Blue Chip Equities: Still Reasons for Caution as the Market Awaits the Fed

Monday's update noted the market had reached an inflection zone and could bottom in short order.  The 1858 downside target was captured (and exceeded, as I suspected it would be) during an ugly whipsaw session -- and as of Tuesday, the S&P 500 (SPX) was again testing the 1880-85 resistance zone.

The Fed wraps up a two-day meeting today, and will announce its decision on interest rates.  The consensus expectation is that the Fed will also reduce QE asset purchases by another $10 billion.  Any surprise deviations from that number could generate directional fireworks.  ADP releases its monthly report on hiring today; and the government's Bureau of Made-Up Statistics (BOMUS) will release its initial estimate of first quarter GDP (this number will later be revised approximately 347 times, but no one will pay any attention whatsoever to the revisions, regardless of how dramatic they are).

Looking at the price charts in equities, I'm inclined to simply say that upside potential presently appears fairly limited.  There are two things that could change that:

1.  A sustained breakout over key resistance.
2.  A positive surprise from the Federal Reserve.

The Fed is the ever-present market-moving wildcard, and they're simply going to do whatever they're going to do -- so I'll wait for the announcement and leave it to the economists to speculate in that regard.  Chart-wise, I've broken down the intermediate wave structure in the Dow Jones Industrial Average (INDU) to illustrate why I'm not terribly bullish with prices at current levels.

I should clarify that I'm not exactly full-on bearish here either, because I do respect the fact that the market is in a long-term uptrend, and betting against the trend is always risky business.  I'm not screaming "top" here, because there's nothing screaming "top" in the charts yet -- it's more like there are whispers of the potential for a top, and I'm respecting that.

By way of further clarification:  The blue chips have been stuck in a trading range for months now, so that doesn't give us much to work with there -- yet beta indices have been in intermediate down trends, and that's a shift from the way things have been for the majority of the bull market.  I've also talked about the long bond in prior updates, and I'm still inclined to think the bond rally has farther to run.

On the long-term INDU chart, we can see that five rally waves may be complete or nearly-complete.  The x-factor is still the potential of a subdividing fifth wave extension, which is entirely possible, but difficult to anticipate.  Until INDU sustains a breakout over resistance, it's a moot point, and obviously I can only draw from what's in the charts as of this moment.  

  
At near-term degree, INDU appears to be in the process of completing five rally waves.  There are already enough waves present in the structure for the rally to be entirely complete, but there's potential for an expanded flat (shown as the blue (A)/(B)/(C)) for one more push up to a marginal new high.

Since it's a Fed day, one option is an early drop in red (4), followed by an "announcement pop" toward red (5), followed by a reversal (the first directional move out of the Fed announcement is often a fake).  Again, though, there are already enough waves for a complete structure, so there may be no "pop" forthcoming.

So that's the long-term and the near-term; now we'll look at the SPX chart for a middle view:

In conclusion, the equities market faces substantial resistance near current levels, and high-beta indices and the long bond are both still warning that caution is warranted in blue chips.  If SPX and INDU can sustain a breakout through resistance, I will of course respect that development accordingly -- but until then, this is a "show me" market.  So while I'm not full-on bearish here, I'm presently inclined to think bears probably have better prospects.  Trade safe.

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Update to US Equities and US Bonds: The Big Picture Implications Behind the Market's Current Inflection Point

Elliott Wave Theory is based on the concept that markets are not random, but instead follow patterns that are fractal in nature. Markets often seem to move in a structured way, and those patterns replicate themselves across all time frames.  There are times when patterns stand out on the larger time frames, and the market thus broadcasts its intentions for the weeks or months to come; one recent example of this comes from the update of March 31, when I noted that the pattern suggested the market would break out in a head-fake rally, and then whipsaw.  Other times, the larger patterns are a bit more veiled and only the near-term patterns stand out (such as last Wednesday).

