Battle at Inflection Point Still Raging: Here are the Levels Bears Need

Last update, I discussed that I felt the 1750+/- zone was important resistance, and that the market was hovering in a larger inflection zone.  Since then, the S&P 500 (SPX) has moved less than 2 points on a closing basis -- so the battle is still underway -- however, bears pulled an interesting reversal in that time, and now have the potential to grab the ball.

We'll start off with the one-minute chart:  The pattern that looks best to my eye is shown in blue.  Interestingly, as I was drawing this chart, the E-mini S&P futures (ES) were up about 8 points, which would have blown out my preferred count. But ES has since declined to +4, which is back into the zone where my preferred cash count can work.

In my perfect world, I'd love to see the cash market open at 1750 +/- and then get sold hard (the proverbial "pop and drop"): That would give me high confidence in my preferred blue path.  I've outlined the levels to watch, on the chart below:

The 30-minute chart shows the market found support at the price point I noted in the last update (1740).  Bears would gain a major foothold on this market if they can reclaim that zone and turn it into resistance.  If bulls continue to hold that zone, then we're simply witnessing a back-test of support, and bears will have to go back to sharpening their claws while waiting for the next opportunity.

The NYSE Composite (NYA) paints a slightly different picture than SPX in a couple ways.  What's most interesting on NYA is the island reversal at the high -- we haven't seen an island reversal from a high since back in the day when Miley Cyrus was still perceived as wholesome.  The other interesting footnote on this chart is the fact that NYA is currently above blue trend line.

In conclusion, from an Elliott Wave perspective, the near-term pattern which looks best to my eye suggests the decline still has farther to run -- however, from a classic technical analysis standpoint, bulls have so far held support.  The battle in this inflection zone continues to appear to have larger implications for the broad market.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Will the Market Repeat this Fractal?

There's been no material change in the S&P 500 (SPX) since last update, and 1750 +/- is still the critical zone for bulls to claim -- so today we're going to take a look at some other markets.

The first is the Philadelphia Bank Index (BKX).  As most of us remember, at one point in the now-seemingly-distant past, the country was experiencing a "financial crisis."  That was, of course, back before the government realized that all they had to do was buy anything and everything in order to create an atmosphere where businesses would thrive and unemployment would plummet and the economy would heat up... or wait, none of those things have happened.  Let me consult my notes here... here it is: they realized they could create an atmosphere where at least the prices of assets would keep rising no matter what, since there's always One Big Buyer waiting at the end of every transaction.  Anyway, somewhere in there is one of the reasons I still pay a lot of attention to what the financials are doing.

I found this chart interesting, because the current pattern is an almost-perfect fractal of the move from January to May of this year.  If BKX goes on to make new highs here, the fractal will be an exact copy, complete with the truncated c-wave decline.  We really haven't seen much in the way of "normal" corrections since QE-Infinity kicked in -- most every correction has fallen short of its typical expectations.  In the current wave, usually I'd look for this rally to be a fake-out, which then allows the pattern to reach its typical downside resolution (shown in red).  In this market, though, the One Big Buyer may not allow it.  Phrased in less dramatic terms: there may simply be too much liquidity floating around for equities to correct "as usual" until QE tapers or ends.

Next is a chart is the Nasdaq Composite, which is a more "modern" index than the S&P 500, and which earned its name because it was constructed from a blend of wood and plastics.  (SPX is constructed solely of wood, since composite had not yet reached widespread use in the 50's.  It's important to know market history!) 

The Nasdaq Composite has now rallied into its Fibonacci target zone from early July.  This isn't much aid for short-term trading, but from a longer-term perspective, it's of some value to watch how the market reacts to this zone.
    

Like any trading system, Elliott Wave Theory derives its value from anticipation.  And that anticipation comes from identifying the fractal the market is "trying" to form next.  The challenge, which I outlined in a few different ways last week, is that there are points where you can't really be sure what the fractal is, and you simply have to take a step back and wait it out.  When the market reaches those points, I generally simplify my approach -- assuming I choose to attempt to trade at all during such times, which I sometimes don't.

