SPX, RUT, and Taoist Farmer Update

In a perfect world, I should now be able to resume regular updates.  Of course, this is not a perfect world, but I'll go ahead and tempt fate by stating I feel 87.6% certain that there are presently no additional shocking crises lurking in my (immediate) future.  I'm still allowing 12.4% odds because, let's face it, the only constant in this world is change.  Indulge me a brief digression into an old Taoist parable that my dad has been telling me for as long as I can remember.  It goes something like this:

An old farmer relied on his horse to work his crops for many years -- until one day the horse ran away.  "We're so sorry!" his neighbors remarked,  "How terrible for you!"

"Maybe," replied the farmer.

The next day, the horse returned, bringing three wild horses with it.  "What a great stroke of luck!" exclaimed his neighbors happily.

"Maybe," replied the farmer.

A few days later, the farmer's son was thrown while trying to tame one of the wild horses.  The son broke his leg badly.  "How awful!" his neighbors lamented.

"Maybe," replied the farmer.

The next morning, military officials came to the village, seeking to draft young men for war.  Seeing the son's broken leg, they passed him by.  "Wow," said the neighbors, "how lucky for your son!"

"Maybe," replied the farmer.  And so on...

And with that out of the way, let's take a look at the charts.  Last update (June 25) concluded that there was probably more near-term downside in store but that it should then resolve with new highs.  That expectation was correct on both counts, though the lower near-term low was very marginal.

For the current charts, we'll start off with the Russell 2000 (RUT), whose recent peak at 1213 is practically a case study in technical analysis.

Next is the S&P 500 (SPX), which captured my May if/then target of 1978-89 and appears to be working on a fourth wave:

Moving a little closer on SPX, another leg down would be reasonable after a reaction rally -- but in this market, bears have little in the way of guarantees.

In conclusion, over the near-term, ideally I'd like to see a rally to 1978-82, followed by a decline below 1952.  Long-term, the trend remains up, so bears still have their work cut out for them before putting a dent in the big picture -- of course, as the old Taoist farmer would tell us, the only constant in this world is change.  Trade safe.

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SPX and INDU: Bears Take Control of the Short-term

In the last update, I noted that the S&P 500 (SPX) could be nearing a fourth wave correction, and it now appears that correction may be underway.  As of this exact moment, this is a market without clear intermediate trades, and personally I'm limiting my trades to short-term only until lower-risk entries present themselves.  The SPX chart below helps illustrate why.  I don't want to get too far ahead of the price action, but not shown on the chart is the potential that the correction could retrace as deep as the 1870's -- that's not a prediction yet, just something to keep in mind.

We find a similar situation in the Dow Jones Industrial Average (INDU), though here the current decline looks like it could be the c-wave of an expanded flat:

On the daily SPX chart, we can see price briefly overthrew long-term trend resistance (which I discussed in May) before falling back inside.  This is sticky territory for longs, as the price chart below reveals some similarity between the current pattern and the price action of late 2009 and early 2010, when SPX tested and established the upper channel boundary of the blue trend channel.  SPX overthrew the channel in that instance too, then ultimately fell back into a steep correction before moving higher again.

In conclusion, while all indications are that we're still in a bull market, due to the market's proximity to long-term resistance, this may not be the most opportune place for intermediate longs.  If this is indeed a fourth wave correction, then it should eventually resolve with new highs -- but as of this moment, the short-term trend is down and momentum confirmed the recent lows, which means the edge goes to bears for lower prices over the short-term.  Trade safe.

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Equities and Bonds: Bond Target Captured; SPX Approaches Its Next Target

Before I get into any market analysis in this update, I feel the need to briefly note the obvious: it's been a while since I've been able to write an update.  I apologize to my readers for the long hiatus; I've had difficult family issues recently, which were sapping the majority of my time and energy.  But things may finally be evening out a bit, so hopefully I can return to my regular schedule in the near future. 

With that out of the way, let's take a look at the market.  The first thing worth noting is that the 30-year Treasury Bond (USB) did ultimately capture my 138 target from February 20.  Almost immediately after it captured the target, it reversed.  And as of this moment, it's testing its 50 day moving average.  With the target capture, I'm now neutral on the long bond:  If the rally was an ABC fourth wave, then it's likely complete or nearly so, and new lows are possible from here.  On the bullish side of the coin, if the rally develops into a five-wave impulsive structure, then we'll consider the possibility that the end of 2103 marked a long-term bottom.