Since the market is of a fractal nature, we can anticipate what it's going to do if we can identify the fractal that's forming.  At times we can do that, but ultimately, it's a probability game, and none of us can identify every single fractal in advance.  Which means there's potential danger in overstepping our bounds at the moments when things aren't clear.

Many years ago, when I first started trading, I followed a subscription service that was almost always "quite certain" of what the market would do next.  They rarely offered alternate possibilities to their subscribers, and things were generally discussed in the cut-and-dried tone of "here's what the market's going to do next, and here's why we're perfectly sure of it."  Yet despite their very certain-sounding approach, they were frequently wrong.  By a huge margin.  I've come to believe that some analysts take the "sure-sounding" approach not because they're actually sure, but because it impresses people.

After all, if you're going to pull in new subscribers for your market newsletter, you'd better at least sound like you have a handle on things -- right?  As humans, this is often how we choose people, and this approach works for certain physical things, because most macro physical things are not probabilistic (it isn't until we get down to the quantum level that we encounter probabilities).  Since we exist in a physical world, we become conditioned toward thinking of things as concrete.  For example, a car either "is" or it "isn't."  So we expect concrete statements from people, and we take our car to the mechanic who sounds like he knows what he's doing.  Then later, we gladly pay the $495 he charged us to "rebuild the solenoid linkage distributor," plus the $186 for a "brand new starter belt."  The problem is, the market doesn't work that way (neither does your car, incidentally -- but your mechanic might!). 

Personally, I'd rather try to help people protect and expand their capital than impress them with tough-sounding talk.  Which is one reason why (largely as a result of my early trading experiences) I almost never ignore alternate possibilities in these updates.  Granted, there have been a rare few occasions when the future seemed so clear that I did ignore alternate potentials -- but I think my public track record on those occasions is pretty close to 100%, so my judgment there isn't too terrible.

Anyway, since the market is fractal in nature, we try to anticipate the future based on the expected form of the completed fractal.  And, obviously, when we don't know what fractal the market is trying to form, we have nothing to base anticipation upon.  At those times, I watch the zones that I call "inflection points."  This term is probably best explained with an example:  If the market forms one five-wave decline in the course of a session, I now know that probability suggests another five-wave decline will form and take the market to new lows.

Two five-wave declines makes a corrective ABC fractal, while three five-wave declines makes an impulse wave.  So, the first five-wave decline tells me to expect at least one more -- but what I may or may not know yet is whether to expect two more declines.  Thus once the market has competed two five-wave declines, that represents an inflection point.  If the market only wanted to form a corrective ABC, then it will bottom after that second five-wave move is complete.  Sometimes we know the market is intending an ABC based on the larger fractal, and sometimes we know it's intending to form an impulsive decline.  But when the larger fractal is unclear (or low probability), then inflection points should be treated with additional respect.

Presently, I feel the larger fractal is a bit unclear.  I know lots of folks are "quite certain" they know what it is, and undoubtedly some of those folks will end up being right.  Personally, I intend to take this market one session at a time for the moment.

I don't always know how the market will react to an inflection point, but I'm generally reasonably accurate in identifying those points.  So, all that to say:  Until the bigger picture clarifies more, I'll continue to note the near-term inflection points (those places where turns become higher-probability), but until something jumps out at me, I'll leave it up to the reader as to what to do with that information.  If one is bullish, then one could wait for declines to reach inflection points before going long; and if one is bearish, one can wait for rallies to reach inflection points before going short.

I discussed all this at length because the market has reached its next inflection point.  Below is the chart of the NYSE Composite (NYA) which illustrates this very well:

In prior updates, I've discussed the bond market and how I feel that the long bond is going to rally further over the intermediate term -- and that makes me wonder if there is trouble on the horizon for equities.  Ultimately, though, I do have to respect that the equities market is not inseparably linked from the bond market -- and, even if it were, I could always be wrong about the long bond.  The chart below is the US 30-year Treasury Bond (USB):

SPX has reached an inflection point similar to NYA.  1884 SPX looked like a "no-brainer" short to me, which is why I was near-term bearish last week; however, the risk/reward equation is different at today's prices -- and if one is inclined to take long positions, then this inflection zone is a place to consider that.