With simplification in mind, here's a straightforward trend line chart, with a small bearish sell trigger noted at yesterday's low.  The first step for bears is to force a breakdown of the blue melt-up channel.  The next step for bulls remains the 1750 +/- zone.
  

In conclusion, the market remains poised at a larger inflection point.  The last noted inflection point was on October 10 -- so inflection points do have the potential to generate strong reversals.  As of yet, however, that potential remains unrealized, and the uptrend remains intact.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Equities Enter Blind Spot

I'll admit, I thought that last rally had "done it."  I thought it had accomplished its goal and flipped the final bears, and sucked in the last of the bulls who'd come late to the party.  I figured the market wouldn't reward those late-comers.  I was wrong.  I should have known better.

Right now I'm hearing a narrator in my head -- that deep-voiced fellow who does movie trailers -- and he's saying: "Coming this October to asset prices near you, the Fed gets revenge in:  Lender of Last Resort III: A Fistful of Fiat Currency."

The market has now traversed into price territory where a myriad of possibilities open.  Elliott Wave Theory can really shine at times, and there are moments I can project the market's next move with high probability.  But at times the market enters into a the equivalent of a blind spot -- and you really can't see what it's planning until it begins to emerge to one side or the other.  I think the temptation with any trading system is to push it beyond its limits and try to anticipate every single move -- but no system (I know of) can actually do that.

We're still in price territory where my original long-term count from February was suggesting a top could form (1750 +/) .  That target was calculated using several methods, so we should probably allow it room to see if it plays out -- but I have to admit that I'm not sure how well the near-term wave structure supports an ending diagonal here (see chart below), so I'm entirely open to a more bullish resolution.  We'll have to see how the market looks emerging from this blind spot.

Interestingly, based on near-term calculations, sustained trade north of 1750 is where I'd largely rule out the immediate ending diagonal (shown in red).  Beyond that level, and we're likely in for the more bullish resolution, which presently could take the form of a more extended sideways-up that frustrates everyone, or a more rapid blow-off move higher.  And again, this should be determinable as we emerge from the current blind spot.      

    

I want to publish two quick updates on other markets.  I've been kicking myself for not calling everyone's attention to IBM, which I noted personally for my own trading, and almost published on October 9; this is one of the charts that kept me leaning bearish on the broader market (wrongly, as it turns out).  I couldn't see any way to view IBM bullishly on that date, and I still don't see good odds for an immediate bottom here.  The decline doesn't look finished.

With that lesson in mind, here's a chart of the US dollar, which has been looking triangular-ish (of course that's a word!) for some time now.  This triangle could be flipped on its head (making it long-term bullish) and it wouldn't matter in the least for the foreseeable future: both the bullish and bearish version of the triangle would grind sideways in a similar fashion for at least another year.

As I noted last year when I flipped my stance from dollar-bullish to dollar-neutral, it's really hard to view the rally from 72 as anything other than a corrective wave.  The first step for dollar bulls to make this chart look more encouraging would be to reclaim the broken support zone at the blue trend line.

In conclusion, as I mentioned in the last update, I don't feel the (now actually reached) new all-time high is reason for complete capitulation of the bear case just yet, but I'm not going to stubbornly cling to that view either.  Viewing everything with as much objectivity as I can muster, I'd say equities have entered territory where bulls and bears have roughly equal odds at the moment.  The good news is equities should emerge from the current blind spot relatively soon, and allow us to assign higher probability to the next move.  In the meantime, trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Market Continues Surfing Despite Tsunami Warning

People become desensitized to certain things rather quickly.  The market now appears to have become entirely immune to the debt ceiling crisis (or debacle, or whatever term you prefer).  To illustrate why this happens psychologically, I need look no further than personal experience.

