SPX and RUT: New Lows Still Expected

In Friday's update, we looked at some of the signs that bears may have more firepower.  In today's update, we'll also take a closer look at the near-term potentials for the S&P 500 (SPX).  Specifically, I'm going to elaborate on Friday's discussion regarding extended fifth waves.  On Friday, I wrote:

The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

SPX came within 1-point of the 1879-82 target on Friday, so let's take a look at a near-term chart of SPX for further illustration (more discussion after the chart):

When an extended fifth wave forms, we know to expect a retrace to wave iv of the extension, which has already happened.  This is usually followed by one or more retests of the wave-v low.  Then, after the retests, the rally will typically retrace to wave-ii of the extension (zone noted on the chart).

The alternate count, shown in black on the chart above, was also discussed on Friday:

The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

Both counts remain viable, and 1862 is the dividing line.  The key point is that, either way, I expect 1862 will break in fairly short order, so I'd be very cautious playing with longs here.  Right now, I view this as a market where I'd short the bounces, not buy the dips.  Ironically, bulls probably have better odds if the market declines directly toward 1850 than they do if 1862 holds and it continues to rally.  (I'll discuss that in more detail in Wednesday's update if it becomes appropriate to do so.)

For more perspective on the bigger picture, let's take a look at the two-hour SPX chart:

The Russell 2000 (RUT) is one of the markets that kept me skeptical of the recent new highs in SPX.  RUT is in an interesting position right now, because it appears to be coiling for a rapid move.  This is a market in which to stay extremely nimble, because the next move is likely going to punish anyone who hangs on "hoping" while on the wrong side of the trade.

In conclusion, barring a breakout over 1903, the charts presently suggest we should remain bearish on equities until there are signs of a meaningful low.  If 1862 SPX fails, watch for a drop to 1848-53, which would also be a potential reversal zone.  Trade safe.

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Equities and Bonds: Signs that Bears May Have More Firepower

In essentially every update I've written this month, I've noted that the S&P 500 (SPX) appeared likely to rally to new all-time highs, but that rally would be a head-fake breakout doomed to whipsaw.  It's probably fair to say that was a decent call, and my only concern at this point is that it seemed so incredibly obvious and it almost happened "too easy."  (That always makes me a little nervous.)  It's certainly too soon to say with certainty that we've seen an intermediate top, but with everything going according to plan, there's presently no reason to doubt that thesis either.

The simple solution is that bulls will need to sustain trade north of 1903 to cast doubt on the bear case; so until that happens, or until there are signs of a meaningful bottom, the bear case will remain favored.  Today we'll also take another look at some of the supporting players to the bear case for equities.

The first is the US 30-year Treasury Bond (USB).  On February 20, I wrote that I felt the long bond was on its way to 138-140 -- the funny thing is, at roughly the same time, nearly 100% of economists surveyed felt that bonds were heading lower.  So that's something to consider, for those folks who view technical analysis as some kind of pointless voodoo.

The long bond is still implying a shift toward risk off, and thus hints at the potential of continued trouble for equities.

Next up is a chart I haven't updated since mid-April -- this chart tracks the ratio of the iShares High Yeild Corporate Bond Fund (HYG) to the iShares Barclays 20+ Year Treasury Bond (TLT).  I use this as a measure of risk-on/risk-off:  When the ratio heads lower, it means risk-off, which is bad for equities.  In March, I mentioned that HYG:TLT had broken through the uptrend line that began in 2012, and felt that was a warning sign.  Now this ratio is breaking down from a pretty ominous-looking head and shoulders, and this could suggest more trouble on the horizon for risk assets.

Finally, the SPX chart, and I'm going to break down the time frames separately to avoid confusion.

Bigger picture, RSI suggests new lows are on the horizon for SPX one way or another -- so whether we rally near-term or not, I'd be surprised if 1862 isn't broken in the coming sessions.

Near-term, there are two ways to view the recent decline: 

1.  The conventional way to view the big drop as the belly of wave iii-down of 1-down.  That would mean the bounce that began yesterday is merely a fourth wave consolidation that should be fairly short-lived.  In that count, the market is still forming wave A or 1 down, with wave v-down of 1-down still to come. 

2.  The way I'm tempted to view the decline, though, is as all of wave 1-down.  Instead of viewing the big drop as wave iii-down, I suspect it may have been an extended fifth wave.  Calling extended fifths is difficult, though, because the technical indicators literally don't work -- so it's all about "feel."  These are the types of calls I run with as a trader, but shy away from as an analyst, so do with this what you will.  If this was an extended fifth, then expect a retrace rally toward 1879-82 (the chart says 80-82), followed by a retest of the 1863-70 zone, followed by another rally leg up toward 1888.

