"Someday This War's Gonna End"

"Someday this war's gonna end."  

-- Lt. Colonel Kilgore, Apocalypse Now

Ralph Nelson Elliott, the man whose wave theory is so often discussed in this column, called third waves "a wonder to behold."  In the very first article of I penned for 2013 (January 2, 2013), I wrote:

In conclusion, this is not a rally I would look to short any time soon.  There is massive pent-up energy in the charts, and nested third waves are not to be trifled with.  Third waves are the "point of recognition" for the masses, and tend to be strong trending waves that rarely let up for very long.  Third waves tend to peg indicators at extreme readings and stay there for much longer than seems reasonable.

Bulls have been experiencing a third wave rally for over a year now and, looking back at the market's behavior, I think we can all agree that Elliott had it right in his description.  But despite the wondrous power behind third waves, there is a dark side to them as well.

One of the "jobs" of a third wave is to shift sentiment from bearish to bullish and vice-versa.  Folks who've traded for the past decade have now been fortunate enough to live through massive third waves in both directions, in order to experience this firsthand.  In 2008, a third wave decline unfolded into October and did its job of shifting sentiment from bullish to bearish -- so much so that by the time the fifth wave rolled around and bottomed in March, lots of folks had decided stocks were headed to zero (or lower).  Bears were fat and happy... and complacent.  Some were so complacent that they shorted their accounts to oblivion during the subsequent (current) bull market.

Now sentiment has firmly shifted the other direction.  Bulls are fat and happy, and bearish talk is quickly laughed away as "impossible," "stupid," or "stupidly impossible, stupid."  Investment clubs have even begun to spring up again -- remember those from the 90's?  These are groups of folks whose knowledge of equities is generally limited to something they've seen on TV, and whose raison d'etre (French, literally: "raisins exist") is to buy equities because "stocks always go up in the long run!"


To add to the point, I'd like to again borrow quotes from the archives, this time from February 11, 2013 ("Is Bullish the New Bearish?"):

...for the first time in a while, I decided to check out a few random articles across the web to get a brief pulse on sentiment.  Maybe I just read the wrong articles, but it seemed like just about everything I read was bearish and looking for a top.  As I skimmed through, I got to wondering: when did it become so popular to be bearish in the midst of a powerful rally?  Is it contrarian to be bullish now? 

I think it's wise to consider that this is pretty much how sentiment behaves in bull markets: they call it "climbing the wall of worry."  There are always a million reasons not to buy and there are a million reasons why the market will finally top tomorrow... but it just keeps going up anyway.  Bear markets work in reverse -- once everyone is convinced that every single decline should be bought with both fists, then we'll keep dropping.  Maybe we'll get there when the bearish voices are the lone nuts in the wilderness again, like they were in 2000 and 2006-2007. 

So -- are we there yet?


Personally, what's surprised me most about this rally is the fact that we've yet to see even a good fourth wave correction.  Even third waves don't go straight up (or down) forever.  Somewhere along the line they lead to fourth wave corrections.  However, there is yet no concrete evidence that said correction has begun.


I still feel the charts suggest caution for bulls, since there have been warning signs that a larger top may be close -- but the market is ambiguous at current levels, and that calls for a different trading approach than when the market is clear.  The key to remember is that there will be time to get on board once a real correction starts.  Just as we had advanced warning a year ago that a big rally was coming, we should have advanced warning when a real decline begins.

For some perspective, let's look at a long-term chart.  Below is the Nasdaq Composite (COMPQ), which has now slightly exceeded July 2012's dual-Fib target zone.  The current wave can also be counted as nearly complete, but as noted, is still open to interpretation.

The S&P 500 (SPX) notes two potential counts.  I'm inclined to give a very marginal near-term edge to the bulls for a trip to 1860-65.  However, if SPX sustains trade below 1835, I'd be inclined to think we're headed at least 20 points further south.