Since 2009, my family and I have lived in Maui, Hawai'i, and in the years we've lived here, there have been maybe a dozen tsunami scares.  I vividly remember our first big tsunami scare, since my adrenaline was pumping for hours.  We were awakened by the tsunami warning sirens at 6 a.m., and we rushed off to the grocery store to stock up on essentials like water, batteries, Rolos, etc.

The tsunami warning center said the first wave would arrive at 11:19 a.m..  We drove to high ground, where we'd have a good view of the ocean, and I sat there with my camcorder at the ready, anxiously awaiting the arrival of the first big waves.  As the clock ticked down, I turned on the camcorder, and zoomed-in on the beach.  To everyone's amazement, precisely at 11:19 a.m. almost to-the-second -- exactly when scientists said it would arrive -- there was nothing.  So we watched and waited some more.  Then we got hungry and went home to watch the local news.  Then we took naps, because let's face it, who gets up at 6 a.m. on a Saturday?   As it turned out, that tsunami was a complete non-event.

The next tsunami warning we experienced was slightly less exciting, but still tense -- but it also turned out to be a non-event.  By the third, the routine had become old hat (and I had amassed a stockpile of water and canned goods already, so no need to rush to the store anymore) -- so while there was still a little bit of nail-biting, I think the sentiment was best summed up by my wife who remarked, "Yeah, whatever, that's what they always say."  And it was indeed another non-event.

Ever since then, we've been pretty much immune to the drama.  And while we're not willing to completely throw caution to the wind like some folks (out here, you often see locals walking the beaches and surfing while the sirens are blaring), we really don't get too worked up about it anymore.

It's a mathematical certainty that one of these days, the warnings will actually pan out and a devastating tsunami will hit our shores and wreak havoc with our infrastructure.  But in the meantime, we've become largely desensitized to the whole thing.

I think America has collectively reached a similar psychological footing in regards to the debt crisis.  Nobody really believes anything will come of it.

And maybe it won't.  If we're really lucky, our leaders will decide on yet another "temporary" increase of the debt ceiling, so we can do this all over again in a few months.  That certainly seems like the most likely resolution, since it would allow the government to solve the problem by doing what it does best:  nothing.

Regardless of outcome, I find it interesting that the market seems to be pricing in the odds of US default at essentially 0%.

ConvergEx Chief Market Strategist Nicolas Colas recently wrote: “If there were even a 1% chance of a Treasury default, the VIX would be over 20 and stocks would be retreating, not advancing. Too much of the world’s financial system is predicated on Treasuries as 100% reliable collateral to believe anything else. Russian roulette with a 100 chamber revolver is still too dangerous a game.”

So the market is saying not only that default won't happen; it's literally saying that it can't happen.  I think watching the market rank the default potential at 0% bothers me for the same reason I'm bothered when I see people surfing during a tsunami warning.  Yeah, I agree, odds are good that probably nothing will happen -- but the odds are still most definitely higher than 0%.  Anyone who's studied quantum mechanics and is familiar with the Heisenberg Uncertainty Principle knows that the odds are never 0%, any more than they can be 100%: simply nothing in the physical universe can be quantified with those levels of absolute precision.

Still, I realize there's no sense trying to preach the Morality of Odds to the market -- as John Maynard Keynes famously said:  "Markets can remain irrational a lot longer than you and I can remain solvent."  In other words: the market's gonna do what it's gonna do, and it really doesn't care whether we judge it as careless or not.

So the market is clearly front-running a positive outcome with the latest rally.  That sort of front-running can sometimes create "sell the news" events.  If too many investors get on board with something before it happens, then there's not enough folks still left to buy after it happens, and sellers take over.

Here's an interesting chart of the Nasdaq Composite (COMPQ).  Last time I published this chart, I anticipated a rally, but also expected we'd later see a retest of the low, due to the RSI readings at that low.  COMPQ instead went on to overlap the key bearish price point, which suggested a new high; which it has since narrowly achieved.  But the question posed by RSI still remains: Can bulls cheat the odds entirely here?  Obviously it's not impossible that they could -- I can't predict the future, I can only examine the past and try to anticipate based on what the odds suggest is likely from prior examples.

