SPX, NYA, INDU: Friday's Action Helps the Picture Gain Clarity

In the last update, we talked about the market reaching an inflection point, and I noted that my preferred near-term count had SPX very close to completing an extended fifth wave.  Friday's sudden drop validated my near-term count, as extended fifth waves almost always see rapid retracements.

Bigger picture, the bull count has had some questions to answer, and we've been watching for further confirmation (or rejection) from the market.  Friday's action was actually quite good for the charts, and my instinct is that Monday or Tuesday's action will clear up the entire picture.  I'm not going to discuss all the options I'm still seeing at this moment because it would get extremely confusing for readers.  Thus I'm only going to discuss the most basic options today -- but I feel like I see what the market needs to do from here; so, depending on what happens today, I may pop in on Tuesday with a quick update

First off, let's take a look at NYA, which was the chart that "started it all," so to speak, and let us know to short the all-time-high in SPX and to cover in the 1899-1907 zone.  NYA remains an excellent canary in this situation, because it formed a clear 3-wave decline into the lows, which was what we'd anticipated from the beginning.  If it can now overlap its wave (A)/1 low, then we'll have early confirmation that odds are indeed favoring new highs across the board.

This is due to one of the most basic principles of Elliott Wave, which states that wave 1 and wave 4 cannot overlap the same price territory.  Therefore, overlap of the wave (A)/1 low would tell us that the rally is not a fourth wave, and that would leave two options:

1.  That the low was indeed the bottom of wave C, and the rally is indeed the anticipated larger fifth wave to new highs.
2.  That the rally was another second wave, which would lead to a decline of monstrous proportions on a break of the last swing low.

Given the broader picture, option 2 would be the underdog in this situation.  Thus trade into that key wave (A)/1 zone would suggest bulls remain in control of the big picture until proven otherwise.

SPX essentially validated my near-term extended fifth wave count.  It's unknown to me if Friday's low marked the end of the entire retrace of that wave, but trade north of 1964 from here would suggest several possibilities:

1.  We're launching directly into a larger third wave of the rally off the low.
2.  A complex "double retrace" back to 1930-35 via an expanded flat (which would play out as new highs north of 1964, then a fairly direct reversal to new lows beneath 1942).  In that event, the dip would be a buying op.
3.  A potential ending diagonal motive wave off the low.  This is currently an underdog.  For this option to gain traction, I would need to see "more of the same" in the shape of the price structure over the next day or two.  Suffice to say there should be advance warning if this is unfolding.

If there are no new highs above 1964, then bears would have a shot to turn everything over here.  If there are new highs, then their chances continue diminishing. 

On August 13, I suggested bears "exercise extreme caution" if SPX sustained trade north of the 1944 +/- pivot, and the market has since bounced from that zone twice, including on Friday -- so that zone has served bears well.  At this point, the pattern has now shifted, and 1929 +/- becomes the key pivot for intermediate bears.  (I'm assuming the market's use of 1929 as the new bear zone is purely coincidental, and of no relation to that infamous year.)

Finally, another look at the long-term INDU chart.  It's always amusing to me how the media ascribes so much weight to news events as drivers of the market.  Note that on Friday, INDU was rejected directly at the blue dashed line that I suggested (a week ago) would be important resistance.  In my experience, the market often leads the news, not the other way around.

In conclusion (perhaps counter-intuitively) Friday's big drop may actually aid in solidifying the bull case, depending on how things unfold over the next session or two -- and depending on how things shake out today, I may update again on Tuesday.  Trade safe.

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