SPX, NYA, INDU: Friday's Action Helps the Picture Gain Clarity

In the last update, we talked about the market reaching an inflection point, and I noted that my preferred near-term count had SPX very close to completing an extended fifth wave.  Friday's sudden drop validated my near-term count, as extended fifth waves almost always see rapid retracements.

Bigger picture, the bull count has had some questions to answer, and we've been watching for further confirmation (or rejection) from the market.  Friday's action was actually quite good for the charts, and my instinct is that Monday or Tuesday's action will clear up the entire picture.  I'm not going to discuss all the options I'm still seeing at this moment because it would get extremely confusing for readers.  Thus I'm only going to discuss the most basic options today -- but I feel like I see what the market needs to do from here; so, depending on what happens today, I may pop in on Tuesday with a quick update

First off, let's take a look at NYA, which was the chart that "started it all," so to speak, and let us know to short the all-time-high in SPX and to cover in the 1899-1907 zone.  NYA remains an excellent canary in this situation, because it formed a clear 3-wave decline into the lows, which was what we'd anticipated from the beginning.  If it can now overlap its wave (A)/1 low, then we'll have early confirmation that odds are indeed favoring new highs across the board.

This is due to one of the most basic principles of Elliott Wave, which states that wave 1 and wave 4 cannot overlap the same price territory.  Therefore, overlap of the wave (A)/1 low would tell us that the rally is not a fourth wave, and that would leave two options:

1.  That the low was indeed the bottom of wave C, and the rally is indeed the anticipated larger fifth wave to new highs.
2.  That the rally was another second wave, which would lead to a decline of monstrous proportions on a break of the last swing low.

Given the broader picture, option 2 would be the underdog in this situation.  Thus trade into that key wave (A)/1 zone would suggest bulls remain in control of the big picture until proven otherwise.

SPX essentially validated my near-term extended fifth wave count.  It's unknown to me if Friday's low marked the end of the entire retrace of that wave, but trade north of 1964 from here would suggest several possibilities:

1.  We're launching directly into a larger third wave of the rally off the low.
2.  A complex "double retrace" back to 1930-35 via an expanded flat (which would play out as new highs north of 1964, then a fairly direct reversal to new lows beneath 1942).  In that event, the dip would be a buying op.
3.  A potential ending diagonal motive wave off the low.  This is currently an underdog.  For this option to gain traction, I would need to see "more of the same" in the shape of the price structure over the next day or two.  Suffice to say there should be advance warning if this is unfolding.

If there are no new highs above 1964, then bears would have a shot to turn everything over here.  If there are new highs, then their chances continue diminishing. 

On August 13, I suggested bears "exercise extreme caution" if SPX sustained trade north of the 1944 +/- pivot, and the market has since bounced from that zone twice, including on Friday -- so that zone has served bears well.  At this point, the pattern has now shifted, and 1929 +/- becomes the key pivot for intermediate bears.  (I'm assuming the market's use of 1929 as the new bear zone is purely coincidental, and of no relation to that infamous year.)

Finally, another look at the long-term INDU chart.  It's always amusing to me how the media ascribes so much weight to news events as drivers of the market.  Note that on Friday, INDU was rejected directly at the blue dashed line that I suggested (a week ago) would be important resistance.  In my experience, the market often leads the news, not the other way around.

In conclusion (perhaps counter-intuitively) Friday's big drop may actually aid in solidifying the bull case, depending on how things unfold over the next session or two -- and depending on how things shake out today, I may update again on Tuesday.  Trade safe.

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SPX, RUT, INDU: Big Picture Inflection Point

I have to admit, I've been really torn on this market since the bottom at 1904.

On the one hand, the market reached my target zone and rallied, which was the expectation I'd had all along.  On the other hand, I'm not keen on the wave structure near the lows.  A few markets, such as RUT, still have big questions to answer.  I would have really like to have seen a much cleaner wave structure at the bottom, so I could be gung-ho about buying the dips now.

Last update, I presented some of the holes I'm seeing in the bull case, but because of my prior expectation for a bottom at SPX 1899-1907 and the potential of new highs, I still have not shifted to the bear camp.  As I've wrote on Monday:  "While I am not entirely sold on the bull case just yet, that's a whole different animal than 'being bearish.'"

The challenge right now is this:  On a two-hour chart, everything looks fine for the anticipated fourth wave bottom at 1904 and straight on to new highs (that's a turn of phrase; don't take it literally) in a fifth wave.  But when we break everything down at the micro level, the pieces don't seem to fit together quite right.


