the strong potential for a gap open on Monday, and the short-term counts seem to indicate this opening gap will indeed come to pass. 

The present challenge at this juncture, which I've alluded to in the past, is that fourth waves will often string together several complete fractals to make up a larger fractal. The rally from 1347 to 1365 was a complete a-b-c fractal, which is what led me to believe at the beginning of last week that there would be new lows coming beneath the 1347 print low. This happened, of course, and yet because of this tendency of fourth waves, I cannot be absolutely certain that the 1343 low was not still part of the fourth wave.

Further, I simply can't be certain whether the recent bounce was red wave ii or a continuation of blue (4).  It would be very weak for a second wave -- but again, see 2011 for examples of why that's not impossible.  On the Dow Jones Industrials, it counts passably-well as blue (4) (see 2nd chart). 

At times like this, we'll simply have to play it by ear as it unfolds.  Despite the aggressiveness of the count below, and the fact that it's not "obviously the right count," I am leaning ever so slightly toward this interpretation.  When everyone's on one side of the counts and market, I say: bet the other way.

The Dow counts well enough as a running triangle, but the e-wave looks too impulsive.  The same potential ugly wave ii exists here as well.  On this chart I've labeled the aforementioned fourth wave as the preferred count, for contrast.

The incredibly bearish potential which seems to have been ignored by most is the possibility that this whole decline has been nothing but a nest of 1's and 2's.  I've illustrated this on the RUT below.  There has been absolutely nothing to allow this count to be ruled out -- and if this is what's occuring, then the market could decline relentlessly if support fails, so be careful out there.

Since the potential wave counts are ambiguous at the moment, I've prepared a simple chart of support and resistance.  Sometimes these can be useful until the count clarifies.  The potential support at 1340 does lead one to believe that the wave (5) count could be the correct interpretation.  It bothers me that this count is almost too obvious, however.  When a support zone is that obvious, many traders front-run -- so when the market finally gets there, there may not nearly as much support as everyone thought there would be, since many buyers jumped in early. 

Through the years, I've seen the market set traps like this before. 

If we get a solid bounce near 1330-1340, great -- wave (5) it was, and enough buyers were waiting in the wings to drive a decent rally.  But if we get a muted bounce there, then watch out.  Because if and when the "obvious" support zones break, everybody tends to bail at once and the market tanks. 

Below is a zoomed-in version of the support/resistance chart shown above.

In conclusion, both counts are ultimately expecting new lows below 1343.

The "obvious" count is that the next low will mark wave (5) and lead to a solid bounce.  I'm not 100% sold on that view, however, and I think the market is potentially in a very dangerous position.  If support holds, then great: false alarm.  If it doesn't, things could get ugly fast.

There has been some talk of late regarding Germany possibly capitulating to a new round of printing from the ECB.  If that happens, then all bets are probably off for the bearish intermediate term view (the short-term outlook still stands), since that new liquidity flood would find its way into the market, just as the last one did.  As such, I should also mention that it still remains viable from an Elliott Wave perspective that the decline from 1422 will be fully retraced after the next bottom and that an intermediate-term low is nearby... but until the market can either reclaim some key levels and/or form a more convincing bottom (or the EU announces LTRO II), I'm not giving much air-time to that potential. 

I'm sorry that my certainty -- beyond expecting new lows -- is limited at the moment, but to pretend otherwise would be intellectually dishonest.  We're simply going to have to watch how it develops over the next few sessions to gain further clarity.  Trade safe.

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