Is it Time for Caution Yet?

Sometimes it's hard (for me, anyway) to follow my own updates because I typically write 3-4 per week and, due to the nature of the space-time continuum and my finite existence within it, they need to alternate randomly between somewhat inspired and somewhat mundane.  Yesterday's update was based on decades of hands-on research (i.e.- my own life experiences), but today's update is going to be a bit more on the mundane side (if you missed yesterday's article, it can be found here: 3 Common Psychological Mistakes Traders Make, and How to Overcome Them)

On Monday, the S&P 500 (SPX) rallied to within one point of my standing upside target and stalled.  The question everyone seems to be asking now is "was that it?"  Today, we're going to take a somewhat ambitious look at multiple degrees of trend, from the very near-term to the very long-term.  I can't promise to get all of these right.  I always think of long-term projections in terms of "leverage" -- the market's a dynamic environment, things can change dramatically from week to week, so a moderate change this week or next can leverage itself into a larger change over time.

It's interesting that bears seem to be capitulating with greater frequency lately. I find the mass sentiment shift which has been occurring recently to be of interest, since such things are sometimes precursors to a big shakeup in the market.

Let's start with the near-term chart and build from there.  The first chart is the SPX 3-minute chart.  Right now, the market has formed three waves down, which is a corrective structure.  This would be an excellent place for the correction to complete -- however, if it does go on to become a five-wave decline (gray iv and v), then we'll have to anticipate that the near-term trend has shifted and expect it to be followed by a bounce and another leg down.

As noted above, the near-term chart leads me to believe it's probable there will still be a move up into the "official" 11/14 target zone.  The 30 minute chart is starting to show some warning signs that the rally may be tiring, though more action is needed to turn those early warning signs into more significant signals.  Maybe the best way I can state it is as follows: the market is in the midst of a wave pattern which dictates that alternate counts with larger top potential need to at least be considered and watched.  If one of the alternate counts is to become reality, though, we should start to see five-wave impulsive moves to the downside as early indications, which would then suggest we adjust projections accordingly.

As you can see on the chart below, my preferred count is unchanged, and still rather aggressively attempting to anticipate several more bull/bear shifts (the last few portions of the projection have already come to pass).  As I stated earlier, I can't promise I'll get all of these right this far ahead of time, and they may need to be adjusted in real-time.  It is possible wave (3) completed at 1808, but I feel the structure would count better if it made another thrust up into the target zone.

The daily chart is unchanged from November 15, and in a perfect world, I would still like to see the market stair-step its way up into the 1825-1840 zone.

In conclusion, at this exact moment, I'm still inclined to favor higher prices.  However, I am also presently of the opinion that the pattern suggests we're nearing a more significant corrective phase ("nearing" in terms of price, not necessarily in terms of time).  The last few moves were fairly straightforward to me, but I think things are going to get a bit more interesting relatively soon, and am prepared to adjust and update the projections as needed.  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.

Three Common Psychological Mistakes Traders Make, and How to Overcome Them

The only technical news fit to print since Friday's update is the S&P 500's (SPX) new all-time-highs, which have officially validated my preferred Elliott Wave count of the past couple weeks.  There's been no material change in the market outlook for a while, and there are only so many ways I can say "the projections still look good" -- so today we're going to explore three common psychological mistakes which can derail traders (or anyone, frankly), and some strategies to overcome those mistakes.

Emotions in general are the enemy of traders, but certain emotions can be particularly damaging because they start us down a long path which ultimately ends in self-defeat.  Much trading advice has been written about greed and fear and similar emotions -- so I'm going to cover a more subtle topic: the emotion known (rather generally) as "discouragement."

Discouragement rarely hits us all at once, but tends to build over time in response to an ongoing series of setbacks and/or failures.  As negative events pile one on top of another, we may gradually become discouraged with our own efforts.  This feels like a "natural" response to the situation, so we often fail to recognize the immediate danger we're putting ourselves in:  Discouragement feeds on itself and can easily become a self-fulfilling prophecy. Negative events beget discouragement; discouragement begets reduced effort; reduced effort invites failure -- and failure begets even more discouragement... rinse and repeat.