Moving on to equities, the last couple updates in May noted some if/then equations for the S&P 500 (SPX).  As noted on the chart below:

1.  On 5/23/14:  Sustained trade north of the blue trend line would suggests a trip to the red trend line (captured).
2.  On 5/30/14:  Sustained trade north of the red trend line would suggest a target of 1978-89 (high of 1963 so far).

While a larger fourth wave could sneak its way in here (blue "Bull (4)"), as long as support holds, then we should probably give the benefit of the doubt to bulls for the next correction to be bought higher and into the target zone, if the target zone isn't captured more directly.

The Nasdaq Composite made new highs recently, and has thus officially validated the intermediate preferred count of April 7.  I presently don't have a strong opinion about how much higher wave V will carry, though current evidence suggests more upside is probable.  The worst scenario for bears here would be if the wave I have labeled as a leading diagonal (from 2010 to 2013) was instead a nest of first and second waves (as mentioned on the chart).

In conclusion, the long bond captured February's target, so I no longer see a clear trade there -- we'll simply have to wait for more information, and for the next trade to emerge.  Regarding equities, I ended my last update (May 30) with this sentence: 


"...in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again."

That's where we stand at the moment.  For the time being anyway, the bull market continues; and until bears put a dent in the long-term technical picture, there's no point fighting the tape.  Equities may be close to entering a fourth wave correction, but present evidence suggests that further upside is likely to follow that correction.  Trade safe.

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Update Schedule

Just wanted to drop in briefly to let readers know that the rumors of my death have been greatly exaggerated.  In actuality, I have been dealing with a very difficult family situation for the past week and a half.  I'm hoping to be able to return to a regular schedule at some point next week.

I apologize for any inconvenience this has caused.  Thanks for your understanding.

How Will Equities React to This Long-Term Resistance Zone?

The S&P 500 (SPX) made new all-time-highs since the last update, thereby invalidating the preferred count.  On the plus side, we were looking for a bottom when the market bottomed, and the new highs weren't too far past the upside target zone -- so things could have been worse, and there were only about 10-14 points of "whoops" involved.

Interesting to note that SPX seems to be leading many of the major indices these days.  The Dow Jones Industrial Average (INDU) has not yet made new all-time highs.  And the Russell 2000 (RUT), Nasdaq Composite (COMPQ), Philadelphia Bank Index (BKX), et al are all still trading well below their respective all-time-highs.

Before we look at the intraday charts, let's take a look at a long-term monthly chart of the S&P 500 (SPX).  This chart notes an interesting long-term resistance line, which SPX is bumping into again:

On the two-hour chart, we can see the red trend line I've talked about since March is essentially the same trend line shown on the monthly chart above:

INDU's chart argues that the current rally should probably be viewed as, at best, a fifth wave, and that may bode poorly for the market's chances at clearing long-term resistance on this attempt.  While the black count is labeled as the "or" count, at this point it should probably be viewed as (at least) equal in odds to the blue count.

In conclusion, while SPX has broken though near-term resistance, it is still within a very-long-term resistance zone, so it will be interesting to see how it reacts to that.  Support doesn't always support, and resistance doesn't always resist -- if anything worked every time, then trading would be the easiest job on the planet.  But more times than not, the market does indeed react to support and resistance, so bulls should probably stay on their toes heading forward.  Conversely, in the event that SPX and INDU can power through long-term resistance and turn it into support, then this could become a trend followers market again.  Trade safe.

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SPX and NYA: Is the Current Equities Rally the End of the Road -- or the Start of a New Move?

It's funny how, even when the market does what we think it will, it always does its best to convince us that it's going to do more.  The rally has modestly exceeded my expectations, but (of course) now it wants us to believe that it's headed "to infinity and beyond."  And maybe it is, one can never say for sure.  But, so far, the market has done a pretty darn good job of following the roadmap I outlined a week ago (Friday, May 16), when I wrote:

I suspect [the recent sharp decline] 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.


In the wake of that update, the S&P 500 (SPX) rallied to 1886, then reversed and retested the 1863-70 zone, then indeed reversed again into another rally leg (which has since exceeded the original 1888 target).  So, in essence, there have been no real surprises yet, and last Friday's roadmap captured roughly 40 SPX points of profit.

The question now, of course, is whether this rally end of a correction, or the beginning of a new bull leg.  From a purely Elliott Wave perspective, unless and until bulls sustain trade above 1903, there is no compelling reason to treat this rally as anything other than a correction, and the preferred count remains unchanged.

   
When we study the above chart, it immediately calls to mind two questions:

1.  What is the mysterious black alternate ("alt.") count?
2.  Why do we have "hot water heaters" when hot water doesn't need to be heated?  (This second question isn't covered on the chart specifically, but it's implied.) 

