Bulls and Bears Still Battling Over Who Gets the Treats

For the past couple weeks, I've been yammering on about how the market has reached an intermediate inflection zone.  After digging around my chart book for a while, I found an index which illustrates this as well as it can be illustrated.

So we'll lead off with the Wilshire 5000 (WLSH), which basically represents the entire market.  WLSH's chart has a couple interesting features:

1.  The recent peak was a perfect confluence of two long-term channel lines.

2.  The wave can be counted as a completed five-wave move, complete with a key intermediate level to help sort out the bull/bear propositions.

I've outlined both sides of the trade on this chart.  We probably have to give the edge to the bears, considering the long-term trend.  In the event bears are too busy getting beaten up by the tag-team of Bernanke and Yellen to step up to the plate and the market breaks out over that confluence, then we'll have to consider that we're likely unwinding the  more bullish count.  

 
Stepping down a time frame, and shifting over to the S&P 500 (SPX), there have been a couple interesting events since my last update.

1.  The market turned less then 2 points shy of the noted 1777 Fibonacci price level.
2.  Thursday's rally attempt was strongly rejected at the intermediate trend line.

Looking at the near-term, the odds look good for new lows.  The only thing that gives me even the slightest pause is the beating most near-term bear counts have taken all year.  The Fed has become the Earl Scheib of the equities market:

"We'll print over any pattern for only $99.95*!"

*Prices are shown in trillions of dollars

In conclusion, bears have so far turned the market where they needed to in order to keep hopes alive for the intermediate term.  That said, bulls haven't given up any key levels yet, so we have a battle on.  If the near-term pattern plays out to normal expectations, we should still see lower prices in the coming sessions.  Trade safe.

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Nasdaq on the Cusp of Capturing July's Target, Reclaims 39-year Resistance

Last update, we discussed the fact that the market had reached a larger inflection point, and that one targeting method suggested SPX 1777 (+/-) as a possible target zone for this wave at intermediate degree.  We're almost there; and it's worth mentioning that the long-term charts indicate rising trend resistance is approaching.  As I see it, we're now in a do-or-die situation for bears, and I'll outline this with a couple charts.  If this market clears approaching long-term resistance, I think we have to go back into trend following mode until proven otherwise.  First things first, of course, but I want to put that warning out there well ahead of time.

The 30-minute chart shows the recent breakout over a cup and handle formation which, interestingly, also targets roughly 1777.  If this is a standard five-wave rally, then it should be nearing completion -- but please note the caveat in blue on the chart below.  Always interesting when the charts align with an event, and today we have the FOMC announcement.  If trading today, keep in mind that the first semi-convincing directional move in the wake of the announcement is sometimes a fake-out.

The daily chart shows approaching resistance which isn't visible at smaller time frames.  The blue channel line connects the peaks of  waves (1) and iii, and theoretically represents a rising resistance zone.  Looking beyond that point in advance: in the event bulls can break out over that level and hold it as support, then look out above, because the rally would likely pick up steam with clear sailing overhead for the foreseeable future.  Again, first things first, though...

The next chart hasn't been updated since July 17, but it's become relevant again, since the Nasdaq Composite is now on the cusp of capturing my intermediate target zone.  What's particularly interesting on this chart is Nasdaq's recent breakout over a 39-year trend line -- and while that's par for the projection, it always looks more convincing once the market actually realizes the projection and breaks out...  so as this target approaches, bears are moving into a do-or-die intermediate inflection zone.  The last time we saw an inflection zone of this magnitude was back in December 2012.

In conclusion, SPX and Nasdaq are both approaching major intermediate inflection points.  As I see it, this is a zone where bears will either need to make a stand or head back into hibernation for the foreseeable future.  Trade safe.

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The Long-Term Inflection Point

As most readers know by now, I primarily use Elliott Wave Theory for my market analysis.  One of the keys for me is to find waves which triangulate the count to a degree.  Certain waves will allow me to rule out some counts, and assign higher probability to other counts via the process of elimination, and from experience.  The market hasn't had a triangulation wave at higher degree since all the way back in January.  What we've had in recent months is a series of waves which could be interpreted as the market unwinding fourth and fifth waves -- but the pattern could also be interpreted as several other ways.

Let's start with the daily chart of the S&P 500 (SPX) to illustrate.  Going back to red ii, we had a clear windup of first and second waves, which is why I was strongly bullish back in January and February.  In May, I published a target of 1680-1690, which the market hit just before reversing strongly.  And that's where the pattern started to get a bit "weird" -- not weird in the sense of being unheard of, but weird in the sense of being extremely difficult to predict.

When we look at the chart below, we can see the series of whipsaws bulls have endured, and the series of higher lows that bears have endured.  The pattern looks like an ending diagonal, which is a series of overlapping waves which gradually contract -- in classic technical analysis, it's called a "bearish rising wedge."  Diagonals are not supposed to be obvious or easy (though they can be), they're supposed to chop everyone to pieces.  The biggest challenge is that they're not always bearish patterns.  If you look at the pattern starting at blue A/i and ending at red i, you can see a similar-looking structure.  In fact, a lot of folks thought that was a bearish ending pattern at the time, but it instead turned out to be a series of first and second waves.

The market faces a similar situation now, and there's really nothing in the current chart to say that one outcome is higher probability than the other.  I've outlined the bear pattern in red, and loosely outlined the bull pattern in green.  As I've been talking about for the past few updates, this appears to be an important inflection point. 

 

 
Let's take a look at this chart from another angle.  Below is the SPX monthly chart -- notice on the monthly, SPX is headbutting the upper line of the long-term trend channel (black), and approaching the upper boundary of the very long-term channel in blue ("approaching" in a relative sense -- still a ways to go).  This chart suggests there should be some resistance near current levels.

The second challenging feature of the current market landscape comes courtesy of the fact that SPX has now reached February's "bear" count target of 1750 +/- and is in the territory where it could complete the c-wave of a very long-term expanded flat.  This means that the long-term counts have come to a fork in the road: Earlier in the year, both counts pointed upwards, but that's no longer the case.  

Near-term, the main significant feature of this chart is the so-far successful back test of the breakout over the rising black trend line.  It's hard to be terribly bearish as long as that holds, but there are two things which are less-encouraging for bulls:  one is the very choppy, overlapping rally since the back-test; the other is the fact that the rally since (4) has been unable to hold above the blue (2)/(4) trend line.  Both of those facts suggest buyers are noncommittal at current prices, and we may see some near-term weakness to bring prices back to a level which looks more appealing.  Be aware, though, that this is the type of move where -- perhaps counter-intuitively -- buyers would likely step in again and chase at higher prices if "the they" can form a convincing breakout above 1760.   

In conclusion, the long-term charts illustrate the importance of the current inflection point, but there's little in the way of clues as to which side will emerge victorious.  At times like this, the tiebreaker generally goes to the established trend -- nevertheless, the charts do suggest there should be some degree of resistance near current price levels.  Trade safe.

Bonus chart sans commentary: NYA

 

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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.

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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.

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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.

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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.

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