Market Update: A Look Back, A Look Forward -- and Why the Market Always Wins in the End

SPX officially made new all-time-highs recently, so before going further, we need to address the implications there.

First off, let me preface this by stating that this is not going to be popular with bears.  I realize that a lot of my readers are bears, but nobody should be trading with the "hope" that the market does something to justify their underlying bias.  The only reason to trade is to try and be on the right side of the trade in order to earn a profit.  If a trader is doing anything besides that, then they might as well just pile up all their money in the backyard and set fire to it, since that would ultimately be more fulfilling.

Or, heck, give it to charity or something.

I mention this for a reason.  In mid-late 2012, I began to turn bullish; then, starting with my very first article in January 2013, I published a series of articles arguing that the market had just begun a massive rally.  I even published an article titled "A Survival Guide for Bears in a Bulls World" (I still think it's one of my better pieces; might be worth a reread).  In February 2013, I published my preferred long-term targets for SPX; my first target was SPX 1750, and my second target was SPX 2170 (chart below).

All of this is intended to present an important point:  In 2013, I lost a lot of bearish readers because of my bullish stance.  Some bears got mad about it, and went to look for other analysts who would back up their biases, of which there are never any shortage.  Not sure how all that worked out for them, but I do know how things worked out for the market. 

So, with that said, here are the implications of the recent price action:

For the past few months, I've talked about the rally off the February low as the probable C-wave of a larger B-wave.  A few times I addressed the fact that B-waves are allowed to break key prior levels (such as the all-time high).  The issue for bears right now is that a B-wave that breaks a prior high is ultimately going to come back to that high, no matter what happens next.  In other words, even if SPX were to drop 500 points next week, it would most likely recover shortly thereafter, and return to break current prices.

That's an important understanding, because it means that whatever happens in the foreseeable future -- even if we got a huge drop from here -- will most likely still be occurring within the context of a larger ongoing bull market.

So... that's what bears are up against here.  At present, their best hope appears to be for a big C-wave decline that amounts to a temporary victory for sellers.

At worst (for bears), they are up against a rally that is going to keep grinding higher, with only temporary reprieves, for quite a while.

The chart below outlines the situation (as it appears at this exact moment) in a lot of detail.  I used INDU because it did NOT make a new low at red b/bull:2, so the implications of its pattern are clearer -- and for that same reason (see chart) this is the market that has thus kept me somewhat skeptical for a while now.

In conclusion, this is a very difficult position for bears to be in.  If this rally is a bearish B-wave, then it may be nearing completion -- but as I mentioned at the beginning of the month, this is a very difficult type of wave to front run.  The best thing we can do from here is watch for clear signals of a turn, then take it one trade at a time from there.  Be aware that if the "incredulous" count shown above is underway (despite my skepticism), then bearish trades will only work on short time frames, and things will remain bullish for longer than probably seems reasonable.  In the event the bearish B-wave count is correct, then the C-wave will be significant enough that it should allow time for bears to get on board.   Trade safe.

SPX Update: Chart Update and Random Thoughts

Thursday's update anticipated we would see another wave down in SPX before rallying higher, but it was not to be.  I'll be frank:  I feel like I haven't been that fooled by a near-term wave in a long time.  Although I did mention that "For whatever reason, there's something bothering me ever so slightly about the impulsive appearance of this decline, but I can't put my finger on it, so it may be nothing."  I essentially ignored whatever was bothering me, and ran with the idea that another near-term wave down was forthcoming.  As it turned out, I should not have ignored my gut.

Before the open on Thursday, I mentioned "the possibility 2108 marks a more meaningful top," but we knew shortly after Thursday's open that this was absolutely not to be.  Once 2109 was broken to the upside (albeit: barely) on Thursday, then we knew two things that we didn't know on Wednesday:

1.  Because there was no sustained breakout over 2109, Thursday's downside targets still had a shot -- IF we got an expanded flat.  I mentioned this on the chart, as follows:  "Sustained trade north of 2109 would call the downside targets into question, but not entirely eliminate them, due to expanded flat potential.  Nevertheless, bears should play it cautiously if 2109 is claimed."

