SPX and RUT: Bull Case, Bear Case

If this had been a normal market for the past few years, then I'd probably already be rabidly bearish.  But this has not been a normal market -- and once bitten, twice shy, as they say.  Or as George W. Bush so eloquently put it:  "Fool me once, shame on you.  Fool me twice, and I'm going to punch some central bankers."

I mean, let's face it, bears have been here a few times before.  It goes like this:

1.  Support levels begin failing, VIX spikes.
2.  The pattern starts to look exceedingly bearish.
3.  CNBC trots out several analysts who all share the nickname "Dr. Doom," and they each talk about how the fundamentals are garbage and the market is clearly headed to zero or below.
4.  Bears see a bunch of green in their accounts and start to feel excited...
5.  One of the major central banks announces some radical new program, such as that it will be providing free, unregulated personal printing presses for each and every banker who'd like one.
6.  SPX gaps up 257 points, and shorts are left running for cover as the market rallies relentlessly.

So are there any differences now?

Well, there is one elephant in the room, and that's the recent, and still ongoing, oil crash.  Needless to say, an oil crash is deflationary, and has the potential to cause a host of interconnected problems.  This is a new twist in the market picture relative to previous recent corrections, so maybe this time bears are for real.

But I think the jury is still out on that.

Let's start with RUT, which has essentially confirmed that its last major correction (from July) was exactly that: a correction.  This implies that RUT needs new all-time highs to fulfill its pattern.  I've been looking at RUT with that bias, and expecting a fifth wave up to new highs.  Some analysts are now saying that RUT must have had a failed fifth wave.  I take issue with that conclusion for several reasons:

1.  Failed fifth waves are the rare exception, and one should only consider them as a last resort.
2.  There's nothing in RUT's chart yet to invalidate a fourth wave -- so a fifth wave up is still entirely viable.
3.  There are other options beyond the simple linear logic that "either RUT makes new highs or it's a failed fifth."

For example, the decline off the all-time high can be corrective, as part of a triangle -- which means the rally since October would also be part of that ongoing correction.  In that case, the rally would be an ABC -- which, without a fifth wave, is, in fact, exactly what it is (as of this moment).

So, I think since the fourth wave has not been invalidated yet, a fifth wave up should still be considered as a very viable possibility.  If no fifth wave materializes, then our first consideration should be that the rally was an ABC and no fifth wave is needed -- and the correction from 1213 is thus ongoing.

 
Next, let's look at the long-term SPX chart.  This chart is little changed over the past month -- in fact, on November 17, I suggested a target of 2065-75 for the peak of 5.  If the decline continues from here, then we simply got "caught looking" at the top, as it was anticipated well in advance in the big picture.

The December 10 update noted that "Ideally, we are nearing the completion of wave 5 of 5, meaning bulls will want to stay very nimble.  Do note that SPX is now BELOW the blue trend line, which should be viewed with some caution as long as it continues."

So, is it time to call it quits on another wave up?  Well, that's a matter of personal preference, of course -- but objectively, according to the charts:  Not just yet.  As we can see below, SPX has (so far) only formed an ABC decline:

COMPQ is also near an inflection point:

In conclusion, so far, the decline is not impulsive, so bulls aren't out of the running just yet.  The next few sessions will be important, and should help us determine if bears have already seized intermediate control -- or not.  Trade safe.