  

Financials continue to lag the broad market, which hasn't been particularly bullish in the past.  Note that so far the Philadelphia Bank Index (BKX) is simply testing the black resistance zone.

The S&P 500 (SPX) remains within the multi-month noise zone.  A new high isn't out of the question, but presently, I would expect a correction to follow soon after.  Bears like to feel downtrodden about the market (seems to go with the disposition to a degree), but they might ask themselves: How many bulls have bought those last two breakouts to new all-time-highs, and how are they feeling after two immediate whipsaws?

If the market does sustain trade above the previous all-time high, then next resistance is indicated in the 1740-1750 zone.  On the bearish side, there's a small potential head and shoulders forming on the SPX 5-minute chart, which suggests a trip toward 1680-85 if 1695ish fails.

 
In conclusion, as I noted last week: I'm not closed to more bullish options.  But all I can work with is what's in the charts right now -- and there are a few things still suggesting that bulls aren't out of the woods just yet.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Friday's Projection Played Out; What Next?

On Friday, I drew a somewhat unconventional near-term projection, projecting the market would close at 1703 and decline first thing Monday.  Shortly after Friday's close, CME announced that it's raising margin requirements -- which is a bit of an unusual move, given the relatively low volatility we've had this year.  If we assume traders are net long after that rally, the newly-increased margin should impact bulls more than bears. 

Then over the weekend, Congress and the White House indicated that the only point on which they both agree is that they still hate each other.  In the spirit of true bipartisanship, the President stated that he wouldn't be willing to work with Congress "even if it was the last Congress on earth," while Speaker Boehner was quoted as saying he'd be willing to negotiate "only if President Obama stops making fun of my tan."  This rhetoric was markedly less virulent than last week's, so pundits are arguing that these statements mean we're extremely close to an agreement.    

All that to say: the news over the weekend wasn't terribly good, and futures are suggesting a decent-sized gap down for Monday's open.  This means I hit the short-term projections exceptionally well -- but I would caution that my short-term work is based on (oddly enough) the short-term; so neither the close at 1703 nor the ensuing gap down will guarantee that the intermediate wave counts are also correct.

This is a truly difficult position for intermediate prognostication, because the market has been essentially range-bound for the past several months, and very little information is conveyed within a range-bound market.  To make matters even more challenging, markets often move quickly through thinly-traded ranges, which can give the appearance of greater strength (or weakness) than is actually present, causing indicators to give false readings.  These are some of the reasons this is boiling down to an instinct call for me: there simply isn't much in the charts to argue definitively for one outcome over the other. 


I still feel it's more likely that the decline isn't done at intermediate degree, and that a stronger sell-off is pending.  And I think it's safe to say I'm probably bucking majority sentiment with this view: from what I've been able to gather, most everyone is expecting that Washington will get its act together reasonably soon.  I think everyone expects a nail-biter which then gets resolved in the eleventh hour -- and maybe that will happen, who knows.  If Washington announces a satisfactory resolution, bears will almost certainly cover in droves and send the market straight up in a vicious short-covering rally.  For that reason, this is not a position where I would continue to hold my shorts in the face of a solid market reaction to good news.  I'm hoping my short entry north of 1700 guarantees me some profit no matter what happens heading forward -- and hopefully Friday's update afforded readers that same opportunity.     

Let's start off with the S&P 500 (SPX).  This chart shows the trading range quite clearly.  The market really hasn't made much upwards progress since May; so while bears seem to be feeling more beat-up, the bulls really haven't had too much to cheer about lately either.  Range bound markets don't favor bulls or bears: they favor short-term traders.

Next is the SPX 10-minute chart; the preferred red count is unchanged from Friday's update, but I needed to adjust the green alternate count slightly.

