Bulls and Bears Battle in US Equities, while Indicators Conflict with Elliott Wave Counts

Long-time readers know I'm not a "perma" anything when it comes to equities.  Outside of how it impacts my account (and yours), I really don't care whether the market goes up or down.  I let the charts dictate the probabilities, then trade in the direction that seems like it's going to pay the most.

We have an interesting situation now, because a lot of traders will have systems that have switched to buy signals on the recent rally.  That means the majority will be expecting upside follow-through, and many will be expecting new all-time highs (in fact, I've heard numerous perma-bulls gloating already, as if new highs are simply a given).  Some of my indicators are on buy signals as well, and I have to respect that -- but I also have to respect the wave counts.  These are the most difficult moments for me as an analyst, because I have conflicting signals between my preferred wave count, which is bearish, and my indicators, which are bullish.

So I've combed the charts extensively for clues, and in this update, I'll present a few things which may help as signals.

While the S&P 500 (SPX) has rallied basically straight up, a number of indices are lagging by a significant margin, and we're going to look at two of those today.   First up is the Russell 2000 (RUT), which has a bit different wave structure than SPX, as shown below:

    
Next is the Dow Jones Transportation Average (TRAN).  TRAN's rally so far appears quite anemic in comparison to SPX (shown in the lower panel).  Note that TRAN has run into resistance.  Also note that the first upside target (this is not a target that was discussed previously here, it was one I calculated near yesterday's open) for SPX (1823) has been reached.  Not shown on this chart is the fact that hourly RSI (for SPX) confirmed the 1823 high with no divergences. 

From a near-term perspective: If SPX makes a low below 1818.38 before it breaks above 1821.32, then it would suggest we've formed at least a small impulsive decline against the 1823 high -- which would favor that at least one more leg down (of similar length or longer) would follow the next small bounce.

Finally, the SPY chart.  As I mentioned a moment ago, many of my own indicators are now bullish -- so in order to understand why I'm still favoring the bearish wave counts over the bullish indicators, we need to revisit something I discussed on Monday:

There is only one thing bothering me for bears here, and that's the fact that my preferred count has us presently retracing an extended fifth.  Extended fifths frequently form impressive "double" retrace patterns -- if that happens here, the current rally will retest the all-time high before dropping to new lows.

From an intermediate perspective, we are currently retesting the all-time high.

In conclusion, this is one of those times when you almost hate to make a call, because you know that if you're wrong, you're going to berate yourself for ignoring your own indicators.  Yet I have to honor my own system, and feel I owe it to readers not to be wishy-washy here (and I'm fully prepared to eat crow if necessary!). 

The toughest part of trading and analysis is when the probabilities don't line up with the actualities -- and although this happens in everything in life (as you know if you've ever uttered the words, "What are the odds?"), when it happens in trading, it costs us money.  Ultimately, we simply have to see that as "operating cost."  No venture in life is without risk -- and even something as simple as driving five minutes to the local drug store can turn into a life-altering event.  I use this example because I almost had a head-on collision on the highway last night, when I rounded a blind turn and came face to face with a car in my lane who was trying to pass in a no-passing zone.  I ended up coming to a full and complete stop in the middle of the highway (from 50+ mph!) in order to avoid hitting him.

Trading is sometimes no different.  This is one reason why risk-management is an integral part of any system (yet one that's often over looked by newer traders) -- when the probabilities don't go as planned, make sure you're at least wearing your seat belt.  Trade safe.

Follow me on Twitter while I try to figure out how to make practical use of Twitter: @PretzelLogic

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