SPX and INDU: Bull Case, Bear Case

The longer a market spends inside a chop zone (trading range), the more difficult it gets to interpret the near-term wave patterns, and the less reliable the reads of those patterns generally become.  Whipsaws become more and more common, because each near-term support or resistance level (inside a range) grows weaker the more times the market trades around it, which allows the market to start pushing those levels around.  It becomes harder to judge which waves are impulsive and which are corrective, because the more often a market trades through a range, the thinner support and resistance become -- so every wave seems to move with ease, and the usual signs of corrective waves grow harder to spot.

I'm noting this because this chop zone has reached a point where it's difficult to get a fix on the near-term waves, and you'll likely find that even trend lines and traditional support/resistance are going to get a little squirrely as long as the market remains within the range.

In the last update, I noted that a deep retrace of the prior decline seemed probable, and noted SPX 2105 +/- as a potential target -- and SPX rallied all the way back to 2109.  There were a lot of sellers waiting in the zone near the high, and yesterday's opening pop was rapidly reversed.  But it's "put up or shut up" time for the bears here, and in the event of a breakout, we'll have to give odds to the bullish triangle that I've been discussing for the past few weeks.

Since I mentioned it, we'll start there:

SPX intermediate counts:

Let's take a look at INDU's long-term chart for perspective: (continued, next page)

INDU's 60-minute chart shows one possible path for the near-term, but do please refer back to the opening paragraphs, and realize that projecting the near-term with accuracy has grown to be almost impossible at this point in the trading range.  In the event that there's anything to this, then SPX would, of course, follow a similar path.  But by practical necessity, my confidence in the near-term path is somewhat low.

This chart only presents the bear case -- see SPX triangle chart for the more detailed bull case.

Finally, INDU's simple trend line chart:

In conclusion, there's no real change to anything, since we're still in the chop zone -- but I do want to mention that in markets like this (going back several months here), I often build my thesis by analyzing the smallest time frames, then work up to form a complete picture.  When I initially built the bear thesis (months ago), many traders were looking for a moon-shot rally.  That looked unlikely to me from the position the market was in at that time -- and indeed, afterwards we went on to break the March swing lows in INDU, so I was correct in my view that the March lows appeared unlikely to represent a significant bottom.

Part of the reason I built that bear thesis was because the rallies appeared corrective, and indeed they were -- but at this point, months later, we do have to recognize that corrective rallies would still fit a triangle pattern (each of the five waves in a triangle is corrective), as shown on the SPX chart.  Does that mean I'm capitulating the bear case?  Well, no, because as I've said before, I make it a rule not to turn bullish near resistance.  But I'm not closed to the bull case, and if the market can make a clean breakout from the trading range, then that case will have to be respected.  Until then, I'll continue to slightly favor the bear case -- because, the fact remains, the rallies have been corrective.  That means bulls have to prove those corrective rallies are all part of the same consolidation structure and not something more ominous -- and they can only prove that with a sustained breakout.  Trade safe.