2.  2109 was indeed claimed, meaning bears needed to be cautious from that point forward, because the break of 2109, however small, technically invalidated the possibility that the leg from 2108 down to 2074 was impulsive (impulsive waves cannot be retraced in excess of 100%, or they're not impulses).  

As it turned out, 2109 did function as near-term resistance, and bears were rewarded with a decent little decline, amounting to a 57% retrace of the prior rally wave (down to 2089).  This at least afforded anyone who shorted 2109 the chance to exit with a small profit, or the chance to move stops to break-even.

It pays to remember that C-waves are always corrective waves, and a corrective wave is always 100% a counter-trend play.  A counter-trend play at a high enough wave degree (for example:  the market's declines over the last year or so) can be very profitable.  At near-term time frames, though, counter-trend plays require traders to be very nimble.  One of the market's rules is that surprises are almost always in the same direction as the prevailing larger trend.  For that reason, I would advise newer traders to avoid near-term counter-trend plays entirely (not trading advice!), and to trade only in the direction of the larger trend.

Over the weekend, I published a few thoughts in our forum, which some members suggested I should share with the larger world, so here are the thoughts I posted:

(This began as a reply to "where will the next C-wave down begin?")

I know what you're asking and why you're asking it... but prefer not to try and anticipate where such waves will begin (at least, not as a trader; as an analyst, sometimes) -- as I said on the chart, I prefer not to front-run these types of moves unless there's a clear level to act against and/or an impulsive decline to act against. I'll identify some inflection points (the ATH and 2144ish being two), but we can't worry too much about "when will this end?" from here.

Here's one reason why: The first place you look for a C-wave to end is the 1.618 extension (presuming we're in C-up to be followed by a larger degree C-down)... but they can also end at 2.618 extensions, and nobody in their right mind wants to take that much drawdown. So, I might short the 1.618 extension with a tight stop, but I'm not going to keep holding if it runs through my stop. If it stops me, then I HAVE to wait for a clear impulse at SOME time frame before trying again. Otherwise I'm literally just trading randomly. And we all know how that always ends.

Here's another reason: What if it's not a C-wave? Even an 80% probability is still going 100% against you 20% of the time (yeah, I know: insert "Anchorman" clip here). So we have to account for the 20% by staying nimble and not stubborn -- otherwise 20% of the time we're just shorting into a bull move and we'll get murdered. That's why it's so important not to take the market personally. The BEST trades on the planet go 100% wrong sometimes, and they always will.

(Warning: TANGENT ALERT)

There's a time to cling to a position... for example: You get a great entry with a 3-point stop and the market drops, you don't take an exit -- then it makes a "bullish looking move," but stays below your stop. I might want to cling stubbornly unless and until my stop is hit. But that's ONLY if I got a good entry. I won't do that if my entry is bad -- because to cling stubbornly to a bad entry means devastation if the market goes against me. To my way of thinking, the rule is, if you take a bad entry, then you have to stay nimble. That's the price of admission on a bad entry. You have to let the market shake you if it wants. That's the trade-off, and I know that going in. If I get lucky, then the market runs in the right direction to support my bad entry and I end up in profit. If I get stopped, then I just have to wait for the pattern to tell me when there's a good entry point.

But if I take a bad entry and hold on "no matter what," I invariably get slaughtered. The losses are too big when I'm wrong. It's almost like the market intentionally punishes us when we lack discipline. But really, it's not the market punishing, it's just how life works.

So, we can do one, but not all, of the following:

1. wait for the right trades with discipline (and that means we MISS OUT on some trades)
2. take marginal trades if we stay ultra-nimble, or
3: cling to marginal trades stubbornly, and ultimately damage our accounts severely whenever the market goes against us, which it inevitably will at times.

The middle ground, and the hardest ground to stand on, is trying to jump in and partake of a move that looks good. To do this, one is by definition taking a less-than-perfect entry (ideally, at least, near a minor inflection point). But if one chooses to do that, then one has to realize that they're on shaky and potentially dangerous ground from the very beginning, and protect themselves accordingly. A bad entry and/or an ambiguous wave is the wrong time to be stubborn, unless you're fully prepared to take a massive loss.