So I'm remaining open to both potentials for the moment -- and fairly evenly-split on the two.  There's times I can look at the market and feel very confident about where it's heading (such as the last few weeks); but there are other times that all I can do is try to react to the price action in real-time in an appropriate manner.  Nobody's right all the time, and nobody needs to be -- one just has to have a reasonable idea of when and where to act, and when to sit still.

Let's look at some big picture charts.  Several markets have reached inflection points, including SPX, which closed yesterday at a rare quadruple confluence of resistance.  I have the bear count shown as the alternate on this chart, but as noted, I'm fairly evenly split on the two as of this exact instant.

INDU has cleared first important resistance:

RUT has not:

BKX rallied up to its next inflection point, where I had red (4) drawn on the chart:

Finally, the SPX 15-minute chart reveals that the near-term wave structure isn't terribly clear right now:

In conclusion, there's nothing in the charts that's screaming of a clear pattern, so the bull and bear options are pretty well in balance at this time.  I generally take action as a trader when the patterns are clear to me, or when I can get low-risk entries that strike me as a roughly 50-50 shot, but with significantly better than a 1:1 risk:reward ratio.  This is the type of market where I'm watching for the latter.  Trade safe. 

 

SPX, INDU, RUT, TRAN, COMPQ -- 1904 SPX as Red-Line Critical Support

The more charts I look at, the more I'm worried for the bull case.  I still wouldn't characterize myself as "bearish," but I would be very bearish below 1904 SPX.

I spent too much time on charts tonight, and didn't leave myself much time for words, so we're going to get right to it.  Hopefully the annotations will lay out my thoughts in enough detail.

First, let's look at some of the charts that are making me worried for the bull case.  We'll start with BKX.  This shows the "mild" bear case:

Next, TRAN -- this is a little more of a hardcore bear case, because the count implies a third wave (the longest and strongest wave) decline below 7959.

Bouncing over to COMPQ, we see the overlap at 4413 rules out the rally as a fourth wave (waves 1 and 4 cannot overlap) -- therefore, any decline below the recent swing lows should be treated as a third wave.  In other words, any breakdowns should be approached as the precursor to a potential waterfall decline.

Next is RUT, which is flashing more warning signals for bulls.  Remember Monday's little "or 2?" annotation?  That's where the rally stalled.  Again, there's third wave decline potential here.  If bulls can sustain a breakout over 1149, it would help relieve some of the bearish potential energy that's coiling in this chart, and could trigger a larger rally.

Another look at INDU's long term chart below.  INDU has so far failed to reclaim the broken red trend line, which is a key pivot zone.  Most of the time, trend lines like that don't count.  This one does.

Also note that on Monday, the only "official" personal target I gave for the rally was in INDU, and my target was 16,660 +/-, which was effectively reached at 16628 (32 points in INDU is the equivalent of about 3-4 points in SPX).

Let's look at SPX.  Given what I'm seeing in other markets, I think we have to consider 1904 as a critical support zone for the time being.

Incidentally, a reader asked me why the decline was corrective, but showed as five-waves off the all-time high.  Please note the all-time high is being counted as wave B of an expanded flat.  For anyone who missed it, I explained this pattern in detail on August 4.

SPX 15-minute.  The rally stalled at the black (3) on this chart (Monday), but it looks to me like (4) and (5) may have compressed.  It's entirely possible the rally is essentially over.

To the north, bears probably want to step aside if SPX is trading above 1944, at least until a resistance zone is hit and/or a clearer picture emerges.

In conclusion, the more charts I study, the more I'm nervous for the bulls.  In fact, if the market hadn't found support directly where it "should" have for a larger fourth wave (big blue (4) on the 30-minute SPX chart), I would probably actually favor the bear count at this juncture.  As it sits, I can't quite bring myself to do that just yet -- and SPX would maintain a bullish bias above 1944.  But if SPX sustains trade south of 1904, then I would be very inclined to treat that as the start of a large third wave decline.  Trade safe.

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SPX, INDU, RUT: Market Rallies after Maui Survives Hurricane

On Thursday, while the big island (of Hawaii) and parts of Maui were busy being flooded by The Tropical Storm Formerly Known as Hurricane Iselle, SPX and INDU were busy capturing my target zones.  On Friday, the storm broke up and moved on.  And the market rallied, as Wall Street breathed a sigh of relief that Maui had survived. 