If SPX sustains trade beneath 1862, then we're probably dealing with option 1.  If SPX sustains trade north of 1873, then option 2 has a decent shot.

Not shown on the above charts:  SPX recently tested the 50-day moving average for the third time in three weeks, and may thus be exhausting buyers in that zone.  If it tests the 50-dma a fourth time, then it's likely to break -- and that could spark a decent sell-off, since a fair number of traders use the 50-dma as a stop zone.  That hypothetical fits my expectation that SPX is completing wave 1 down, with the wave 2-up rally on deck -- to be followed by wave 3-down.  That third wave would coincide with a break of the 50-dma, which could provide selling fuel to power the decline.  The third wave is usually the longest and strongest of a move, so I like the overall setup.

In conclusion, while it's too early to confirm an intermediate top, everything has gone according to plan, so the preferred view will remain bearish on the bigger picture until such time as the market says we should consider other options.  Presently, the first thing bulls would need to accomplish is to sustain trade north of 1903 -- but since RSI confirmed the 1862 low, it appears unlikely that will happen immediately.  It instead looks likely that new lows are on the horizon one way or another.  And, as discussed, new lows will break the 50-dma, which could spark an extended sell-off.  Trade safe.

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US Equities Finally Reach the Decision Point

Last update expected the S&P 500 (SPX) would rally to new all-time-highs, and we didn't have to wait long for that expectation to prove out.  The market has finally entered the key upside inflection zone, so this is where things will get interesting (for the first time in a while -- thank goodness!).

In a perfect world, I'd like to see SPX head a bit higher -- but if this breakout is a head-fake, the market is going to want to throw a few more curve-balls in here, and the rally is likely to end abruptly and unexpectedly.  I've added a bull count to the chart below, and in the event of a sustained breakout through the upper red trend line, then we'll have to consider the potential that the last few months were a coiling pattern headed for the upper-1900's or beyond.  Until that breakout comes, though, bulls will want to avoid complacency in this inflection zone.

I've updated the near-term support/resistance chart below.  There are a couple confluences of support that should help offer clues as to the strength or weakness of the recent breakout.

I've also updated the NYSE Composite (NYA) because the pattern here gives us a near-term upside level to watch for clues of market strength.

In conclusion, the new all-time-highs in blue chips came as no surprise, and SPX is now sitting inside the key upside inflection zone of 1900-1920.  If it can push through this zone, then bulls will have something of an "all-clear" signal.  But as of yet, the breakout hasn't been substantial, and we're continuing to see weakness in beta indices -- so this is no place for complacency.  Trade safe.

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Did the Stock Market Just Tip Its Hand?

Lately the market has done its best to convince traders that there are probably easier ways to earn money, such as by selling a kidney, or by stealing the Mona Lisa.  For the last couple weeks, I haven't done much in the way of near-term projections, because I felt the market was near-term "un-projectable."  I have no regrets in that regard -- sometimes the best trades are the ones you don't take, and recognizing in advance when a market should be avoided can be valuable.

Today, though, we'll consider the possibility that something recognizable may be emerging from this mess, and we'll examine a potential near-term pattern (and variations thereof).  So, without further ado (adieu?), let's get right to the charts.

The first chart is the S&P 500 (SPX), which hints at a potential triangle in formation.  This also fits the recent whipsaw nature of the tape -- for comparison, the last triangle we encountered was in March.

Stepping out to the long-term view, we can see that if there's a near-term breakout, then SPX will encounter long-term resistance soon thereafter:

The NYSE Composite (NYA) is in a similar position to SPX (via a slightly different pattern), and has already completed enough rally waves to be complete:

In conclusion, the market still hasn't laid its cards on the table, but may be tipping its hand just a little bit here.  Keep in mind that if this is indeed a triangle, then it would mean that any breakouts will whipsaw in fairly short order, since triangles virtually always form as the penultimate wave.  Either way, bears still have a good shot at gaining traction over the intermediate term, so keep in mind that all near-term bullish bets are off below 1859 SPX.  Trade safe.

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Small Caps Still Trending Down While Blue Chips Grind Sideways

During the last few weeks, trading SPX has been the equivalent of playing a game of Whack-a-Mole, as it continues to head-fake its way to nowhere.  A few weeks ago, I wrote about why I felt this market called for patience, and nothing has changed since then -- ultimately, we have to respect that we're still stuck inside a three-month-long trading range.

Trading ranges frequently wreak havoc on trader psychology (and on trader accounts), and over the past few weeks I've watched some bears turn bullish, and some bulls turn bearish.  Traders often let their imaginations run wild inside trading ranges, as they grow more and more anxious waiting for the next directional break.  Of course, sometimes we want to ignore the fact that directional breaks may remain delayed for a long time, as the market reserves the right to continue grinding sideways for as long as it wants.

