SPX Update: Is Santa Coming to the Market Soon?

(Note: I have no clue why the paragraph spacing came out so strangely on this particular article, but I can't seem to fix it...)

Friday's action remained within a tight range, which added little information to that day's pre-open update.  Interestingly, on Sunday, E-mini S&P futures (ES) had a wild night and thrust down into the cash target zone, before recovering in a parabolic fashion, as the futures market was struck with a sudden buying panic.  Since futures reached the target zone, this adds some flavor to the option discussed on Friday that the cash market could have completed wave C of (4) down at 1772 -- though I'm still not entirely sold on that idea. 
                                                       

My standing target for this wave has been 1760-1770, and I recently added a "perfect world" target (calculated using Fibonacci wave extensions) of 1765.33.  Though I'd still like to see that zone reached, 1772 is acceptably within the margin of error for that target.  We're simply going to have to see how things play in the cash market to start off the week, in order to add or subtract confidence to either view. 

It's also worth mentioning that the 50 day moving average on the S&P 500 (SPX) currently crosses 1761.74, so one more thrust lower in cash would likely make prices a bit more attractive and pull in some additional buyers.  Essentially, we're still picking nits here on time frames.  Near-term, I'd prefer to see another thrust lower into the target zone, though it isn't required. Intermediate-term, I'd like to see a run to the upside target of 1825-40. 

The bottom line is: Assuming this wave doesn't mutate into the more bearish alternate count, then we'd expect the fourth wave will find a bottom soon, most likely during the first half of this week.

An interesting seasonal statistic which should provide bulls some encouragement:  December is a positive month for equities 73% of the time -- and during bull market years (such as 2013), that figure jumps to 80%.  Since we opened December north of 1800, and the target for wave (5) is 1825-1840, this appears to have all the necessary ingredients for the 80% odds to work.  The fourth wave has made a nice shake-up to clear out some of the weak hands and get folks looking downwards.  This was necessary, because it seemed we opened the month with a lot of folks looking up.  This is now the perfect setup for not only a Santa rally, but for the "whipsaw market" I discussed on December 9:

If all preferred wave counts play out across all wave degrees (to be fair, that's basically asking for perfection from my work, which is something I'm rarely capable of), then we'd see another wave down over the near term, followed by a recovery and final rally into the wave v target zone, followed by an abrupt peak and decline.  Purely from a market psychology standpoint, a move like that would really create the feeling of a whipsaw market, along with mass confusion.

None of the arguments presented Friday have changed, nor have the charts.  RSI still gives the odds-on favor to a new low (near-term) with a positive divergence.  This has nothing to do with wave counts, it's purely based on historical performance.

The 30-minute chart is unchanged, and Friday was mainly noise (note: this is not to be confused with "manly noise," which is the grunting sound Tim Allen made famous):

The 3-minute chart is also essentially unchanged.  At first glance, one might suspect a triangle here -- but upon closer inspection, the structure violates Elliott Wave rules for a triangle, since the last wave (which would be labeled "wave e" at 1779.43) exceeded the price high of the wave which would be labeled "wave c" (1779.27).  Friday's action left the preferred near-term path open, since 1772.28 held both of the session's declines.

In conclusion, there's been no material change since Friday.  This is perhaps an overly-bold call, but I'd still like to see a near-term rally to the above-noted targets (on the 3-minute chart), followed by a near-term decline to 1760-70, followed by an intermediate rally to the 1825-1840 target zone (the decline and beginning of an intermediate rally would be a nice setup for "Turnaround Tuesday").

The near-term alternate count is that wave C bottomed at 1772, while the intermediate alternate count is that a more bearish leg is underway.  To this point, the market hasn't done anything unexpected to cause us to favor an alternate view -- but the market always reserves the right to do so at a moment's notice.  As the next few sessions unfold, the charts should provide us with some new patterns and key levels, which I'll update as needed.  Trade safe.

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SPX Update: New Lows Achieved, Are We "There" Yet?

On Monday, I mentioned I was prepared to eat crow in the event I was wrong on the preferred count, but it turns out I'll have to throw it back in the freezer and save it for another time (and there will be a time, I promise you that.  I live in Maui, so I even keep canned crow in the pantry just in case a tsunami hits us and knocks out the supply chain).  Yesterday's new low kept the preferred count's win streak unbroken, and it's now hit virtually every turn since 11/14.  In my experience, this is, ironically, where things can become a little dangerous for readers, so I'd like to discuss that briefly. 

There's a tendency to assume that since everything has played as projected to this point, then the future projections will do so as well.  In my experience, one of the dangers of Elliott Wave is that it can be used as a rationalization to justify poor risk management.  The key to making it work is to remember that even when we think we know exactly where the market's headed next, we must still utilize proper entries and exits.  Projections must always be treated as probabilities, never certainties. 

