This Counter-trend Rally Should Be Short-Lived; Here's Why

On January 14, I outlined why I thought the decline would continue a bit lower before finding a bottom and launching into a strong counter-trend rally.  I continue to believe this rally will present the best short opportunity this market has seen in a long time.  Let's discuss why.

First off, let's establish whether this Elliott Wave stuff has any validity.  As my veteran readers know, I was long-term bullish on equities on the very first trading day of 2013.  By February 8, 2013, I'd calculated (and published) two long-term targets for the S&P 500: my first target was 1750 +/-; my second target was  2170 +/- .  I mention this not to toot my own horn, but so that newer readers understand that I am not a perma-bear.

(If you're new to Elliott Wave, it may help to visit my primer on the subject:  Understanding Elliott Wave Theory)

I've been employing Elliott Wave since the 90's, and I learned a long time ago: It only works to the degree that you can take your ego out of the picture.  The second you lose your objectivity, you'll begin to warp the charts into whatever you personally want to see, and you'll stop seeing what's really there.  And once you stop seeing what's truly there, you're no longer analyzing the market, you're simply projecting your own hopes or fears onto a price chart. 

Time and again, I've watched analysts succumb to bias, to the detriment of not only themselves, but of their readers/subscribers.  Thus I do my best to analyze and trade what I see, as opposed to trying to get the market to follow along with my personal agenda.  To me, the challenge lies mainly in determining what the wave structures actually are; and the fact is, sometimes they're incredibly hard to interpret.  At those times, any of us can make mistakes, so my analysis is far from perfect.

But I do try to keep it unbiased as much as humanly possible.

Back to the point: I remained long-term bullish for the majority of the past couple years, but more recently, on November 17, 2014, I published the following preferred count for the S&P 500 (SPX):

  
As we can see, Elliott Wave has performed pretty well, considering that projection was published more than two months ago.  I refined those projections in real-time, and remained bullish until the end of December.  Let's take a look at the updated chart, which features additional trend channels, and a whole bunch of clutter in the form of historical annotations.

We'll come back to SPX in a minute.  I'd like to jump over to the Dow Jones Industrial Average Ordinary Mediocre (INDU) first, because this chart is the chart that clued us in to rally potential back on January 14.

The most noteworthy change to this chart is that Friday's failure at 17262 suggests that the remaining intermediate options are bearish or more bearish.  It's a challenge to find an intermediate bull count in this chart, and that's very unusual for me to say.  Literally the only bull count I can see would be if wave (3)/C truncated severely and completed at Friday's low -- but that's unusual, and would almost qualify as a "failed" c-wave.  In other words, that would be the exception, not the rule.

There's little to add since the update of January 15, but I have included a black alternate count, which would see a smaller expanded flat than previously anticipated.  Basically, if you're a bear, you might want to watch for the first five-wave impulsive declines as sign of a turn, because C-wave rallies (current rally) can be fast and unforgiving of counter-trend (meaning counter-trend to the C-wave) trade attempts.  Ultimately, this rally itself is expected to be counter-trend to the higher degree waves, of course.

On the INDU chart below, I've added significant detail to outline my thinking.  The pattern currently underway is expected to be an expanded flat.  In a bearish expanded flat, the (b)-wave low exceeds the start of the (a) wave; and the (c) wave high then breaks the high of the (a)-wave before reversing again to head back below the (b) wave low.  It's the ultimate double-whipsaw, slaughtering traders who use prior highs and lows for their stops or entries.  What's interesting about the current wave is that there appears to be an expanded flat within the expanded flat (the middle blue a-b-c that makes up the (b) wave).  This is one of my favorite patterns to trade, because it's fairly high probability.

It's worth noting that bears and bulls alike should stay alert to the possibility of a running flat, which would see wave (2)/B stall just short of the blue b-wave high.  The odds go to the expanded flat based on percentages, and because the market likes to fool the majority, but a running flat is always possible and simply cannot be predicted or ruled out.  Thus, as (and if) we approach 17,850+, stay very alert if there are any signs of an early turn.

Finally, let's examine the 1-minute SPX chart.  It's worth mentioning that SPX has a slightly different wave structure than INDU, in that it did not make a new high when INDU did -- so it's possible that SPX is in a slightly different wave count.  As noted on the first INDU chart as "alt. 2," there is another possibility here, and that's the more bearish option that the prior decline is a first wave.

For the moment, anyway, we have to give significant respect to that possibility.  Note the classic TA target for the prior basing pattern also lines up with the second Bear: 2 target zone. 

In conclusion, there's limited clarity in the near-term wave structure from which to draw a high-confidence reversal target, though the pattern does at least suggest further upside for the moment.  Hopefully the near-term charts will clarify further in the next session or two.  In the meantime, we do have some pending near-term inflection points, where we should at least stay alert to developing turns.  If the rally can make it through those, then, at best, I think bulls are done when the expanded flat noted on INDU is complete.

And regardless of which near-term path we take, the intermediate picture still appears decidedly bearish for the moment.  Trade safe.