In conclusion, the only easy answer here is that the trend is still up, since there have been no key level breaks yet.  That said, I'm not entirely comfortable with the easy answer at the moment, since the indicators have flashed warnings that we may be in the neighborhood of a top.  Thus I'm left with the conclusion that it's "too close to call" at this exact moment and we'll have to await a bit more in the way of signals before assigning higher probability to a direction.  Trade safe.

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Bears Fumble, Bulls Recover -- But the Game is Still Deadlocked

(NOTE:  There was something weird going on with Blogger that it wouldn't let me publish this... I've been trying to publish for at least 40 minutes now...)

Every now and then, the market catches me completely off-guard; frankly, the strength of yesterday's rally surprised me.  While I noted in passing that the potential existed for a fairly direct bottom, I actually expected the market would rally only briefly, then decline to new lows, even if only marginally lower.  The silver lining is that yesterday's action probably couldn't have done a better job driving home the point I was trying to make about trades vs. projections when I wrote:

The point is, on several occasions last week I mentioned that selling retests of the S&P 500 (SPX) 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous.  Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.     

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward.  The reality is, the market hasn't yet done anything but form a three-wave corrective decline.  No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change.  While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at intermediate degree has not yet ruled out the potential for another wave up.  Speculate accordingly.


The interesting thing about all this is that bears who missed the boat are now being presented another opportunity to take a crack at a retest of the all-time high.  That trade looked a bit better to me last week, but as we'll cover in a moment, I can't say it doesn't still appeal to me for technical reasons (these days I'm not really a bull or a bear; I have no bias beyond whatever the charts give me each day, and simply try to project and trade what I see.).


Let's jump right to the chart which suggests bears aren't completely out of the running just yet.

Sometimes the market gives us straightforward patterns to work with, and sometimes it gives us patterns which would force Stephen Hawking to break out a calculator and start cussing.  Right now, we're in the latter type of pattern.  People who've followed my work for a while know I analyze portions of the wave structure which are often "skipped-over" in popular Elliott Wave analysis.  Some of my best calls historically have come from the results of this micro-work, but...

The obvious count here is a simple ABC decline in SPX, shown in black below.  The thing is, when I look at this chart with zero bias and no opinion of what the market "should" do next, I come up with the count shown in blue below.  The challenge with the blue count is that the inherent complexity of the structure creates a higher probability for error -- just like most things in life: the more moving parts, the more opportunities for something to break or go off-track.  So I can't say that count is high probability, because that's simply the nature of the beast.  The end result is this "here's what I see" micro count is keeping me from jumping on the bull bandwagon just yet.   

As I've noted previously, no key levels have been broken yet in either direction.  Traders sometimes let their imaginations run wild during these types of noise-filled ranges, but it's often better to sit back as patiently as possible and wait for the market declare its intentions.

The Dow Jones Industrial Average (INDU) has not yet invalidated the possibility of a fourth wave.  While SPX has simply expanded its trading range (and is running within that range), INDU is still trading below its most recent consolidation -- a potential resistance zone.

 

 



 
In conclusion, bears put in a good showing on Monday and bulls put in a good showing on Tuesday, but neither side has actually accomplished anything of intermediate significance yet.  As I mentioned yesterday, the action over upcoming sessions will have implications for the bigger picture -- but we're not "there" just yet.  Trade safe.

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Upcoming Week Has Intermediate Implications for US Equities

For the past couple updates, I've been warning that I felt the market was in a potential topping zone, but was uncertain if the S&P 500 (SPX) had another small wave up still left.  As the pattern developed across markets, in Friday's update I noted that the Dow Jones Industrial Average (INDU) looked destined for new lows.  With this mention, I published an if/then target: if 16,378 failed, then it suggested a strong decline to 16,200-16,240.  On Monday, INDU broke the key level, then dropped rapidly to 16,240.60 before staging a small recovery.

For at least a year, this has been a very hard market in which to project downside moves against the (obviously) prevailing bullish trend -- and the market's current position is often where things get even trickier for bears.  No matter how hard we try, as humans we can't help but want to envision a market that moves in a linear fashion.  We have to fight the urge to project the market's future by using the same equations that work in the macro world, such as: "If a train leaves New York and travels at 100 miles an hour, how long until it reaches Cleveland, 400 miles away?"  We figure: 4 hours, right?