In conclusion, if the market was trying to form an ABC decline, then odds are reasonable that it's complete (or nearly so), which would mean a resumption of the rally.  If the decline continues more than a little further, then that would be a clue -- one which may indicate that bears are in control of the intermediate time frames.  The next few sessions should thus be enlightening.  Trade safe.

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The Long Bond vs. US Equities: Is One of These Markets Lying?

Wednesday's update ended with the conclusion that I was "near-term bearish with a chance of bigger thunderstorms."  The S&P 500 (SPX) failed to make a new high in the two sessions since that update, so the "near-term bearish" call was a hit; today we'll look at some of the key levels which should help indicate if those "bigger thunderstorms" are going to show up or blow over.

Let's talk about the bull case first, which is pretty simple:

1.  It's a bull market.
2.  Virtually all the major equities markets are still within long-term technical uptrends.
3.  It's a bull market.

Now for the bear case.  I monitor anecdotal sentiment with some frequency, and one thing that should bear consideration is the about-face so many traders have done from bearish to bullish in such a short time.  Many traders were extremely bearish at the recent bottom, as I wrote about at length back on April 15:

Bears may want to stay on their toes right now, because the charts have reached a technical inflection point, and it's significant.  Here I'm going to briefly digress from the technical discussion, but I'll return to it in a moment.

Digression: The herd is getting awfully bearish lately.  I've seen more "crash" articles show up over the past week than I have in a long time.  What's troublesome for bears isn't that these articles are being written, it's that they're being read.  Admittedly, this is very anecdotal -- but I write about this stuff, so I've picked up a thing or two over the years regarding mass sentiment and the popularity of articles.  Thus the current popularity of crash-type articles bothers me a bit because, from the perspective of market timing, the majority rarely read hardcore bear articles when they "should" -- instead, when they should be reading bear articles, they read bull articles; or articles about flowers and cute fluffy kittens (not necessarily in that order).  They usually want bear articles right before a bounce is due.

As noted, many of those same traders are now very bullish -- right as the market is hitting intermediate resistance.  I've been observing sentiment throughout this entire bull market, and this is the fastest I've seen sentiment reverse with this level of conviction.  I assume it's because, at this point, "bullish" has become a Pavlovian response for traders.  The market has recovered from each and every prior decline (that's what bull markets do, after all), so traders are finally programmed to expect it.  It's interesting to me because, in the instances prior to this, the market has recovered by climbing the proverbial "wall of worry," and has rallied into heavy trader skepticism.  It seems that this time, it's rallying into hope.  People are literally scared to be bearish -- and that's the type of mentality we see near tops (at bottoms, it's the same thing in reverse: folks are scared to be bullish).  I, of course, can't promise that the market is building a top, and I remain open to both bull and bear possibilities at the moment.  But here again, I felt it worth discussing.

One of the charts that continues to keep me on my toes in equities is the 30-year bond (USB).  The long bond has recently broken out over resistance and, barring an immediate whipsaw, looks to be headed toward my February targets.  Sometimes when bonds turn bullish, equities turn bearish, so this chart leads me to wonder if there will be a shake-up in equities in the reasonably near future.

As noted last update, SPX is at an inflection point, where it has to decide if it wants a five-wave rally, or if it's already completed a three-wave rally.  Though not shown on the chart, keep in mind that fourth waves are often complex, and a fourth wave could continue modestly lower without creating any technical issues.  I suspect there's more downside in store, at least for the near-term.

There's nothing new to add on the long-term SPX chart, but it's shown again for reference purposes:
 

In conclusion, nothing of intermediate significance has happened since the last update, so there's little to add in that regard.  I suspect there's more downside in store for at least the near-term, and a breakdown at 1870 does have the potential to generate bigger fireworks in SPX.  Trade safe.