Finally, the Philadelphia Bank Index (BKX).  BKX is one of the main things keeping me leaning toward the bear camp.  The alternate count on the BKX chart is for a completed ABC decline.  There are two reasons that count is the alternate and not the preferred count:

1.  The Fibonacci relationship between waves A and C is still a bit weak.
2.  The last decline didn't act like a c-wave.  C-waves are third waves, and they are usually strong and scary.  One of the "jobs" of a c-wave is to convince traders the trend has changed.  While the last leg of the decline in SPX was strong, BKX merely lollygagged around support and probably wouldn't have frightened even the most faint-hearted bull.

In conclusion, there genuinely isn't too much to add down here.  Bears should stay alert to a three-wave decline as warning of the alternate count.  Hopefully Friday's entry was solid enough that even in the event of the bullish count, we'll be alerted to bullish developments in real-time and be able to lock-in profits.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Bulls Shake-up the Charts

Yesterday saw bears capitulate en masse, while bulls trampled and gored everyone who got in their way, in the hopes that Washington's issues might get resolved soon.  As far as I've heard, nothing actually got resolved -- but perception is reality in the market.

As I talked about yesterday, the market had reached the toughest type of inflection point in Elliott Wave, and from there, it then proceeded to plow right over my preferred near-term count.  Most of the traders I've spoken to since the close are now bullish.  And why not?  After all, the market has had a persistent bid ever since the QE-Infinity liquidity started pouring into the primary dealers' accounts, and every halfway promising-looking decline of 2013 has turned into a new high in fairly short order.

The rally appeared to be impulsive, which suggest it isn't over yet, and normally, I'd look for another leg of equal or greater length.  However, I'm favoring an unconventional near-term count which I'll outline momentarily.

Frankly, I'm a bit uncomfortable with this market right now.  There are times the charts make perfect sense to me, and there are other times that there are portions of the wave count that I can't comfortably reconcile.  When I look at the charts right now, there are two conflicting things that jump out at me:

1.  The decline from the all-time high reconciles better as an impulse than a correction, and that leads me to suspect it's not over.

2.  The signals I saw at the close on Wednesday led me to expect a snap-back rally, but that rally's strength exceeded my expectations.   Yesterday's rally was a face-ripper, and bulls recovered a ton of lost ground in just one day -- normally, that suggests they have "money in the mattress" (or in the printing press, as the case may be) for more.

It's probably going to take an event to turn this market back down.  In my opinion, the charts are still hinting at the idea that we could get one.  But this is as much an instinct call as anything, and trying to predict an event is like trying to predict the winning lotto numbers, so feel free to ignore me and trade what feels right to you.

First up is the Philadelphia Bank Index (BKX), which could have completed gray iv -- however, in my opinion, it has the wrong look for a completed correction.  I'm presently inclined to think this index makes another new low before it makes a new high.

Next up is the S&P 500 (SPX) near-term chart.  I'm favoring a somewhat unconventional resolution here -- but again, this is pure instinct, and my instincts can be wrong.

Finally, the SPX hourly chart.

In conclusion, I'm fully prepared to shift my intermediate footing depending on how the next couple sessions shake out, but I still feel the charts have bearish potential and, at the moment anyway, still feel that they'd look better with a new low.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

   

Bad Moon Rising? Or Let the Good Times Roll?

I stole part of today's title from the famous CCR song "Bad Moon Rising," in which John Fogerty passionately sings:

Don't go around tonight, 
well it's bound to take your life,
there's a bathroom on the right.

Or that's what it always sounds like to me, anyway.  I assume he's singing about one of those highway rest-stop bathrooms, in which case this chorus is very sound advice.

On a more serious note, this is the toughest type of inflection point in Elliott Wave.