To draw an analogy:  We can think of the market's price patterns as pieces of a jigsaw puzzle; but it's a puzzle with a missing box, which means we're not 100% sure what the final picture is.  Let's imagine we find a few pieces that join together to form a picture of a thorn, and our immediate assumption then becomes that the whole puzzle is something unpleasant -- but as we assemble more pieces, we realize this thorn is simply part of a beautiful rose (or vice-versa.  Incidentally, in a way, all of life works this way; we often don't understand the true significance of events in our lives until we're further down the road.). 

Anyway, for the past four weeks, I've been able to assemble the puzzle pieces so that we knew what was coming well ahead of time.  Along with this, I've suggested one bigger picture view those pieces may fit -- but there are plenty of other "big pictures" into which those same puzzle pieces would also comfortably fit. 

If I could boil all that down to one thought, it would be this: the minute you get cocky, start thinking you've got it all figured out, and decide you can forsake your risk management for higher-risk entries, that's usually the exact same minute the market does something completely unexpected.

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." -- Peter Lynch

Without proper risk management, even "the best of the best" projection systems will eventually leave your broke.  Likewise, without a good system of positive expectation, even the best risk management will simply result in being stopped out repeatedly, and will also eventually leave you broke.  The two disciplines must be combined for lasting success.

In my opinion, the key to effective use of Elliott Wave Theory is to utilize low risk entries, despite the fact that you "think you know" where the market's headed.  For example, the retest of the 1813 high was a great short entry from an risk/reward standpoint. Even if you viewed new lows as a 50/50 proposition, the R/R made that a winning play (math hypothetical: 5% loss 50% of the time vs. 15% gain 50% of the time -- trade nets 10% over time). Risk management is still paramount to any trade strategy, and I believe if you combine good Elliott Wave analysis with good risk management, it's almost impossible not to make money over time.

So, referring back to the big picture, my current expectation is that this is a fourth wave correction prior to new highs.  However, there is an intermediate alternate count, so I'd like to briefly refer back to some thoughts I shared on December 2:

We're now entering waters that, while not exactly dangerous yet, certainly call for added caution...  I had high confidence in the last two fifth wave rallies; however, my confidence is not as high for another one.  Given the charts as of this moment, I'm still leaning toward it, but be aware that it's a higher-risk proposition and act accordingly.  Also be aware that the wave count suggests we may be nearing a higher-degree fourth wave correction -- this means that the coming correction is likely to be deeper and longer-lasting than the previous two.

The chart below is largely intended to show RSI, but also shows the intermediate alternate count's "next move" in black.  One reason I remain in favor of the preferred count is the overthrow of the blue channel, which is typical of third waves.  So for the moment, we'll maintain the idea that this is a fourth wave correction and keep the alternate in the back of our minds. 

The next question is, assuming this is red (4), is it complete yet?  This is an exceptionally difficult question to answer.  The decline has (so far) come within about 2 points from the target zone, and (as shown below), hourly RSI confirmation of the 1772 low does suggest the target will ultimately be reached.  On the 3-minute chart, however, one can theoretically find enough squiggles to call the wave complete (2nd chart).  Two additional devil's advocate arguments are made on the hourly chart below:

Let's look at the 3-minute SPX chart.  The first leg of the rally from 1772 does appear to be impulsive, suggesting at least one more leg up for the near-term.  Upside targets are noted on the chart below, and we'll have to see how it develops from there to determine if we should give higher odds to the idea (4) has completed.  For now, I'm favoring the view that it has not yet completed.

The 30-minute chart includes the added note of the "perfect world" target of 1765.33 for wave (4).

In conclusion, to sum up everything across all time frames:  I'm inclined to favor the view that this wave will reach the 12/6 target zone, and I'm still inclined to believe this is a fourth wave correction which will lead to 1825-40 for the fifth wave up.  However, we're presently within a game of inches on both counts, so caution is warranted across the board.  Trade safe.

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In this business if you're good, you're right six times out of ten. You're never going to be right nine times out of te

SPX and Oil Updates: Long-term Oil Chart Suggests New Mulit-Year Highs

Recent sentiment data is getting a bit extreme toward the bullish side of the equation.  This is often a precursor to a correction; in fact, the last time sentiment was this one-sided was Summer of 2011, shortly before the mini-crash.  It's interesting to see sentiment reaching these extremes at a time when markets are bumping against long-term trend resistance (many markets have reached the upper boundaries of long-term trend channels, as I've covered in previous updates).  In addition, equities are quite overbought on weekly time-frames.

But we can't talk about that stuff, can we?  These days, even hinting at anything bearish is about as popular as hinting that you're considering becoming a politician (though decidedly less scandalous).