If not halted quickly, we can gradually spiral downwards into a dark trap of our own making. 

In trading, this series of negative events often takes the form of a string of losing trades.  With no big winners to break the cycle, we feel increasingly frustrated and ineffective as we watch our accounts dwindle.  During these cycles, sometimes even the winning trades can make things worse for us emotionally.  If you've traded even moderately, you will know exactly what I'm talking about when I say that during these "losing trade cycles," it seems we always manage to close the winners for negligible profits only minutes before the market explodes in the direction we were hoping all along.  I believe this is unlikely to be coincidental, and may actually be a result of our own mindset -- part of the "self-fulfilling prophecy" of discouragement.

I imagine virtually everyone has encountered this type of setback cycle at least once (probably more than once) in their lives and trading careers.

Ultimately, discouragement is an internal response to external events.  And that's good news -- because while we cannot control the market or life itself, we can control our reactions to both. In fact, sometimes our only weapon against forces larger than ourselves is the freedom to choose our own reactions.  Granted, sometimes choosing positive reactions to negative events is easier said than done, especially when life seems to be kicking us while we're down.  Life is difficult.

But it's critical to keep these negative emotions in check, because even moderate discouragement can and will create a self-fulfilling pattern of failure if not halted immediately.  

So let's discuss some of the psychological pitfalls that lead to (and at the same time embody) discouragement -- and how we can overcome them:

Pitfall #1:  Being overly harsh with ourselves when we're already beat-up:

One of the worst things we can do to ourselves is to become overly harsh and endlessly self-critical at moments when our self-esteem is already suffering.  Sometimes we speak to ourselves in ways we would never even consider speaking to another person, and this negative self-talk can be extremely damaging to us (just as it would be if we were speaking to someone else!).  We sometimes justify this talk by telling ourselves it's a form of "tough love," and that we're using this harshness as motivation to improve -- but harsh self-talk doesn't motivate us when we're already wounded; all it does is discourage us even more.

If you just made a losing trade, beating yourself up afterwards simply doesn't help.

When our self-esteem is injured, the best way to position ourselves for future success is to nurture that esteem back to good health by focusing on the positive things we know to be true about ourselves -- not to crush ourselves even further with negative self-talk.   (Not surprisingly, the same is true when we're speaking to others whose self-esteem is suffering.)

Pitfall #2:  "You can't fire me -- I quit!" syndrome:

Another common mistake is to quit an effort before the battle is truly lost.  This is a self-defense mechanism -- it's a way to give ourselves the illusion of control by voluntarily giving up before we are (we assume) involuntarily defeated.  This one may be the toughest of the three pitfalls, because there are times it is absolutely correct to give up -- so we have to understand both ourselves and the situation to recognize when surrender is the correct course, and when it's an emotional cop-out.  Many times, we're quitting not because the situation is actually lost, but because we're discouraged and tired of the struggle. 

The average millionaire has gone bankrupt more than 3 times in his or her lifetime.  What separates those folks from the rest of the pack isn't luck, but the internal perseverance to pick themselves up and try again even after repeated failure.

The second reason this pitfall is challenging is because we frequently offer compelling excuses as to why quitting is the right move, and eventually convince ourselves that we're "just being realistic."  We tell ourselves that, gosh-darn-it, we tried our best -- but in the end, we just couldn't cut the mustard and that's okay, it just wasn't meant to be, blahblahblah.  There is a short-lived sense of relief that comes with giving up, as the pressure is suddenly lifted.  But it goes without saying that in order to reach one's full potential and discover what one is truly capable of, then one has no choice but to push oneself beyond the limits already known, comfortable, and familiar. 


If your goal is to go from being a losing trader to a profitable trader, then the only way to achieve that is to apply techniques you are not currently using.  Those techniques will initially seem foreign, unnatural, and uncomfortable.

People are inherently goal-driven; without goals to strive toward, our spirits gradually begin to atrophy just as an unused muscle would.  Pushing our own limitations makes us stronger.

(continued, next page)  

SPX Still on Track and the New Key Levels

It's always tempting to become complacent after a rally like yesterday's.  The preferred bullish wave count appears to be unfolding as anticipated, which makes it easy to forget that there are other patterns still viable.

