The Market's Moment of Truth Arrives

Sometimes as an analyst, you put yourself out there and, frankly, you feel like an idiot while you're doing it.  You might start off quite convinced in the correctness of your view, but then the market throws a few curves and complicates the pattern -- while meanwhile, most of the other traders you respect are taking the opposite side of the trade from you.  Eventually you worry that maybe you're "creatively" interpreting the market to fit your original bias.

Your worst fear as an analyst is to lead people the wrong way... so while you personally always trade for the outcome you see as more likely, you sometimes feel the need to back away publicly and give additional airtime to the other side of the trade, so that folks can make their own decisions.  At least, that's how I handle it.  I suppose I can't speak for everyone.  I've said it before, but for me, the hardest part about being an analyst isn't actually the analytic work.  It isn't even having to eat crow when I'm wrong.  For me, the hardest part, hands-down by a mile, is the fear that I might somehow unintentionally hurt someone.  Trading for your personal account (and managing the periodic inevitable losses) is one thing; but feeling like you "caused" someone else a loss is entirely another.  I'd rather lose my own money a thousand times than lose someone else's money once.  I don't know how brokers and fund managers do it.

Yesterday the market finally vindicated the preferred near-term wave count in a spectacular fashion, as it reached the very-narrow "perfect world" target of 1773-1774, then reversed straight down to new lows.  Score one for the near-term counts, but...  The challenge I have with this market at the moment is, frankly, I don't have a strongly-preferred long-term wave count right now -- and I really haven't had one since the 1700's were reached.  I'm still slightly leaning toward the bear camp, due to the series of markets which have reached long-term resistance (as outlined over the past week) -- but I'm open to awaiting the market's declaration of its long-term intentions.  This is why, from a predictive standpoint, I've been focusing almost solely on the near-term.  The near-term fractals generally work regardless of the long-term.

Where that can get sticky is at points such as right now.  If the market's goal was to form a simple ABC (three wave) correction before heading higher, then we basically have enough near-term waves in place for that to happen.  However, if we're witnessing a more significant turn in progress, then this decline will go on to become a larger five-wave move.  Once that happens, then I'll be able to more strongly favor an intermediate wave count (one five-wave decline would suggest another) -- and then I can fill-in the blanks on the long-term outlook from there.  As I've written about for several weeks, this is a major inflection point, and I don't see much in the charts to give either side a strong long-term edge yet.  I can say I wouldn't suggest any bullish complacency here, because major inflection points can and do sometimes generate major trend reversals.

So, I hope readers don't mind operating inside a long-term vacuum for the moment (just pretend we're inside Bernanke's skull).  I'll try to calculate the key near-term levels/targets in the meantime, and we'll worry about the next puzzle pieces as we get there.  The reality is, we can only actually trade the present anyway.

We'll start off with the near-term S&P 500 (SPX) chart.  I'm inclined to favor the decline has a bit farther to run, but we've reached the minimum expectations of the count so it's not out of the question for the market to bottom fairly directly.

The 30-minute chart shows that important intermediate support comes in near 1730.  Important near-term resistance is as noted on the chart above (1757 +/-) -- so that gives us the next two key levels to watch.

Finally, the long-term chart, which is unchanged since October 30.  This chart also reveals 1730 as the next key intermediate level.  This is because, if we're in a third wave rally, the fourth wave should not overlap the price territory of the first wave -- which in this case is presumed to have peaked at 1730.  Don't mortgage the house and go short if we break 1730 just yet, though -- it's still possible we're in a subwave of said third wave rally, which would be "allowed" to overlap the 1730 price point.  Again, we'll figure this out if/when we get there.  These are just signposts on the road right now.

In conclusion, yesterday saw a pretty ugly breakdown; but keep in mind that the first downside targets have effectively been reached, so I'd suggest treading lightly here.  The first step for bulls to right the ship is to reclaim 1757.  Trade safe.

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The Long-Term Trend vs. Long-Term Resistance

Fans of Dow Theory watch the Dow Jones Transportation Average (TRAN) for confirmation of moves in the indrustrials, and TRAN theoretically acts as a barometer of economic activity.  If the economy is doing better, then the amount of goods being produced and consumed increases, which means more goods need to be shipped around the globe -- which is then, of course, good for the transport companies.

That was back in the Old World, though.  The John Houseman world, where "they made money the old-fashioned way: they earned it."  In today's QE world, it's hard to say how much equities relate to the actual economy.  It used to be the economy had an impact on liquidity: solid economies produced additional liquidity, while bad economies caused liquidity to dry up.  Excess liquidity generally leads to rising asset prices, so good economies used to equate to up-trending markets.

But nowadays, the motto of the world's Central Banks is:  "Economy?  ECONOMY?  We don't need no stinkin' economy!!!"  So TRAN's current price may have less to do with the amount of tangible goods being shipped, and more to do with the global liquidity picture.  Economic fundamentals are about as dated as the big hair bands in the 80's, but probably less relevant.