That said, I suspect we're finally getting close to a directional move.  In my perfect world, I'd still like to see a new all-time-high and a whipsaw, but this market is offering no guarantees right now.  The chart below is the S&P 500 (SPX), which has not yet broken this year's high.  Not shown is the NYSE Composite (NYA), which did break this year's high -- and that, coupled with the fact that we can count five waves up off the April lows, does require us to at least consider the possibility of a failed fifth wave without further highs (I alluded to this in the last update).

On an intermediate basis, the upper red trend line is still the key zone where more bullish potentials would begin gaining traction. 

The next chart is the 15-minute chart of SPX.  Because of the range-bound market, there's little in the way of key near-term levels right now -- pretty much everything is fair game within a range.  So, don't overplay these trend lines, since range-bound markets love to whipsaw.  It is worth noting that the uptrend from the April lows (red line) was broken recently, and SPX closed right on the back-test of that line.  Bears may try to make a stand and reject the advance here.

The Russell 2000 (RUT) has recently made a new low, and continues to look weak.  This suggests that "risk-on" is still absent from the current market.  It will be interesting to see if, at some point in the future, we look back on the SPX trading range as a giant distribution zone.

In conclusion, neither bulls nor bears have been able to get anything accomplished in SPX for the past few months -- but bears are getting things done in RUT and in some other high-beta markets.  Bond bulls are also getting things done in the long bond.  And, unless something changes, those are two of the reasons why I continue to suspect the balance of power may (also) shift to bears in blue chips over the coming weeks.  Trade safe.

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SPX, BKX, USB: A Terminal Pattern for Equities?

Monday saw the S&P 500 (SPX) gap lower at the open (in an extended fifth wave), which was quickly retraced, leading SPX to close in the green.  Neither bulls nor bears have gotten much accomplished lately, and thus both sides continue to keep options open for the intermediate term.  I'm still inclined to give the intermediate edge to the bears, and, presently, the 1910 level looks to be the dividing line.

SPX appears to be in the midst of a terminal pattern.  Ideally, I'd still like to see another thrust up to a new all-time high, but it's not required.

Over the past few weeks, we've discussed the fact that the high-beta indices, such as the Nasdaq Composite (COMPQ) and Russell 2000 (RUT), are in intermediate down trends.  Another index that I watch religiously (but haven't shown lately in the updates) is the Philadelphia Bank Index (BKX).  BKX is also in an intermediate down trend, and has recently broken beneath a three-point validated uptrend line.

BKX is interesting, because it hasn't even come close to taking out its all time high, and my long-time expectation here is that it's simply forming a huge ABC correction.  At the beginning of 2013, I was very bullish on this index, looking for a trip to 72 -- but that target has long-since been captured, and there are potentially enough waves in place for the entire rally since 2009 to be complete.

Finally, the long bond (USB) has held its breakout (as anticipated), and seems to be making a run at February's 138 target -- but, of course, blue chip equities are still holding their own.

In conclusion, right now the near-term charts resemble my four-year-old's refrigerator art, so there isn't much in the way of sure-fire near-term targets at the moment.  Looking at the bigger picture, though, the intermediate charts still suggest equities may be in a vulnerable position.  Until blue chips signal the all-clear for bulls, I will continue to treat this as a terminal rally.  Trade safe.

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100-year Chart of the Dow Jones Industrials Shows Equities at a Major Inflection Point

Wednesday and Thursday's sessions consisted of much sound and fury, but very little price progress.  So today, we're going to step back from the near-term, and take an in-depth look at the very-long-term wave count on the 100-year chart of the Dow Jones Industrial Average (INDU).

First, the good news:  Relative to the last hundred years, it appears most likely that the market will ultimately recover from its next large correction, and continue to rise over the course of the coming decades.  Okay, well, if nothing else, that's probably good news for our kids.  Looking at the immediate future, though, this chart emphasizes the gravity of the current inflection point and the coming inflection point.

The current inflection point is shown in black by the "or A of IV," etc., which considers the potential of a massive expanded flat forming within the blue megaphone pattern.  I first discussed this option back on February 8, 2013 (at that time, I was bullish and noted we should expect a rally toward 1750 SPX at the minimum) -- and that pattern is still on the table because there are only three rally waves complete so far (three waves is the requirement for a B-wave).

The three-wave rally makes this an inflection point.  If the market breaks though that inflection point, then the assumption will be that it's currently within Cycle V of Supercycle III.  In that event, the next decent correction will be a "small" (relative to the last hundred years!) fourth wave down, which would be labeled as red iv.  From there, the market would ultimately rally to new highs, in Primary (red) v of Cycle (blue) V.  That scenario would put the true end of the bull market out at least a year or two into the future.  At the end, though, things would have the potential to get very ugly.