I still favor the bulls, but I'm going to spend most of the article talking about where that projection would be called into question.

The main option still available to bears is for a repeat of the fractal we saw earlier this month: an expanded flat.  The difference is that last time around, I felt pretty confident an expanded flat was unfolding and we'd reverse to new low -- whereas now, I would not put the expanded flat in first place as the preferred count.  But I can't rule it out either -- there's just enough ambiguity at the moment to suggest bulls should stay on their toes.  The 30-minute S&P 500 (SPX) chart notes the potential for the bear pattern, and the newly-drawn green trend line should serve as fair warning.
 

 
The short-term SPX chart doesn't offer a high-probability near-term count, at least not to my eye.  I can see potential for a partial retrace of the rally, but I can also see potential for it to simply run straight up to new highs.  I try to offer near-term projections whenever I can, but when the two minute charts look like a coin-flip to me, I don't want to give a false impression -- so I've noted a few levels, and we'll simply have to wait for the market to tip its hand.  Note yesterday's successful back tests of both down-sloping trend lines suggests that buyers were anxious to jump on board.
 

Two-minute chart squiggles aside, the long-term ratio chart of equities and bonds seems to support the preferred count at higher degree, and does suggest the idea that the market is indeed wrapping up fourth and fifth waves.  We can see that when RSI has reached similar levels in the past, it has often led to a larger pause or retrace in equities.

If the preferred count in equities is correct across all degrees of trend, then we're close, but not quite there yet.

In conclusion, while I spent most of today's article talking about the bear argument, I would continue to give the odds to bulls for new highs.  In the event bears can reclaim the noted levels and trend line, then we'd need to shift odds accordingly.  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.

SPX Reaches Minor Inflection Point

Last update was on Tuesday -- and during that session, the market hit the short-term downside target, then rallied immediately.  From there, it went on to develop into a five wave structure, which I'd noted would serve as a near-term warning to bulls.  We're now at an inflection point, since the decline has come very close to the first key overlap level.

The first chart we'll look at is the S&P 500 (SPX) near-term chart, then we'll look at the key overlaps on the longer time frames.

On the 30-minute chart,  The dual failures at the black and red trend lines are of some early-warning concern to the bull case.  Bulls need to arrest the decline here, or risk invalidation at blue 1 -- which would then at least open up the potential for a larger correction. 

Finally, the SPDR S&P Trust ETF (SPY).  My preferred count here at the larger time frame is for an extended fifth.  At the smaller time frame, the chart would look better with another leg up -- but if blue (i) is overlapped, we'll have to at least consider the possibility that all of v is complete.  Ideally, we'll have additional warning signs, since the current leg should develop into a five-wave structure if v is already done; from there, it should bounce before forming another leg down.

In conclusion, the decline has reached a minor inflection point, at the cusp of invalidating the near-term count.  If this is the anticipated fourth wave decline, then it's likely the bottom is in (or very close).  I probably have to give the edge to bulls here, due to the wave structure so far, but they can't afford to give up too much more real estate.  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.

SPX Tracking Projection -- and Some Random Thoughts on "Work and Trading"

We all know there are more important things in life than work.  No matter what that work is: whether it's trading, consulting, or construction.  We know this so well, that it's become "accepted wisdom" and a bit cliche.

Yet what is work, really?  That seems to depend on the individual: for some, work is simply a path toward financial goals, nothing more.  For those folks, work is the pure exchange of time and effort for money; it's a means to other freedoms by way of voluntary enslavement.  For others (the lucky ones), work is an extension of who they are -- it's a vital aspect of their personalities, which finds expression in a form that also happens to earn money.

So, are there more important things in life than work?  One of the things my father told me when I was young, which has stuck with me forever:  "Life is about people.  People are the only thing that truly matters in this world."  And I think we all instinctively know that, which is why we judge those who work "too much" (at the expense of their relationships) as doing "something wrong."  But I don't think there's a right answer, because it's a deeply personal thing and it depends on the individual.  For some people, the answer is probably no, there aren't more important things than work.