While we're seeing some early-warning indications that trouble may be brewing, we must remain cognizant of the fact that the trend is indeed still up.  Things such as sentiment are warning signals; signs which suggest caution is warranted.  They are not to be confused with guarantees of an immediate reversal of trend.

I view these additional warnings as added potential energy which is awaiting a catalyst.  In physics, potential energy is stored energy; it's the energy available for a future reaction.  I often view stock market chart patterns as similar to a coiling spring -- markets seem to build energy in advance of a move, and I believe that build-up stage is observable.

In the current instance, the "coiling spring" is wound pretty tight already.  At some point, it will need to release some of that stored tension -- but that doesn't guarantee it can't wind even tighter before doing so.  While I continue to feel risk is increasing for long positions, ideally, I'd still like to see a trip into the SPX 1825-1840 target zone before any major "events."

The 3-minute chart of the S&P 500 (SPX) notes a bullish buy trigger and a bearish sell trigger, along with the added note that Target 2 (1808-1813) has now been captured.  Sustained trade below 1790 would suggest new swing lows.

The 3-minute chart above should help with directional tracking for the preferred vs. alternate count on the 30-minute chart below.  As I've mentioned in previous updates, if all my work is perfectly aligned across time frames, I'd like to see a new low, followed by a new all-time-high, followed by an intermediate trend reversal.  That's asking a lot from my work, though -- it would be unusual if there isn't an adjustment required somewhere along the line, so we'll continue to take it day-by-day as it unfolds. 

I'd also like to add a quick update on the long-term oil chart.  My work here suggests two main possibilities, both of which ultimately lead to new multi-year highs north of 114.83.  The preferred count favors that this run is already underway, but the chart notes the signal which would suggest the alternate count was unfolding -- if the blue trend line breaks, we'll look for a trip to retest the bottom of the range.  From there, I would then currently still anticipate new highs as long as the noted invalidation level holds. 

In conclusion, as noted, we have fairly decent signals available to build from as the next few sessions unfold.  Trade safe.

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Upside Target Capture Leaves Market at Minor Inflection Point

Friday's action was both expected, and a bit surprising, at the same time.  The most recent correction was anticipated to be a fourth wave, and as I've written many times previously, fourth waves are my arch-nemesis.  So with the first downside targets captured, and the upside targets now captured, we reach the inflection point and the next trade becomes a bit less obvious than the prior trades were.  I'm still marginally inclined to favor the idea of another leg down, but this isn't a cut and dried call as it sometimes is.

Let's start with the S&P500 (SPX) 30-minute chart.  Given that the price action has performed almost exactly as drawn on December 4, one might ask why I have any doubts at this point -- to which I'd answer that first off, it's a bull market, which means surprises are almost always to the upside.  Second, it's simply the nature of the game.  A few days ago, people were fearful and bearish, because it's in our natures to think and project in a linear fashion; for the same reason, most people are bullish as we open this week.

As Robert Arnott once said so wisely, "In investing, what is comfortable is rarely profitable."

    
The 3-minute SPX chart notes some additional signals:

I'd like to revisit the SPX daily chart briefly to help provide a bit more perspective.  There's been no material change since November 11, and I'm still anxious to see if we hit the projections of that same date, and if that indeed marks the peak of red v of red (3).

If all preferred wave counts play out across all wave degrees (to be fair, that's basically asking for perfection from my work, which is something I'm rarely capable of), then we'd see another wave down over the near term, followed by a recovery and final rally into the wave v target zone, followed by an abrupt peak and decline.  Purely from a market psychology standpoint, a move like that would really create the feeling of a whipsaw market, along with mass confusion.

At the moment, though, the immediate question is whether wave (4) has completed or not.  The invalidation point for wave (4) remains 1813.55, so near-term bears don't have too much real estate in which to make a stand.  If wave (4) proves to have completed, then we'll turn our attention to the remaining 1825-1840 target zone of the next higher wave degree.  Trade safe.

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Downside Targets Captured: Where Next?

Last update anticipated a decline to 1779-1785, and noted that should be a good buying opportunity for at least a near-term bounce.  That target was captured, and the projections played out quite well.  Today's update has the potential to get a bit confusing, since I've drawn projections across several time frames, so I'm going to summarize briefly before continuing:

1.  Near-term, I expect higher prices.
2.  I presently expect that bounce will be sold to new swing lows, though the alternate count allows the possibility that all of wave (4) is complete.
3.  The larger trend is still up.

Let's start with the 30-minute S&P 500 (SPX) chart to get our bearings. Ideally, I'd still like to see a trip into the 1825-1840 target zone -- however, I'd prefer to see new lows before that happens.  That said, the market has already captured the minimum downside targets for the expected fourth wave.