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SPX, RUT, and NYA: "Risk On"? Not Quite Yet...

The S&P 500 (SPX) has continued to power higher, largely unabated, and has now reached the zone that qualifies as a retest of the all-time-high.  A lot of folks have now jumped back on the bull bandwagon, because, after all, it's a bull market.  However, there are still numerous markets showing that "risk-on" hasn't entirely returned to the menu yet.

Among other things, the high beta indices like the Russell 2000 (RUT) and Nasdaq Composite (COMPQ) are still lagging the blue chips.  The chart below shows RUT in the top panel (log scale) and SPX in the bottom panel:

Part of the "among other things" not shown in this update is the chart of the 30-year bond (USB), which is back-testing its recent breakout.  I remain bullish on the long bond for a trip toward 138.

SPX is retesting the all-time-high -- a "retest" of an intermediate level isn't an exact price, but is more of a price zone which extends slightly above and beneath the exact price.  SPX has also reached a specific resistance point at 1884.  At least a near-term correction from here would be pretty normal.  In the event there's no immediate correction and SPX breaks the all-time-high, then the red trend line is still the next pivotal resistance level.  Take a look at the long black trend line, which began back in May 2013, for an example of a similar pivotal level.
 

The NYSE Composite (NYA) is in a similar position, and the current price zone qualifies as the next big inflection point.  The last time I mentioned the market had reached an inflection point was on April 15, when it bottomed -- I was near-term bullish on that day, but in hindsight, was not bullish enough.  

In conclusion, there are essentially three stances one can take as an analyst: bullish, bearish, or neutral.  Neutral is probably the least popular with the crowd, because people naturally crave resolution (nobody likes it when an episode of their favorite TV show ends with "To be continued.")

But the reality is:  Some markets beg to be anticipated, some beg to be reacted to, and some beg for the patience of limiting oneself to only the lowest-risk entries in both directions.  The market has now reached another inflection point, which means it hasn't quite closed the book on either the bulls or the bears just yet.  I think bears have a good shot at turning the market here, at least for the near-term -- so, for the moment, just put me down as near-term bearish with "a chance of bigger thunderstorms."  Trade safe. 

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SPX, WLSH, Nasdaq: A Monkey Wrench in the Ointment

In the last update, I noted the market had entered something of a no-man's-land.  I also talked about the S&P 500 (SPX) level of 1873 as key resistance.  That level has not been claimed yet, and today we're going to look at another aspect of the argument.

Personally, there are times I don't like attempting to predict the market, because it's simply "too close to call," and I think getting too attached to outcomes at times like that can be dangerous.  Certain types of markets call for nimble trading and flexibility of opinion, and I think the current market qualifies.

As I've looked across markets, there are two charts that cast some doubt on any bull case.  One of these is the Wilshire 5000 (WLSH), which is basically the entire market represented in index form.  WLSH throws a wrench into the ointment (I enjoy mixing metaphors) for bulls because the recent low took the shape of a three wave decline, as shown below.  

On the other side of the coin, the Nasdaq Composite (COMPQ) captured the target I noted was most probable (back on April 7), then bounced off the 200 day moving average and the blue trend line that I scribbled on this chart a few months ago.  Bears have done what they set out to do here for a potential fourth wave, so further decline is not required -- though it's not yet clear if the decline is finished. 

Finally, the S&P 500 (SPX) chart.  Due to WLSH and a few other markets, I'm officially recanting 1873 as a key overlap.  I still think it's important resistance, but no longer believe that a brief break of that level would represent the end of the road for bears.

In conclusion, the market remains in a no-man's-land.  Sometimes markets are clear and high probability targets present themselves (as evidenced by five captured target zones so far this month), but other times, staying nimble is our best weapon against the market.  I'm slightly inclined to favor the bears on an intermediate basis, but this is as much an instinctive call as anything; with the market in its current position, one thing which won't serve either bulls or bears is complacency.  It is worth noting that I've observed some level of complacency on the bull side recently, so it will be interesting to see if the market chooses to address that in the near future.  Since it's unlikely the market will hang around current levels for long, a clearer picture is likely to emerge quite soon.  In the meantime, trade safe.