Still -- I suspect there's a balance to be found, though I myself sometimes struggle to find it.  I can't speak for everyone, but I know that personally, I have parts of myself that are so intrinsic to who I am that I simply cannot ignore them without some degree of internal loss.  If I do ignore those intrinsic parts of myself, then my personal relationships also begin to suffer -- not necessarily for lack of time, but for lack of having something of value to offer to others.  If my own tank is drained because I haven't refilled on the things which nurture me, then I find my ability to benefit others comes up wanting.

So I believe it's important to nurture those parts of ourselves which allow us to stand a bit taller, to express ourselves a bit more openly, and, ultimately, to give a bit more of ourselves to the rest of the world.

Each individual finds that in different things -- since you're reading this, then maybe you find that in trading.  Or maybe trading is a developing aspect of yourself, and you're still working at another job in the meantime.  Or you're an investor, and trading is simply another means to an end -- a way to reach goals which have more value to you.  Whatever the case, strive to find the balance.

Money means a lot in this world: security, health, freedom, etc..  But sometimes in working towards a goal, we lose the forest for the trees -- and we start to obsess over a financial outcome so much that we forget why we were striving for that outcome in the first place.

We can cling to something so tightly that we've already lost it.

And that type of striving is often laced with emotion -- which makes us less effective traders, not better. 
  
Yesterday's market performed about as well as I could have hoped, projection-wise.  It never ceases to amaze me how well Elliott Wave can work at times.  There was really nothing in the near-term chart to suggest a turn, yet the market found resistance right within the target zone -- and at the upper edge of what appeared to be a completing wave structure (as drawn on the 30-minute chart) -- and then reversed.

For the moment, we'll maintain the assumption that this is a fourth wave correction.  If the S&P 500 (SPX) turns into a five-wave decline, then we'll start looking for additional downside action.

Currently, the decline would look a bit better with a new low, but it's not required.  In the event that gray (4) and (5) end up developing, then we'll have to start thinking larger correction.

I've also updated the Wilshire 5000 (WLSH) chart, since there's been a noteworthy breakout here.  These types of breakouts can sometimes represent the "rubber band" stretching a bit too far, and lead to a snap-back in the opposite direction -- so I wouldn't recommend an attitude of bullish complacency.

In conclusion, the near-term wave structure would look more complete with a new low.  Assuming that doesn't go on to develop into a five wave form, then we'll look for a resumption of the rally soon thereafter.  If it does turn into a five wave form, then we'll have to consider a shift of footing.  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.

        

SPX and SPY: Upside Targets Captured, What Next?

On Friday, the S&P 500 (SPX) 1798-1804 target zone was captured with minimum pain for bulls.  I had something of a highly unusual weekend, and was unable to draft the lengthy Pulitzer Prize winning article I had planned.  I'd be happy to share it (my weekend story, not the Pulitzer Prize), but it has little to do with the market, and more to do with wives who take "shortcuts" though sugar cane fields and end up stuck in the mud with no clue where they are, which requires you to rescue them before they're eaten by Cane Spiders, even though you drive a vehicle which is about as well-suited to off-roading as a pair of roller skates, which ultimately bottoms out on a rock and rips the oil pan off in the dead of night in the middle of nowhere and you can't get anyone to come flat tow you, because of the mud (of course!).  But, by some miracle, shortly before losing your oil pan, you did locate your wife and she was uneaten by spiders and you got your wife's vehicle unstuck from the mud!  Even though your car is still out in the cane fields as of this writing, patiently waiting for the mud to dry up enough that a tow company will be willing to get within 100 yards of it.  That's the very short version of my weekend... 

So let's start off with the SPX, which, as noted, captured its upside target with ease.  This is the zone where blue 3 would commonly be expected to stall.  If the next wave is indeed a fourth wave, it would be fairly common for it to take the form of sideways chop.  I've also noted the next potential upside target.

SPY, the S&P 500 SPDR (no known relation to Cane Spiders) ETF, also captured its breakout target, and with no draw-down.  This chart is a bit wider view than the last, and as things develop, it will be interesting to see if this is indeed an extended fifth wave rally.  I've detailed the broader implications of an extended fifth (using SPX again) on the chart which follows this one.