Near-term, I expect a bounce from the cash market.
 

Longer-term, I've again chosen the Wilshire 5000 (WLSH) for discussion purposes.  It is worth noting that the position of black "bear v" hasn't moved since it was annotated -- which was weeks before the recent turn occurred.  Since reality has now performed in line with that potential, we must at least continue to consider it as a viable possibility.  We're way ahead of the game here (and this market hasn't even broken the upper blue trend line yet, so there's nothing terribly bearish in the action so far), but I should at least mention that in the event that the recent peak did mark the end of v, then this correction will last months.  That's a warning, which we'll update as appropriate -- however, given what's in the charts so far, we have to continue to give the benefit of the doubt to the established trend, which is up.

 
In conclusion, the long-term trend remains up, but the recent decline probably counts a bit better as an impulse wave, which suggests we may see new lows after the near-term rally completes.  Alternately, trade above 1813.55 would clear SPX for a trip directly into the next target zone.  Trade safe.

SPX and INDU Updates: Dow Triggers a Warning Signal

"There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market." - Paul Tudor Jones

In Monday's update, I noted that November's 1809-1816 target had been captured, and warned that a larger correction appeared likely.  Later that same day, the S&P 500 (SPX) even presented longs with a second opportunity to exit within the target zone before dropping below 1800.  The market has continued to follow the expectations of last month's preferred wave count, and today I have some added signals and potential targets.  I'll let the chart annotations do most of the talking today, so we'll start with the SPX 3-minute chart and build from there:

Now that there's more info to draw from than there was during the weekend (Monday's update), I can provide a bit more perspective on the SPX 30-minute chart.  Note the potential head and shoulders top under construction.  The alternate count has to be considered for the moment, since this is not yet a clearly-impulsive decline -- a new low would give it a much more impulsive appearance.

The Dow Jones Industrial Average (INDU) notes an interesting warning pattern that has formed in RSI and MACD:

In conclusion, if this decline is indeed part of the anticipated higher degree fourth wave correction, then it should be at least two legs in depth.  A new low from the current leg would go a long way toward confirming that outlook.  Trade safe.

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SPX Captures November Targets; What Next?

"What sets successful traders apart?  Most people think that winning in the markets has something to do with finding the secret formula.  The truth is that any common denominator among the traders I interviewed has more to do with attitude than approach."  -- Jack Schwager

On Friday, the S&P 500 (SPX) captured the next target zone, and promptly turned where it "should" for the preferred Elliott Wave count.  We're now entering waters that, while not exactly dangerous yet, certainly call for added caution.  Part of Elliott Wave Theory revolves around counting the number of waves in the correct way, and then anticipating (based on that count) where market will head next.  For the past few weeks, the market has been unraveling fourth and fifth waves (the final waves in a series), and we've now reached a point where it becomes a game of inches. 

The best way I can explain this:  when you count the early portion of a wave (the first and second waves), there's always at least one or two that are a bit vague.  Let's draw an example, and say that you work your count and determine that there are probably 7 first and second waves, which means at the end, you'll anticipate 7 fourth and fifth waves.  But one of those waves is vague -- so you're not 100% certain there are 7.  You can see the potential that perhaps there are only 6 -- this means that you can have pretty high confidence in 6 fourth and fifth waves coming at the end of the series... but that final wave to make it 7 becomes a lower probability trade.

This is basically where we are now.  I had high confidence in the last two fifth wave rallies; however, my confidence is not as high for another one.  Given the charts as of this moment, I'm still leaning toward it, but be aware that it's a higher-risk proposition and act accordingly.  Also be aware that the wave count suggests we may be nearing a higher-degree fourth wave correction -- this means that the coming correction is likely to be deeper and longer-lasting than the previous two.

Let's start with the 30-minute SPX chart.  Note that the location of gray (4) is not intended as a target on this chart -- it's far too early to calculate a high percentage target for that wave, or even to confirm that gray (4) has begun (since the market has yet to form a five-wave impulsive decline for confirmation and target purposes).

The SPX SPDR ETF (SPY) also has enough waves to count as complete, and suggests odds are increasing that a correction is looming.  I'll track and update the odds and signals for the noted potential fifth wave extension as it unfolds.

The Dow Jones Transportation Average (TRAN) is now bumping into the upper boundary of its long-term trend channel.  In itself, this doesn't guarantee a correction -- but it certainly calls for a healthy dose of caution.

In conclusion, Friday's target capture and reversal came right where the waves suggested it would, but as of yet, we do not have a five wave decline to confirm a trend change.  Based on the rest of the wave count, though, in a perfect world, I'd like to see a deeper correction unfold in the near future.  If the higher-degree wave count is also correct, ultimately there will be another buying opportunity down the road, for a trip into the next target zone.  Trade safe.

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