We've reached a point where the market has a clean three-wave decline.  Because of the nature of the bigger picture wave structure, we can't be certain whether to expect this decline to become five waves, or whether this ABC decline was all the market wanted here.  Let's start with the Nasdaq Composite (COMPQ) for illustration purposes:

 
Strangely, the part of this move that had lots of folks confused (last week) felt pretty straightforward to me, and I couldn't find any high probability outcomes that didn't require a continuation of the decline.  That has now changed, and we can see on the chart above that the market currently has potential for a fairly clean, and possibly complete, ABC decline.  We also see that it has so far found support where it "should."  Most of the markets I look at have reached similar support zones, with NYA, INDU, and SPX among them.

But not so fast -- when we look at RSI on the above chart, it suggests the market will want to retest or break yesterday's low.  And that fact is one of several that leads me to give the edge to the bears and assume we're dealing with a reaction rally until proven otherwise.  Additionally -- not to get too far ahead of the market -- but some of the charts I've studied suggest the possibility that this is yet another second wave bounce.  If that's the case, the market is actually gearing up for a mini-crash.

This is dangerous territory for bears here, though, because this is an inflection point where bulls genuinely have a chance to grab the ball at intermediate degree.

Thus my confidence in what's coming next is lower than it has been to this point.  If I had to pick a side, I'd say the bounce is going to be short-lived, and bears are going to reclaim the market in fairly short order.  That logically leads me to consider the two big news events: the ongoing government shutdown, and the debt ceiling deadline on Friday.  Futures are up big right now on the news that the President and the GOP are going to meet and talk -- if my bear thesis is correct, then I suspect those talks will end in failure.

It's always easy to talk theory, but as traders, how do we approach the market when the charts are ambiguous?  With the charts at larger inflection points and major "blow up the tape one way or the other" news announcements coming, I generally do one of two things:  I either avoid the market entirely, or I look for areas that I'd consider as lower-risk near-term inflection points which could reverse a move.

The two zones that jump out at me on the S&P 500 (SPX) are 1670-74 and 1680-85.  Both of those zones have the potential to offer resistance and reverse a rally.

And as I'm writing this, I can't seem to get 2008 out of my head, and I'm reminded of the monster rally we had just before the crash started.  That rally was a Gift from Above for me, and I shorted into it with every dime I had.  In 2008, though, I felt almost 100% certain we were about to crash -- so certain, in fact, that I literally couldn't even comprehend who on earth was buying the market there, or why.  I don't feel anywhere near that level of confidence here at the present inflection point, but I do think there's potential for a solid risk/reward play to catch either a fifth wave down to new lows, or a much more serious decline.

In other words: this is not the type of place where I'd bet the farm with no stops, but certainly the type of place where I'll take a crack at things if I can find ways to limit my potential losses.

Let's take a quick look at the other side of the trade, though.  While I'm still in the bear camp for the moment, the ratio chart below suggest bears should indeed approach this market with caution:

The Dow Jones Industrial Average (INDU) has reached the bottom of a large trading range -- this is one of the charts I referenced earlier regarding markets that reached support zones yesterday.

Finally, the SPX chart.  As noted, I'm inclined to favor the bears -- but this isn't a clear-cut slam dunk to me the way last week's charts were.  Yesterday's market found support about a point shy of where it "should have" for the bullish alternate ABC decline.

In conclusion, the charts are clearly lining up for "an event," and we have two big news items on the horizon.  The bulls have potential here, and I'm not closed to that; so if the present rally forms itself into five larger waves, then we'll have to start thinking bigger rally and start looking at new upside targets beyond the two noted zones.  That bull potential makes me a cautious bear, but we're still just dealing with a potential and we aren't actually to the point where it's become high probability.  On balance I presently think the odds still favor the bears; and that means we have to take that thesis to its logical conclusion:  if the bearish wave counts are correct, then bears are getting ready to hit the market hard.

So to close out the question posed in the title of today's article:  There may indeed be "a bathroom on the right" in the market's not-too-distant future.  Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter:
 @PretzelLogic  https://twitter.com/PretzelLogic

 

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.