On the SPX long-term chart, we're now past February's "bear count" target.  Please note that any talk of turns is well ahead of the actual price action at the moment -- nevertheless, I have detailed the expected outcome (in broad strokes) if we are currently within an extended fifth.

In conclusion, as noted in the last update, bulls have claimed the prior inflection point, and thus seem to have retained control of the market for foreseeable future.  As the near-term waves unfold, we'll be able to begin to assign higher or lower probability to the intermediate extended fifth wave count.  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 Cross the Line

Yesterday's market saw an early decline, which fell a point shy of the first target (that's been the theme for months: downside moves have repeatedly fallen just shy of targets, often by a point or two -- which smells like a bull market).  I talked about the red trend line on the charts as being the key for bulls to maintain control, and the market never traded below it (a bit to my surprise), leaving the technical picture sound for longs.  From there, the market again moved up to new all-time-highs.  "New all-time-highs" is a phrase that's starting to sound cliche and losing its punch, since basically every "new high" is actually a "new all-time-high" -- but outside of inventing a new language (which is beyond the scope of this article), I guess we'll all just have to keep saying it over and over, since the phrase is linguistically accurate.

The big news after the close yesterday was the announcement that Janet Yellen will be marrying Brian Anscreamin, and she has decided to hyphenate her last name, so she will henceforth be known as Janet Yellen-Anscreamin.  This bullish news is probably good for at least another 1000 SPX points.

On a more serious note, the bulls held onto the reigns at the open yesterday, and bears were unable to reclaim the noted key trend line.  Barring an immediate whipsaw, the bulls appear to have finally decisively won the battle at this inflection point.  The lingering bear potential, which simply cannot be predicted as of this moment (only guarded against) is for SPX to develop into an even more complex expanded flat (noted by black "bear: (A)/(B)/(C)").

On November 6, I prepared a long-term chart of the Dow Transportation Average (TRAN) for the November 7 update, then I chickened out at the last minute and didn't publish it.  I did, however promise I would publish it in an upcoming article -- so here it is (below).  This chart suggests the rally is likely to stair-step higher for the time being.  I've said it before, but this is my least favorite part of any wave count.  Perhaps strangely, my strongest trades almost always come at the beginning of a move, before the trend has been established and when most folks still think I'm nuts.  These ho-hum, let's-trade-the-endless-trend markets actually start to wear on me for some reason -- probably because I'm a contrarian by nature and hate feeling like part of the herd.

So I'll admit, even though the chart looks bullish, I make for a really weak bull right here.  This is not the part of the wave structure I personally like swing trading because there is still topping potential, and tops are brutal environments for swing trades -- so I'll stick to short-term trades for the moment, which feel more controlled to me.

Point being, here we are many months into a well-established trend, trying to figure out exactly how many fourth waves need to unravel before we see a reversal.  This can sometimes feel like trying to figure out how many angels can dance on the head of a pin (seven).  As they say: the trend is your friend 'til it bites you in the rear-end (okay, the last part is mine).

Moving back to the TRAN chart: I'm taking a slightly unconventional approach because I feel the wave in the middle of the chart counts best as a triangle -- which means the wave coming out of that triangle is actually where the new move (wave i) began, which then means TRAN is only now in its third wave.  And this implies a series of fourth and fifth waves are still needed.

There are two bear potentials which jump out at me, and the first is noted in black and still suggests higher prices.  The other isn't detailed, so I'll outline that "other" bear count briefly: the only chance bears have for an immediate completion of the trend would be if the final "red 1" marks the end of an ending diagonal for "bear iii," which would then place us in the fifth and final rally wave now.  That count has to be considered an underdog based on the structure of the proposed diagonal, which doesn't appear to be a series of ABC's (required for a diagonal), but instead appears to be a series of impulsive waves.  This is why the counts are shown as they are, and that count is only mentioned in passing as an outlier potential.

I still feel like I'm pulling my own teeth publishing this chart, but it is what it is.

In conclusion, SPX appears it may move to back-test the recent breakout, but as long as that breakout holds (in other words: as of what's visible in the charts right at this moment), we really have no choice but to give bulls the benefit of the doubt until proven otherwise.  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.