A clear wave and a good entry is the only time I want to be stubborn.

So, to wrap it up, the rally ends when it ends. I'll try to get a good entry when that moment comes, but I won't fight it if I'm stopped. Because: What's a good entry against the current rally? 2130? 2144? 2200? 2500? We won't know for sure until it's in the rear-view mirror. That's why we have to find places to define our risk. Besides, we don't want to be in a mindset where we're exclusively looking for short entries -- maybe short is the wrong trade entirely. And we can't find what we're not looking for.

As an aside: The whole slate has to be wiped clean the minute you're stopped -- the next trade is not "another attempt to short this pig," it has to be thought of as an entirely new trade (albeit I sometimes even communicate in "taking another crack at a short/long" -- but I'm not thinking of it as a continuation trade, it's a new trade that happens to be in the same direction as the last trade). Otherwise one gets into a mindset of revenge trading and fighting the market. The market always wins that battle.

We have to start over from zero each time because we can't think clearly otherwise -- we can't spot new opportunities if we're only looking to find a slightly-different version of the "opportunity" we were just stopped on. Maybe the next trade we make should be a LONG entry, but we'll miss that if we're always thinking the next trade is just a "continuation" ("I'll short this pig again later!") of the prior trade that was stopped. Vice-versa for bulls -- that's why bulls tend to buy the whole way down, while bears tend to short the whole way up. It's all viewed (consciously or otherwise) as part of one giant trade with no end.

Each trade has to have a defined ending. Think of each trade as a roulette spin: The ball lands, the wheel stops spinning, the dealer collects money from the losers, and pays money to the winners. The next spin/the next trade is an entirely new bet. EVERYTHING that happened before that is gone, done, finished, over -- for better or for worse. If we approach the market any other way, then we end up in a game without end and no way to define our risk other than "losing it all or winning it all." Well, we'll never win it all. So that only leaves one option.

This ended up being a lot longer than I intended, and I ended up on a few more topics than I'd intended. Hopefully there's some random thought of value in there, but of course NONE OF THAT IS TRADING ADVICE.


Taking a look at the charts, the preferred intermediate count from July 1 showed 2121-2144 as the target, and that's been captured.  It looks likely that there's still more rally coming -- although, if this count is correct, this may amount to nothing more than a head-fake.  Keep in mind, though, that even if it is a head-fake, the market sometimes wants to make that convincing (and all that "convincing" entails -- maybe farther in price or "longer" (in time) than we hope) -- so watch for impulsive declines before getting too stubborn, and define your risk before entering:

In conclusion, the pending break of the all-time-high is a significant technical milestone, and means that everything that's unfolded over the past year is corrective.  In a perfect world, bears will have a shot at a decent intermediate counter-trend play, as shown on the chart above.  But keep in mind that, as of right now, anyway, any pending decline is expected to then resolve with even more all-time-highs.  In other words, as of this moment in time, the bull market still appears to be unfolding.  Trade safe.

SPX Update: Detailing the Waveforms

On Tuesday, I wrote:

I am presuming the rally is due for a pause (or worse), and on Friday, I discussed a real-time short entry on our private forum, at ES 2100... I still do not feel the market is correctly positioned for a large intermediate rally [note: "do NOT feel" -- a few readers read that another way].  A brief head-fake higher wouldn't surprise me one bit, but even that isn't guaranteed -- bears have, so far, held 2113 SPX, which keeps the most bearish options on the table for now.  If SPX develops a decent-sized impulsive decline, then we'll know to keep looking lower for another wave down to follow.  