What, you think it was something else?  Makes as much sense as any of the "let's try to explain why the market did what it did today" news headlines you see on CNBC.  (Long-time readers know I believe that, outside of huge events, news is noise.)

So here we are.  We got the additional fifth waves lower I was looking for; SPX captured my 1899-1907 target (low 1904.78); INDU captured the green target zone and then rallied from the confluence of support that I'd noted.  Easy, right?  Time to mortgage the house and buy calls! 

Well... not so fast.

Frankly, I hate when the market does exactly what I expect it to do.  Well, I don't hate it (it makes me, and hopefully you, money) -- but it always makes me rethink everything.  I don't believe anyone's supposed to be "allowed" to anticipate the market perfectly, so when everything goes perfectly, then I start challenging whatever my next expectation is/was.

Part of this comes about from my prior experiences.  Back in the 2000-2002 bear market, I had (finally) really started making Elliott Wave work for my trading -- and I managed to hit a bunch of turns in a row.  I grew my account by about 700% in only a few months, and began to feel invincible.  Every turn kept going according to plan.  I felt like Russ in Vegas Vacation ("I put a dollar in, won a car!  I put a dollar in, won a car!"), so I decided I had everything right.  I had "cracked the code," and it was time to swing for the fences on my next trade.  So I not only took a huge position, but I leveraged myself to Kingdom Come. 

It would be the trade to end all trades -- the trade that would allow me to quit trading forever!  After that trade, I would move to Maui and live out my days getting sunburns, dodging hurricanes, and sipping Starbucks Frappucinos on the beach. 

That was the plan, anyway.  But, of course, that was the trade that went sour.  In a big way. 

My arrogance, and my resultant complete lack of risk management, devastated my account (it was 7 more years before I'd be able to recover... and move to Maui -- though with less sunburns, and more Frappacinos, than I had originally planned).

And ever since then, I rigorously consider the other side of the trade.

So even though everything went according to plan, we're also going to spend some time talking about the other side of the trade (the bear side).  Let's start off with the big picture INDU chart.  INDU found support where I suspected it would.  The chart notes a couple resistance zones and signals, which may help gauge strength heading forward.

A closer view of INDU helps reveal that bulls aren't entirely out of the woods yet.  Considering how deep this decline was, a one-day rally in itself isn't exactly an all-clear signal that means we're headed straight to new all-time-highs.

RUT is one of the markets that really casts the intermediate bull case into shadow.  RUT looks like a pretty clear 3-wave structure into the lows, and that implies there could an expanded flat upwards correction underway -- though, if so, it would be expected to break the red line, which is still fairly bullish for the near-term.

The 30-minute SPX chart reveals the capture of Target 3, and notes the expanded flat potential:

Finally, the 15-minute chart below is not normally something I'd publish.  This is one of my "behind the scenes" charts, wherein I'm simply trying to figure out if a wave can be reconciled as complete, so I know what to consider and what I can rule out.  In this case, I can't rule out either option:  the downward correction may be entirely complete, or there may still be another wave down yet to come.

But nothing bearish happens while the market is still inside the red melt-up channel, and the very first correction from that channel is likely to be bought to at least a minor new high.

At this point, the best longs were the ones taken in the target zone -- and (for any shorts that held through the target) at the minimum, shorts should have been covered after the breakout and successful back-test of the blue trend line (that was the trend-following exit zone).  INDU and SPX both reached their target zones, so despite RUT (and a few other things), that has to be respected.

We're going to need a bit more info from the market to determine if wave C is indeed entirely complete at 1904.  I maintained a bearish stance since the day SPX reached 1990, but as of this exact moment, I am no longer bearish and would not be inclined to short this market arbitrarily.  While I am not entirely sold on the bull case just yet, that's a whole different animal than "being bearish," and the picture looks bullish for at least the near-term.  The next few sessions will help sort the bulls from the bears.  Trade safe.

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Hurricane Update

Word out here in Maui is that we may be facing one or possibly two (yes, two) hurricanes (and/or tropical storms), which are due to make landfall sometime tomorrow.

So, depending how that goes, there may not be another update until next week, since I may or may not have the following things after the storm hits:

1.  Internet.
2.  Power.
3.  Use of my limbs.

It's also possible that I'll have all of those things, but will be stuck cleaning up masses of debris and floodwater.  Last I heard, we're supposed to get 8-10 inches of rain; and rain is one of the main causes of these islands eroding into the sea (and eventually disappearing completely) over time.  So massive rain storms tend to damage our infrastructure.