The problem is, when it comes to the market, that train may decide to travel to Cleveland by way of Miami.  Or, despite the fact that it's headed that direction, it may decide not to go to Cleveland at all -- just like the rest of us. (Sorry Clevelanders!)

The point is, on several occasions last week I mentioned that selling retests of the SPX 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous.  Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward.  The reality is, the market hasn't yet done anything but form a three-wave corrective decline.  No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change.  While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at intermediate degree has not yet ruled out the potential for another wave up.  Speculate accordingly.

Let's start off with INDU, since the pattern here still appears a bit cleaner to me than SPX.  I've noted some key upside levels on the chart.

SPX doesn't have the clear nested first and second waves that INDU has, but bears would like to see 1823-27 act as resistance to any rallies.  Bulls would like to see 1810 +/- act as support.  The action over the next few sessions will have intermediate implications, though it must be noted that a failure at 1810 simply rules out a micro fourth wave and limits bull options.  In itself, it is not the "end-all" to the bull case -- more on that in the next few updates.

One chart (not shown) which was quite bearish yesterday is the Dow Jones Transportation Average (TRAN).  TRAN lunged to new highs at the open, then closed below Friday's low, thereby forming a bearish engulfing candle.  

I'd also like to show the SPY chart again, to emphasize the intermediate importance of the current inflection zone.  Bulls can still stick save the market in the near future and keep the uptrend alive -- but if they don't, we're likely in for a solid correction, in the neighborhood of 8-10% or more.

In conclusion, the ingredients are in place for an intermediate decline, but we don't yet have confirmation from either the price or the patterns.  This has all the makings of an important week for the markets.  Trade safe.

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Two Intermediate Charts with Warnings for Equities Bulls

There's been no material change in the near-term outlook from the past few updates, but I've discovered an interesting near-term pattern in the Dow Jones Industrial Average (INDU) which may be helpful, and which I'll discuss in a moment.

The near-term question remains the same for the S&P 500 (SPX):  will there be one more wave up to new highs, or are five waves complete at 1849?  I continue to feel the pattern in SPX is too ambiguous to call at micro degree, but feel that the pattern at higher degree suggests a larger correction is pending.  I've assembled a couple more indicator charts which seem to back up this thesis.

First up is a ratio chart of SPX:AGG (equities to bonds), which, in November, pointed to higher equities prices -- but has now reached its price target and is quite overbought on the weekly time frame.

 
Next is another ratio I track, of VIX:TNX -- which recently triggered a warning signal.  This one doesn't always work (does anything?) and doesn't give signals very often; the advantage is that, historically, it tends to catch larger corrections.

Since I'm limited in the number of charts I can publish, I'm going to use SPY as the proxy for SPX today, since this chart details the extended fifth wave count I published in November (and notes that said target was recently captured) -- but also more clearly outlines the expectations of a retrace/correction from an extended fifth.  Note the target correlates to the low 1700's, with potential for the mid-1600's, on SPX.

Finally, a look at the near-term via INDU.  This pattern suggests two near-term bear wave counts, and one near-term bull count.  Though I'm unable to rule out the bull potential, the pattern in INDU gives the odds to the bears for a new low, either directly or indirectly.  A direct new low would suggest a bearish 1-2 nest, first target as noted.

In conclusion, I'm still inclined to believe the market is close to a larger top, and feel INDU now suggests that bears already have the ball.  That said, we still have no confirmation from the wave pattern in SPX, and projecting turns against the prevailing trend is always a tough proposition; this has been especially true against this particular bull market -- so stay nimble, and trade safe.

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Wave Counts for US Equities Beginning to Diverge Markedly

Some markets make you want to give up trading and take up something that requires less focus and concentration, like working in the "customer service" department at Kmart, or being President of the United States.  The market has continued to form an ambiguous pattern, which leaves a lot to interpretation.