Anyway, TRAN is approaching a long-term resistance zone.  The fractal is similar to late 2009-early 2010.  The "most obvious" wave count suggests the market may bounce along the underside of the channel line over the coming months, but there are other options.  Frankly, this isn't the chart I worked for hours on (which I alluded to yesterday), this is a very simplified version of it -- I can't bring myself to publish that chart just yet.  Stay tuned.

 

TRAN isn't the only market approaching resistance; the Dow Jones Industrial Average (INDU) has reached a similar zone:

Last week, we looked at the Wilshire 5000 (WLSH), which is also in a similar position and is approaching long-term resistance.  If bulls can muscle through, it becomes a whole new ball game, but it's just too early to assume that outcome.  Markets like to make us stupidly bullish just as they hit resistance levels (and stupidly bearish as they hit support), so we forget all about those levels.  I'm avoiding the temptation to do so here.

The S&P 500 (SPX) chart is largely unchanged for the past few sessions, though I added a signal to watch on the chart below:

In conclusion, I realize that everyone wants to jump on a bandwagon here (bullish or bearish) -- but sometimes a key to successful trading is to be more patient than the next guy.  I feel we're still in a battle zone.  Obviously, one side will win -- and the folks that picked that side early will be genius in retrospect, but as I see it, the battle of the long-term trend vs. long-term resistance is still unfolding.  Trade safe.

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SPX Still Home on the Range

Well, I spent a really long time last night working on a long-term wave count for the Dow Jones Transportation Average (TRAN), and then I wrote 4 paragraphs about it.  And then I decided to save it for tomorrow, mainly because I want to see how today plays out.  So today's update is shorter than I'd originally planned, but tomorrow's update will have more words and technicolor charts, and will be presented in Dolby stereo.

Monday's update expected a trip to 1768-1773 SPX, followed by a reversal -- the market closed Monday at 1768.78, then gapped down on Tuesday and shook out the longs who'd come late to the party.  The rally from Tuesday's low appears impulsive, suggesting it will have at least one more leg.  The bull and bear counts both remain valid for the time being, though the bear count has morphed into an ending diagonal c-wave.  The all-time-high remains the dividing line.

 The 30-minute chart is unchanged.  One thing on this chart that's a bit questionable for the bull case is the break of the blue trend line.  If wave (4) bottomed at 1752, we'd normally have expected to see that trend line hold.  It's not impossible for a second wave (it would be wave 2 of "bull count (5)") to break the (2)/(4) trend line, but it happens with lower frequency.  

In conclusion, SPX has been range bound for about a week and a half, which always gives traders the option to let their imaginations run wild.  Bulls can view this as a consolidation of the prior uptrend, and bears can view it as a topping pattern.  Meanwhile no new information has been conveyed, and the grind continues for the time being.  Trade safe.

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Bulls Pass Their First Test

Friday's market saw a bit of a fake-out lower which then rebounded with reasonable strength.  I was expecting a new low for this wave, but the decline fell 1+ point shy of my first target zone.  When we look at the S&P 500 (SPX) chart below, we can see the decline from 1768 counts best as three waves.  The first implication of this pattern is that the market is forming a flat correction.  There are several types of flat patterns, but the most common is the expanded flat -- and if this is an expanded flat, then ideally, it should travel up into the blue box target zone before reversing to new lows.  If it's a running flat (less probable), then it will stop shy of that target.  

That's the Elliott Wave perspective -- but looking at this pattern from a classic technical analysis standpoint, the decline and subsequent bounce qualify as a successful back test of support.  So, looking at the other side of the trade, the alternate count considers the option that the low (once again!) fell short of the usual targets and the Fed, I mean the bulls, will push this market to new highs.  Barring the lower-probability running flat, both the preferred and the alternate count point higher for the short term.

One of the things I find interesting about the expanded flat count is that the suggested target for the pattern lines up just about perfectly with another test of the black trend line on the chart below.  This chart also notes the typical near-term upside targets in the event the market sustains trade above the all-time-high. 

During the last few sessions, not much has happened of intermediate significance, and ultimately we're still stuck inside the battle zone.  I'm bringing forward the Wilshire 5000 (WLSH) chart to illustrate this.  Bears have the rejection at the confluence of long-term trend channels working for them, while bulls have Friday's rebound from the breakout line from which to draw encouragement.

In conclusion, the pattern which presently appears to be highest probability, by a narrow margin, is an expanded flat.  This pattern basically amounts to a retest of the all-time-high -- and previous highs/lows are always fair game for the opposing side to take a shot at.  On the flip side of that coin, bulls have held the line where they needed to, so it's not a slam-dunk call here. The good news from a trading standpoint is there are now clear informational levels, so either way, we should have our answers fairly directly.  Trade safe.

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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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