Time for Caution, Though No Reason to Be Bearish Yet

The updates have been suggesting higher prices all month, and the waves are still pointed upwards for the moment -- but I do want to show a few charts that act as caveats and suggest some degree of caution is in order.  The equities markets have remained a bit fractured, in the sense that related markets often seem to be suggesting completely different things -- and this is still making it difficult to predict exactly where we are in the larger picture.  I continue to lean bullish, but a little caution is now in order.

To illustrate the fractured nature of things: the S&P 500 (SPX) is suggesting a smallish correction that holds above 1451, then on to new highs.  But the NYSE Composite and Philadelphia Bank Index (BKX) are hinting that a larger correction may ensue.  There's simply no way to know for sure which it will be at this phase: we're too close to the recent highs to project much to the downside. 

Let's start with the short-term SPX chart.  This chart shows what is almost-certainly a three-wave rally into the 1472 print high, which suggests an expanded flat is unfolding (or already complete).  The expanded flat seems to connect the rally from 1451 to the wave that is unfolding now, which suggests the first part of the rally is simply wave (1) of (5) of the larger wave 3.

Note that the corrective fractal could be complete at the red wave A/alt: (4) label, in which case higher prices are due directly; this appears less likely, but trade beneath 1465.69 is required to confirm the 1461 target.  The only way to eliminate the bullish (1)/(2) potential of this chart is for the market to break below 1451.  Compounding the issue is the fact that the waveform from 1451 is exceptionally weird.

Moving out to the 30-minute SPX chart, we see how this wave fits into the bigger picture (labeled as red (i) (ii) and (iii) on this chart).  Note the alternate count that ALL OF wave 3 has completed.

There are no meaningful signs of a turn yet, but both NYA and the Philadelphia Bank Index (BKX) are sporting the potential of complete rallies.  The challenge here, though, is that the same structure discussed in SPX is entirely possible, and the wave labeled as "v?" may only be wave (1) of v.  There's simply no way to tell this early, but I would be remiss not to warn. (continued, next page)

And then there's BKX, which has not completed an impulse wave up off the low yet.  Normally, we'd expect an impulse wave in this position, but the potential of a diagonal means that an ABC would fit as well.  Because of all the fracturing and weird patterns, equities are exceptionally difficult to get a handle on at the moment.  If you've survived this market for the past year-plus, pat yourself on the back.  

Again, given what's in the charts presently, there's no reason to expect anything other than a continued bullish resolution -- but I do feel I would be remiss not to mention the warnings.

In conclusion, the bulls have had smooth sailing all year, and the updates have noted that was likely.  While there's no reason to "expect" a big correction yet, there are finally some early warning signs that point to caution.  Trade safe.

Reprinted by Permission; Copyright 2012, Minyanville Media, Inc.