Sometimes Elliott Wave provides (what I feel) is an unbeatable edge, such as when the two highest-probability counts agree on intermediate direction -- for example, as they did in the Transportation Average back in early/mid November, when both the bull and "bear" count pointed to higher prices.  When that happens, I'm a little more lenient on my entries and play wider on my stops.

Other times, we end up with two seemingly-equal probability counts which are diametrically opposed:  In those cases, we have to refer to key price levels and allow the market to dictate in real-time.  And at such times, I'll generally enter trades only when provided a low-risk entry, and usually keep tighter stops.  This is where we are at the moment, at least for the very near-term.  At the next higher time frame, though, both the bull and bear counts suggest a top is nearby.  Then the counts diverge again, so the long-term significance of said top will need to be determined in real-time.

For a closer look at the intermediate view, let's start off with the Dow Transportation Average (TRAN), which reached the lowest target zone I published on November 14 (7400-7500).  Back then, the bull and bear counts both agreed that prices were headed higher into year end; however, those two paths are beginning to diverge, with the potential for this to be a marked divergence.  And, just like famous poet and investment advisor Robert Frost, we'll probably want to take the "Trade Less Traveled," since crowded trades usually stink.

On the chart below, I would refer to gray wave iv as an "intermediate" trade (for lack of a better term), and from that perspective we should be close to a peak for both the bull and bear counts, so they both agree on that.  From a near-term perspective, the structure allows for another smallish wave up without any issue.  But from a long-term perspective, the bull and bear counts are significantly different, as gray wave iv (bull count) would mark only a mild correction, whereas the bear count would lead to a protracted decline.  A sustained breakout with multiple closes above the red channel would force a reexamination of the bear thesis.

Moving on to the S&P 500 (SPX), we have two near-term potentials in the making, and for the near-term I'm about 50/50 split on the odds.  This is the type of position where bears might consider a crack at shorts if price moves a bit higher, since that would provide an entry with clear, nearby stops.  That is, of course, certainly not trading advice, and you should consult your broker, your spouse, and a Tarot spread before making any investment decisions.

Based on the length of the existing waves, I'm making an assumption on this chart that if 1823 fails, then the blue wave 1 peak will be broken.  The blue 1 peak is relevant because fourth waves are not allowed into the price territory of first waves (except during patterns known as "diagonals"), so a break there would leave the bulls with fewer options.

In conclusion, from an intermediate perspective, the bull and bear counts both seem to agree that a top is close (as noted, a sustained breakout would call that into question, of course).  From a near-term perspective, the structure does allow for another small wave up -- and it's worth mentioning that if SPX makes a new high and thus validates the fourth wave triangle count, then we have good odds for a decline to follow directly, since triangles virtually always appear as the penultimate wave in a structure.  The market should be close to clearing its way out of the sideways chop of the past few sessions, so I'm hoping for better near-term clarity by next update.  Trade safe.

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Quick Informal Update

Sheer exhaustion has necessitated a short update today.  I'm not certain how much help it will be, since I didn't have time/energy to do my usual cross-market comparisons, but I'll publish a couple quick charts anyway.  My intention is to publish more complete updates Thursday/Friday.

The challenge I'm seeing at the moment is the lack of a clear structure from the 1849 high.  Coupled with the lack of clear structure INTO that high, it's difficult to say whether we've seen any kind of meaningful trend shift.  I'm marginally inclined to think we have:  The only clue I can find on the SPX charts is the apparent triangle noted in the last update, which leans me toward an impulsive decline.  The chart annotations describe my thoughts:

On the 30-minute chart, I'm again left making assumptions.  IF 1823 fails, then the present wave lengths suggest a decline that will break the blue wave 1 peak -- therefore, I can make the assumption that 1823 is probably the game changer.  Note these types of assumptions don't always work, and 1823 could break, but the market could then surprise from there.

In conclusion, sometimes I feel repetitive ending every update with "in conclusion."  (Since this is an "informal" update, I feel okay with publishing that.)  Frankly there's not much to add down here beyond my usual sign-off: trade safe.