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SPX, NYA, and HYG:TLT: Bulls Keep Hope Alive for the Moment

Tuesday's update noted that the market had reached a significant inflection point, and anticipated that the S&P 500 (SPX) would rally over the near-term, with a target of 1840-48.  That upside target was reached early Tuesday, which led to a deep retrace and retest of the low.  The upside target zone was then exceeded in Wednesday's session.  SPX also cleared the noted 1850 pivot and broke out of the down trending channel.

As I covered in detail in the last two updates, I was concerned that sentiment had become a bit too bearish, and that a rally might be needed to "punish" the newly-converted bears.  Frankly, the rally in SPX exceeded my expectations -- punishment indeed, and it certainly must have been painful for those traders who weren't expecting any rally at all.  Bears have now been forced into a final stand at the key resistance zone of 1873. 

The NYSE Composite (NYA), on the other hand, has only marginally exceeded its second upside target zone (10,440-490).  The two wave counts detailed on Friday, which warned of a potential bottom near 10,250, are also both still standing.  The key pivots are noted on the chart.

The bond market continues to hint that there may be underlying stresses in play, and the ratio of High Yield Corporate Bond Fund to the 20+ Year Treasury Bond Fund (HYG:TLT) is now poised at an inflection point:

In conclusion, last update covered the intermediate bull argument in detail and was, in fact, bullish over the near term -- but ultimately concluded that treating the bounce as a selling opportunity (essentially until proven otherwise) was a reasonable stance.  Bulls have certainly added some excitement to the game, since the upside targets were reached and exceeded.  Nonetheless:  Rules are rules, and the key 1873 (intermediate) level has not been reclaimed yet.  While I have a few indicators on early buy signals, ultimately, price trumps indicators.  Therefore, the bear case still stands as preferred for the moment.

Bears will need to reject the rally rather directly and defend 1873 to avoid facing yet another new all-time high -- and while I can't say for certain that's what will happen, the very short-term charts do suggest that as a distinct possibility.  The next few sessions should be revealing.  Trade safe.

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SPX, NYA, and USB: Bonds Finally Break Out, as Equities Reach an Inflection Point

On Friday, the S&P 500 (SPX) captured downside Target 2 (1822-28; published April 7).  On Monday, the Nasdaq Composite (COMPQ) captured its downside Target 2 as well.  The market has now reached an important inflection point, which we'll discuss in more detail in a moment.

Numerous major indices, particularly the high beta indices like the Russell 2000 (RUT) and COMPQ have formed clear series of lower highs and lower lows, which is the very definition of a downtrend.  It's virtually impossible to look at those price charts and find any technical reasons to be intermediate bullish at the current juncture.  Therefore, going on the philosophy of "trade what you see," I'm left with no other option but to continue to favor the bears for the intermediate term -- unless and until proven otherwise.

The bear case is technically solid, and thus has to be considered "preferred," but I'm nevertheless going to devote several paragraphs to talking about the bull case and the other side of the trade, partially because I see very few folks doing so and I feel obligated to bring some balance to the discussion.  Longtime readers know I'm an equal opportunity offender of both bulls and bears; ultimately I don't really care which direction the market goes, outside of how it impacts my current positions.

Let's discuss the bull case: bears may want to stay on their toes right now, because the charts have reached a technical inflection point, and it's significant.  Here I'm going to briefly digress from the technical discussion, but I'll return to it in a moment.

Digression: The herd is getting awfully bearish lately.  I've seen more "crash" articles show up over the past week than I have in a long time.  What's troublesome for bears isn't that these articles are being written, it's that they're being read.  Admittedly, this is very anecdotal -- but I write about this stuff, so I've picked up a thing or two over the years regarding mass sentiment and the popularity of articles.  Thus the current popularity of crash-type articles bothers me a bit because, from the perspective of market timing, the majority rarely read hardcore bear articles when they "should" -- instead, when they should be reading bear articles, they read bull articles; or articles about flowers and cute fluffy kittens (not necessarily in that order).  They usually want bear articles right before a bounce is due.