The answer to both questions is the same:  As of this exact moment, there are no clear answers to either question -- at least not on the SPX chart.  So let's take a look at another index and see if there's more information to be gleaned elsewhere.  Below is a chart of the NYSE Composite (NYA), which is an effective representation of the entire New York Stock Exchange.  On the NYA chart, we can see the bullish wave potential a bit more clearly (still no help on the hot water heater thing, though):

The reason I haven't committed to this bullish count as the alternate on SPX is because we've been stuck in a trading range for longer than it takes a tadpole to turn into a frog (I'm guessing here; I have no idea what the life cycle of a tadpole is) and trading ranges can be very deceptive.  Thus, quite simply, if SPX sustains trade north of 1903, then we know what the wave isn't, but I'd like to see the form of any breakout before deciding what the wave actually is.  For now, it's enough to be aware that there is indeed significant bullish potential energy in the chart -- but until the conditions are met, it's something of a moot point.

Before going further, at the request of a reader, I'd like to briefly discuss a comment I made in passing in Monday's update, when I wrote:  "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.)"

Yet I didn't discuss that on Wednesday, because Tuesday was a very mixed session, and although SPX did not make new lows, several other major indices did.  And that left Monday's original thesis inconclusive; so there was nothing to discuss on Wednesday (well, more specifically, there would have been too much to discuss on Wednesday, and it likely would have only confused many people).   Instead, for Wednesday's update, I was content to simply unravel the near-term waves and project that SPX was headed to 1888-92.  Ultimately, the preferred intermediate count was and is unchanged, so we'll wrap things up with the 15-minute SPX chart:

In conclusion, while the rally has slightly exceeded Wednesday's target of 1888-92, the preferred count is unchanged, and will remain so unless and until there's a bullish breakout.  Trade safe, and have a great weekend!

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SPX, INDU, USB Updates: Market May Have Another Trick Up Its Sleeve

The market has been treating the preferred wave counts well over the past few weeks, and on Tuesday, the S&P 500 (SPX) dropped down into the 1863-70 zone, while the Dow Jones Industrial Average (INDU) made new lows.

The market has now reached a minor inflection zone, and I'm inclined to think we may see the double retrace rally I spoke about on Friday and Monday. 

While I think the intermediate term suggests this is a seller's market, the near-term is on the cusp, and there are two potential challenges for bears over the near-term:

1.  Yesterday's decline was only 3-wave in SPX, leaving open potential that the decline was corrective.

2.  The initial decline off the all-time high featured an extended fifth wave.  And extended fifths are usually followed by complex "double retrace" corrections -- thus, given the 3-wave decline yesterday, the double-retrace is still a very distinct possibility for the moment.

While we've stayed a step ahead of the action lately, this market has been hard on a lot of other traders -- by the time everyone thinks it should be bought, it should be sold; and by the time everyone thinks it should be sold, it should be bought.  While I suggested the market was a "solid sell" near 1882-88, I doubt the masses agreed.  But I'd be willing to bet they agree now -- and that might make this an ideal spot for a second rally leg toward 1888-92 (where everyone will think it's time to buy again... rinse and repeat).

I illustrated this double-retrace on Monday's chart, and so far the market has followed the projected path almost perfectly (all I had to do to update the chart was delete the line that price traded over).  It's a tough call right here, but I'm marginally inclined to give the bulls the near-term edge for that second rally leg.  The preferred near-term count would be challenged below 1868 -- if that happens we're likely to see new lows (and probably a whole lot more) more immediately.  Ultimately, new lows are expected either way.

I've also illustrated the near-term wave count in more detail on the INDU chart, and noted a key upside resistance zone  Additionally, I've illustrated the alternate intermediate-term count -- more on that after the chart.  (Also, red is the new black... or vice-versa... forgot to change the near-term alternate count to red!)

Finally, a quick update to the 30-year Treasury Bond (USB), which is now awfully close to February's target zone.  This is one of the reasons I'm giving consideration to the alternate bullish intermediate wave count in equities:  USB has rallied as expected, but blue chips haven't made much downward progress during this rally.

In conclusion, the near-term is an extremely tight call here, but I'm inclined to give the edge to bulls for a second rally leg to complete a textbook double-retrace rally in the wake of the extended fifth wave decline.  But after that, I expect new lows will follow -- so the intermediate outlook is bearish.  In the event equities are unable to reclaim noted resistance, or in the event SPX sustains trade south of 1868, then the near-term outlook would also turn more immediately bearish.  Trade safe.

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