Anyway, wish us luck!

And good luck out there in the market.  Trade safe.

SPX and INDU: Market Approaching an Inflection Zone

Last update expected a fourth wave bounce, followed by new lows, and that's exactly what's happened since.  The market is now approaching an inflection zone, and things get more complex and become less predictable inside inflection zones.  Major turns can happen in inflection zones, or accelerations of trend can happen if inflection zones fail.  The one thing that's almost always guaranteed inside an inflection zone is that the market will try to confuse and veil its next move.

Let's start with the long-term INDU chart.  INDU has reached my next target zone, but still appears pointed lower, at least for the near-term.

A closer look below:

 
This is where things can be a little dangerous for novice traders.  Choose your battles very carefully here.  Instead of trying to find a new way to say the same thing, I'm just going to refer back to a few things I wrote on Monday:

"...waterfall declines do not lend themselves to the anticipation or projection of bounces -- they lend themselves to trend following.  C-waves are third waves -- and being early on third waves is not unlike trying to snag pennies off a railroad track in front of a speeding freight train...

Longer-term, I currently expect this decline is likely to resolve with new highs.  But part of the value of Elliott Wave comes not just from anticipation, but from understanding the market's position in the wave structure, and thus knowing when not to attempt anticipation.  Since I know we're in a third wave decline, and I know third waves are powerful waves that crush traders who jump in on the wrong side too early, I'll be watching for signs of base-building as the signal to flip long."

That, of course, doesn't mean I won't take a stab at trying to anticipate a bottom -- but I will choose my battles very carefully, and I will honor my stops.  And I will remember that I can't be both long and short at the same time -- so every attempt at a long that gets stopped represents not only money lost, but money I could have earned had I stayed short and followed the trend.

So, with caveats in place, the two-hour SPX chart: 

 And the 30-minute SPX chart:

In conclusion, things are now as complex as they've been in a while:  We have enough waves in place for a complete C-wave decline, yet we have no signs that the trend is over. 

In a perfect world, over the near-term, I would like to see at least two more new lows (micro fourth and fifth wave unwinds).  So near-term, the waves still look pointed downwards, which means I have no confirmation to call an end to Wave C yet -- and for all I know, the wave could extend.  In other words, if it reaches the next target zone, that doesn't necessarily mean it's over. 

This is a session-by-session market right now, which means that the results of only one session could turn everything either very bullish, or even more bearish.  The good news is that we will most likely recognize that moment when it comes.  Trade safe.

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SPX, NYA, RUT: Bulls Still in the Backseat, Asking: Are We There Yet?

Last update here at Minyanville (July 18) had us watching for new lows one way or another.  The alternate count in that update was for an expanded flat in the S&P 500 (SPX), and for a traditional ABC in the NYSE Composite (NYA).  I do feel the need to apologize to Minyanville readers in that I did not know that Minyanville would be on hiatus during the two weeks after that update, and so I did not go into any detail on the rules of the SPX alternate count of an expanded flat.  I just marked the charts with the "alt." labels, and figured I'd be able to address the wave rules on Monday, if the market dictated that it was appropriate to do so.

Had I known there would be no Monday update, then I'd have gone into greater detail on Friday, July 18.

I read back over that update yesterday evening, and I cringed a bit for Minyanville readers, because the rules I had labeled on the chart were for the preferred count (a traditional zigzag ABC), and not for an expanded flat.  I did mark the charts with the alternate labels placed where I thought the waves might end -- I had SPX labeled to top at 1990, and  NYA at 11,050 (the final highs ended up being 1991.39 in SPX and 11,058.96 in NYA).  I also mentioned that the alternate count would "provide a stellar short opportunity" if realized.  But I gave nothing by way of further explanation -- again, I figured I could go into further detail in Monday's update.  I didn't learn there would be no Monday update until a couple days later. 

In any case, my apologies for not detailing everything that very day.  The recent peak was the most well-telegraphed move of the year (as far as I'm concerned), and as close as I've ever seen to the market "ringing a bell" at the top.  The subsequent waterfall decline was even telegraphed in advance, after wave 1 of C bottomed at 1967.  Folks well-versed in Elliott Wave Theory probably needed no further explanation than the labels shown in the update of July 18, but for folks who are not well-versed, let's get caught up.