Once Cycle V completes, we'll enter a massive fourth wave correction at Supercycle degree.  How massive?  Well, this pending Supercycle fourth wave would pair with the 1929 crash.  The chart shown below is in logarithmic scale -- which is really the only way to view a century-long price chart in context -- and notice that the 2007-2009 bear market (as nasty as it was) was only a hiccup relative to the 1929 crash.  Supercycle IV would likely make 2007-2009 appear mild in comparison.

That's still a ways off, though -- so no reason to stock up the bomb shelter with extra Fig Newtons just yet (actually, there's no reason to stock the bomb shelter with Fig Newtons at all) -- and the good news is that we should ultimately recover from Supercycle IV in the Supercycle V rally.

The more immediate concern revolves around the potential for the recent bull market to be B of IV, and to complete in the relatively near future.  A c-wave decline at Cycle degree would certainly not be something to take lightly.

The temptation with charts like this is to focus on the negative, and I would strongly caution against that approach.  If the market is going to form a c-wave decline at Cycle degree, then it's not going to Dow 5000 tomorrow.  It's going to take some time to get rolling, and there should be ample warnings along the way.  In the interim, let's stay open to both possibilities:  We've all seen what the "perma-bear" approach can do to investors, and it isn't pretty.


An interesting side note about the chart below is the way price resistance and RSI resistance have collided near the market's recent levels. 

I should also note that, in the past, I've referred to 2009 as the bottom of Supercycle IV, but I've shown that as the alternate count on this chart.  Basically, the last time I worked up a long-term count with this level of detail was 2007, and I figured six years of additional experience made it worthwhile to reexamine the whole thing.  So I dropped my presuppositions and went from "scratch" this time. 

On balance, I think the 2007-2009 bear probably pairs better with 1937's Cycle II than it does with 1929's Supercycle II -- which is why I landed on 2007-2009 as Cycle IV instead of Supercycle IV.  Ultimately, it's a judgement call, and one could potentially view red i and ii as the fourth wave that pairs with blue I-II, which would make everything since part of an extended fifth wave (and put SC IV back where I had it in prior labelings, at 2009).  I'm pretty evenly split on the two options, but would probably give a modest edge to the preferred/alternate counts as labeled here.

(If you're new to Elliott Wave analysis, understanding this chart would be aided by my quick primer on the subject: Technical Analysis: Understanding Elliott Wave Theory)

NOTE:  To bring up the chart at full size, right click with your mouse and select "Open in New Window."

   

Let's take another look at the Russell 2000 (RUT) chart, which shows the small caps remain in an intermediate down trend.  Investors are still avoiding risk and, as I discussed on April 23, this represents a marked shift in the market's behavior from 2013.  This is one of the reasons I've been advocating caution recently.

Back in February, I turned unequivocally bullish on the long bond, and more than a few folks thought I was nuts.  But in the meantime, the long bond has continued to outperform, and appears headed for my targets.  This is another reason I've been advocating caution in equities.

Recently, I've observed a lot of traders shifting back and forth from bullish to bearish and vice-versa, which is a function of the trading range that blue chip equities have been stuck in for the past few months.  Trading ranges can really play on a trader's emotions -- which is why "neutral" is sometimes the best stance when the picture gets muddy.  Always remember that cash is a position, too; it's usually better to be "out wishing you were in," than "in wishing you were out."

When I look at the current chart of the S&P 500 (SPX), I view it as a fool's errand trying to assign probability to the patterns that have emerged from within this large trading range, since I've learned over the years that giving too much credence to patterns that form within a range is often a losing proposition.  So I apologize to readers if that's frustrating at the moment, but I'd rather say nothing than make a hard call that's patently ill-advised.

So, near-term, here are the main options, for what they're worth:  There are enough waves in place for the rally to be complete, though there may be one additional fourth wave decline and fifth wave rally pending.  At this point, I'd almost rather see the latter, which would lead to a near-term decline, followed by a trip into the 1905-1920 zone (to get the trend chasers back on board, and to get everyone to forget about "sell in May and go away"), followed by a surprise whipsaw into an intermediate correction.  But frankly, none of my systems, signals, or indicators are giving me a solid answer one way or another here.

In conclusion:  At the present moment, the song remains the same as it has over the past week or so, and the message from equities is still "caution."  If you held my feet to the fire, I'd say I'm more inclined to be intermediate bearish here than intermediate bullish, based on the weight of the current evidence.  Ultimately, I'm simply patiently waiting for the market to give us a more solid signal.  Trade safe.

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