The rally was indeed due for a pause, and declined to within pennies of the second downside target I published on Tuesday.  On the SPX chart, I wrote to watch for a significant bounce from one of the target zones, "likely to at least retest the 2100-09 zone."  Yesterday's high was 2100.72, but as we'll see in a moment, that may or may not mark the end of this wave.  Another down/up/down sequence is still possible.  I've detailed this (that's an understatement) on the one-minute SPX chart below:

The bigger news, though, is that the decline does appear to be impulsive, which suggests at least one more leg down after the current bounce completes.  For whatever reason, there's something bothering me ever so slightly about the impulsive appearance of this decline, but I can't put my finger on it, so it may be nothing.  However, let me take this as an opportunity to suggest that bears avoid arrogance and manage their risk, despite the expectation that the market will see another leg down before having a more serious shot at a lasting rally.

The updated 30-minute chart shows the corresponding downside targets, presuming the first leg down was indeed impulsive:

In conclusion, the decline from 2108 appears to be an impulsive waveform, which is as much of a green light as bears ever get after a blistering snap-back rally like the one that began at 1991.  Accordingly, we have three downside target zones, AND the possibility that 2108 marks a more meaningful top.  In the event that bulls can sustain a break out over the 2109 level, then we would have no choice but to rethink that, of course, although 2121 is still the more significant level.  Trade safe.

SPX, NDX, BKX: BKX Lagging Considerably

Before I get into the charts, I just have to share an example of why trying to trade news almost never works.  These two headlines arrived in my email account on the same day, within hours of each other -- and they now hold a dear place in my heart as two wonderfully silly examples of why we don't trade news.  The bottom email arrived first:

Then to make the news cycle complete, yesterday, I received this one, apparently as a gift from the god of Irony:

Anyway, just had to share that, because the first two in particular, stacked as they were right on top of each other, actually made me laugh out loud.

Moving into the charts, let's start with BKX, which has been lagging the rally in most of the major indices.  I maintain that BKX often leads the broad market, so this picture is not terribly encouraging for bulls right now.  That can always change, of course -- but this might be an early warning in agreement with my hypothesis that SPX, even if it were to break the prior highs, is probably not destined for a big intermediate rally right now.

Next is a chart of NDX that bears a warning far ahead of where the market is right now, but worth looking at again anyway.  A sustained breakdown at the blue uptrend line would be first warning for bulls:

Finally, we looked at the bigger picture options for SPX on Friday, so today we're going to focus on the near-term.  I am presuming the rally is due for a pause (or worse), and on Friday, I discussed a real-time short entry on our private forum, at ES 2100:

In conclusion, I still do not feel the market is correctly positioned for a large intermediate rally.  A brief head-fake higher wouldn't surprise me one bit, but even that isn't guaranteed -- bears have, so far, held 2113 SPX, which keeps the most bearish options on the table for now.  If SPX develops a decent-sized impulsive decline, then we'll know to keep looking lower for another wave down to follow.  Trade safe.

SPX Update: Trading by Analogy

Before I get to the charts, a few random thoughts:

There is only one reason to trade, and that is:  To make money.  We don't trade for the thrill of victory, or to prove ourselves right, or for the "excitement of the chase."  We trade to make money.  And that means one must be extremely cautious of the opposite outcome.

Essentially, a trader is a salesperson:  He attempts to buy something at a low price, and later hopes to sell it to someone else at a higher price (or, if he's a bear, he hopes to sell at a high price and buy back at a lower price).  That is the essence of trading, and one would do well to approach it with that in mind.  Many traders are completely preoccupied by a "fear of missing out" on the next big move, instead of being preoccupied with discernment, and making intelligent decisions.

I've found it sometimes helps to make the thinking behind trading more tangible via analogy, to clear out some of our irrational fears and emotions.  So:  Imagine you owned a car lot.  In order for your business to survive, you MUST buy cars for a significantly lower price than you sell them.  You must NOT buy cars that you can't sell at all, or can't sell at a profit.  And that means you have to be very selective.  You can't let yourself buy every car you see -- sometimes the asking price will be too high, sometimes the car will be a junker, sometimes there will be no demand for the vehicle.  You must maintain discipline in the face of your emotions, against your desire to maintain a large and glorious-looking inventory.  Maybe a customer comes in and wants a Jaguar, but you don't have one -- does that mean you should then rush out and buy every Jaguar you come across, simply so you don't "miss out" the next time a customer wants a Jaguar?  That would be ridiculous, wouldn't it?