Certainly we can't trade based purely on anecdotal sentiment like that, but I felt it was worth discussing nonetheless.  From a more technical perspective, this inflection point comes about because SPX and several other indices have reached the zone where a corrective wave structure could form an intermediate base.  Let's start off with the NYSE Composite (NYA) to illustrate this.

Since I often try to foresee and discuss the market two or more turns in advance, I opened this discussion in Friday's article with the following:

One of the questions I indirectly raised earlier is:  "How might the market punish the newly-converted bears?"  There are, of course, no guarantees that it will, but it's a strong possibility.  So, instead of cluttering up the SPX chart, I've used the NYSE Composite (NYA) to illustrate two possibilities for market curveballs.

The first curveball potential is a surprise intermediate bottom in wave C.  C-waves typically reach approximate equality with A-waves, as shown by the green measured-move boxes on the chart below.
The second curveball potential is for a quick drop that captures the SPX target 2 zone, which is followed by a retracement rally (to punish the new bears).  I've shown this option in black on the chart below -- if this plays out, expect SPX to follow a similar path.  Note there is absolutely no technical reason for me to consider such an outcome, this is merely based on trying to determine what might cause the greatest amount of pain to both the bulls and the bears at the current juncture.  The black path would also leave the greatest number of options open, which is another thing the market often likes to do. 

Here I'd again caution readers to watch the crash channel on SPX, and thus not entertain these other options as long as SPX remains within that channel.

SPX broke out of the crash channel later in Friday's session.  Of note is the fact that NYA has, so far, followed Friday's proposed black path very well -- in fact, the last three directional moves tracked the black dashed line so well that the price action essentially covered it up completely (I deleted the overlap on this chart -- the original can be compared in Friday's article).

When I study NYA on the one-minute chart, it suggests the rally since Friday's low was impulsive -- and that suggests at least one more wave up is due.  I would not be at all surprised to see the black path fully realized over the coming sessions.

SPX is also hinting at a near-term bounce.  My main regret on this chart is that, on Friday, I strongly considered splitting Target 3 into two zones (due to the wave structure):  1810-14 and 1798-1804.  As a result of not following my instincts, Target 3 may have to wait.  Of note is the fact that if SPX rallies into the near-term target and then returns to break 1812, bulls are probably in serious trouble, and Target 3 would almost certainly be far too conservative in that event.

On the bigger picture SPX chart, we can see that, on Friday, SPX tested the old black trend line.  One more reason the current inflection point has to be noted and respected, at the very least.

I've spent a lot of time talking about the bull case because it's simply too obvious to ignore, and I feel it's irresponsible to only discuss one side of the trade, especially at an inflection point.  Nevertheless, I am continuing to favor the bears in equities and will treat the (projected) bounce as a selling opportunity until proven otherwise.

One of the charts keeping me in the intermediate bear camp (with equities) is the 30-year bond (USB).  Outside of calling the b/(2) bottom on April 7, there's been no change to this chart or its projections since I turned bullish on USB back in February.  Note the long bond has now broken out above the dashed red resistance line, which is the first true confirmation of my intermediate bullish stance in bonds.  Markets often become whippy around important price zones, so some backing and filling around that breakout isn't out of the question.

In conclusion, I continue to favor the intermediate bear case for equities because, given the current charts, I have no choice.  I've discussed the intermediate bull case in depth because I feel we at least have to respect it, since, for more than a year, this market has repeatedly surprised to the upside.  The bottom line is this:  Near-term, more upside would not be unusual, and I've mapped out the key intermediate upside levels as best I can.  While the bull case bears respect, until those key levels are reclaimed, I have to treat any bounces as selling opportunities.  Trade safe.

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