Bulls Dominated the Equities Market in 2013 -- Will 2014 Be Different?

Well, after a whole year of waiting, the new year has finally arrived.  2014, allegedly.  Which means we're now exactly 30 years past George Orwell's ghastly vision of the "future" in 1984.  We're 15 years past the Moon leaving Earth's orbit in Space 1999.  And we're 13 years past discovering the obelisk near Jupiter in 2001: A Space Odyssey.    Frankly, I'm not entirely convinced the calendar's right.

Weren't we all supposed to have flying cars by now?  Consider this: In only five more years, Los Angeles will experience a major problem with a band of rogue Nexus-6 replicants from the Off-World Colonies -- and we've yet to train even one single Blade Runner.  I suggest we all write our Congresspersons and demand they either get cracking with funding, or they roll back the year to something which better fits our current technology, like 1986.

Speaking of years, 2013 is going to be a tough act to follow for the preferred count, which was rabidly bullish on the very first trading day of 2013 -- and on February 8, projected a target of 1750 for the S&P 500 (SPX).  November and December then closed out the year in banner fashion, with seven straight target captures and zero misses, grabbing more than 130 SPX points over those 2 months.  If 2014's preferred counts perform three-quarters as well as last year's, I'll be pleased.


While 2013 started off crystal-clear and suggested the beginning of a powerful third wave rally, 2014 is starting off with a bit of ambiguity.  We're in a much different portion in the wave structure now, and theoretically, we're presently wrapping up the fourth and fifth waves left over from 2012 and 2013.

Accordingly, the SPX chart below has intermediate bearish potential, but there's been nothing from the market which grants that potential much reality yet.  We have a market that's bumping up against trend resistance, and possibly a complete (or nearly complete) wave structure, but no key downside level breaks.  The first level for bears to reclaim to rule out the most bullish possibilities is the peak of the prior wave (shown as red 3 on this chart).  

If the wave count below is correct, then we're approaching an intermediate correction, which would be expected to travel down toward the mid-1600s.  Again, though: Presently this must be treated as a potential, not a sure-fire projection.  It's far too early to confirm a turn at this wave degree, as the market has not yet formed an impulsive leg down from the all-time-high, and all uptrend lines remain intact.  

Part of trading is knowing when to do nothing.  I'll generally take ambiguous trades only if I can find low-risk entries (by buying or selling the retest of a key level, for example).  I'll take higher-risk entries if I'm high confidence on direction.  But -- and I realize this sounds ridiculously obvious -- I try my best to do nothing if all I'm offered is low-confidence, higher-risk entries.

Below is another look at the long-term, but using a different index (the Wilshire 5000: WLSH).  Note RSI suggests odds are good for a correction, though RSI alone makes no guarantees of depth of said correction.  In a perfect world, I'll be able to arrive at some solid targets after the market provides a bit more info -- but as yet, given the present pattern, I cannot even confirm a trend change and it's entirely possible there is another wave up still pending at micro degree.

Looking at the bullish argument, WLSH has broken out over several trend lines, and bulls will be hoping the next dip is simply a back-test of those lines.

The 30-minute SPX chart notes a potential triangle in blue.  If this is a true Elliott Wave triangle, then Monday will open with a small bounce that stays below 1838.24, which will then be sold to new lows.  Trade above 1837.20 would indicate this is not a true Elliott triangle, but merely a triangle-shaped pattern -- which would thus open up bullish potential. 

The market was relatively "easy" to anticipate during November and December, but it goes without saying that not every day in the market is so clear.  Such is the case now:  It's possible to count the wave from 1767 as complete, but it's ambiguous enough so as to be unclear whether another wave up remains. 

In conclusion, SPX captured (and slightly exceeded) my November target.  With the market in its present position, there are no new high-probability near-term targets -- but ideally, the next few sessions will add some key information to help determine if we are indeed close to an intermediate trend change, or if the rally has farther to run.  In the meantime, trade safe.

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