In Elliott Wave Theory, one form a correction can take is called a "zigzag" -- in that form, the start of wave A marks the price high, then wave B retraces part of wave A, but does not exceed the high of wave-A (in fact, a zigzag structure is invalidated if wave-B exceeds the start of the A-wave).  Wave-C then makes a new low.  That was the preferred count as of pre-market on July 18. 

Another corrective structure is called a flat, which can take several forms.  One possible form is called an "expanded flat."  Expanded flats behave much differently than zigzags; in an expanded flat, the B-wave high actually exceeds the start of wave-A.  In other words, in a bull market, the B-wave of an expanded flat makes a new all-time high.  That was the alternate count as of pre-market on July 18, and, as I wrote then:  "This chart also reveals a glimpse at an alternate count that, if realized, would almost certainly be an excellent shorting opportunity."

This 5-year bull market has seen several expanded flats; the most memorable of them culminated with wave-C becoming the 2011 mini-crash.

I believe SPX is currently in the C-wave of an expanded flat, though I believe it is at a smaller wave degree than 2011, and -- while I can't completely rule the following out -- I believe it is unlikely to be of the magnitude of 2011.  The main challenge at the moment is that the decline has already met and exceeded all my initial targets.  It has also met some of the adjusted targets, as of Friday's session.  And it doesn't look done yet.

Let's take a look at the 30-minute SPX chart to get our bearings.  We can see based on the wave count, and based on RSI, that it's unlikely wave-C is entirely complete.  More likely we are completing wave (3) of C, though it's not even entirely clear if wave (3) is finished.  Based on the Russell 2000 (RUT), wave (3) may still have room to run (RUT chart to follow shortly).

Before coming back to SPX, let's take a look at RUT.  Unless bulls sustain trade north of 1133, new lows appear quite likely for RUT.  We can see that red wave C is still a ways from its standard targets, which leads me to wonder as noted above on SPX.

RUT's near-term pattern seems to fit and confirm the idea that wave C isn't complete in SPX.
 
And now back to SPX for a broader view.  On the big picture SPX chart, the current expectation is two-fold:

1.  The decline isn't finished yet for the near-term.
2.  The final high isn't in yet for the long-term.

Looking at the above chart, one can almost hear bears saying, "No way there will be new highs!  Not after that decline!"  My only reply is:  Remember 2011.  Everyone said the same thing then. 

But -- is it possible that 1991 SPX is "it" for the bull market?  Or at least "it" for a long time?  Sure it is.  But here's the beauty of the whole thing:  we don't need to guess.  Right now, the pattern still points lower, so we don't have to get hung-up arguing about long-term charts.  Bears can stay bearish for the moment, as far as I can tell.

But the pattern on SPX looks like a clear expanded flat, so after the market completes five waves down, then we'll start looking for new highs to follow.  And the wonderful thing is that the same market that told us to short any rallies (back on July 18) should also warn us if we should start thinking bigger correction.

NYA is in a slightly different wave structure than SPX, and I believe it will give us fair warning if this decline is only the beginning (instead of the end).

On the NYA chart below, we can see a very clear three-wave ABC is forming.  If NYA completes that, and then goes on to form a fourth wave rally and a fifth wave decline (which would be labeled as red 4 and 5 -- not shown), then we will have an impulsive decline in NYA.  And we would thus know to forget about new all-time highs for the foreseeable future, because an impulsive decline would suggest a much larger correction was unfolding.

So, in conclusion, I feel the patterns are more clear than they've been all year, and I believe the charts are continuing to provide us an excellent road map that has very clear signposts.  And those signposts should give us advance warning about the market's next moves.

Presently, I do not believe the charts are suggesting a final low in place, but it's possible that a fourth wave bounce may be due.  How high that fourth wave will stretch is highly debatable, since waterfall declines do not lend themselves to the anticipation or projection of bounces -- they lend themselves to trend following.  C-waves are third waves -- and being early on third waves is not unlike trying to snag pennies off a railroad track in front of a speeding freight train.  Maybe you'll even get away with a few, but does the risk/reward make much sense?

Longer-term, I currently expect this decline is likely to resolve with new highs.  But part of the value of Elliott Wave comes not just from anticipation, but from understanding the market's position in the wave structure, and thus knowing when not to attempt anticipation.  Since I know we're in a third wave decline, and I know third waves are powerful waves that crush traders who jump in on the wrong side too early, I'll be watching for signs of base-building as the signal to flip long.  Trade safe.

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Reprinted by permission; Copyright 2014 Minyanville Media, Inc.