Yet many traders approach their sales and purchases with exactly that mindset.  They don't want to "miss out" on ANYTHING.  If you approached any tangible business that way, you would soon find yourself bankrupt.  The same thing happens with trading.

You are going to have to pass up some iffy trades if you want to survive.  You are going to have to accept that, sometimes, you just don't know what the market is going to do next.  Maybe it will make a dramatic move that could have made you tons of money if you'd been positioned right, but you "missed out."  That's okay!  That's GOOD.  So what if you didn't have a Jaguar to sell that one day -- your last Jaguar sat on the lot for years, depreciating the whole time.  The transmission fell out during a test drive, and you ended up selling that car for a considerable loss.

You take similar losses when the market runs against you.  FORGET about being part of every move.  No car lot can stock a car for every single potential customer, and no trader can be part of every single move the market makes.  Let the emotions go:  You are in business to buy low and sell high (or sell high and buy low).  That's it.  Period.

Onto the charts.  Or, for today:  Chart.  I'm going to cram everything on to one chart here, because in a market like this one, it actually helps to see what we're up against.  Basically, if bears are hoping that this rally is going to mark a second wave, then they need to make a stand directly.  Maybe they'll do so -- we are approaching an inflection zone.

The chart below also shows a count that I've been considering for a few weeks, and that I was tracking even at the recent 1991 low -- but the market decided to throw a bit of a curveball by adding another B-wave into the mix.  I was hoping that we had already begun C-down, and thus was looking for a five-wave decline.  We had a three wave decline instead -- and that suggests the low is a large B-wave.  It could also, of course, be a large 2nd or 4th wave ABC, which is what the true bulls are hoping for (I don't think that fits the pattern as well, though).  Bears are hoping it's a nested second wave (black "bear 2").

I think there's another options, though, besides the obvious bear and bull options (which are the two options most folks will be tracking) -- the expanded flat in blue and red would punish and frustrate the greatest number of participants.

In conclusion, the most bearish of the bear options (a second wave rally) remains on the table until 2120 is broken.  If we do break 2120, I'd be surprised if that kicked off a new bull leg -- as I talked about in the prior update, the typical signs for a lasting bottom at 1991 aren't present, so I'd be more inclined to think it was the red B-wave and doomed to whipsaw quickly, thus chewing up both bulls and bears yet again.  Trade safe.

SPX and NDX: Why the Decline Probably Isn't Over Yet

Going back several weeks in the updates, I've been mentioning the zone around SPX 2000+/- as an inflection point, and the "zone to beat" for bears.  On Monday, SPX dropped down into that zone, and bulls found support waiting there.  The question bulls and bears both have now is:  "Is the decline over?"  Today I'll attempt to answer that question.

Okay, well, I thought about trying to build suspense here, like they do on TV ("When we come back, the answer to 'Is the decline over?'"), but that would require running a few commercials and you don't have that kind of time, so let's get right to it.  The answer is:  "Probably not."

For evidence, I submit Exhibit A:  NDX.  The basic issue discussed on the chart also applies to several other charts as well.

Exhibit B is even simpler, and is shown via the SPX chart.  Keep in mind that SPX has the same options for a complex bullish (then bearish) expanded flat as NDX, using equivalent highs/lows -- but I consider the expanded flat an underdog:

In conclusion, although bulls are staging a convincing rally off the first SPX support zone, the current available evidence suggests that this bounce is probably a simple countertrend rally.  As noted, next resistance is near 2050 SPX and the red trend line, so we'll see how the market reacts there and watch for impulsive turns.  The expanded flat shown on NDX is technically possible, but probably a slight underdog at the moment -- nevertheless, bears probably don't want to be shorting willy-nilly (symbol: WLNL) into this rally, but should choose their entries carefully and respect their stops.  Trade safe.

SPX and RUT: Equal Time

Last update, we talked about all things bearish, so in this update, we're going to at least take a look at some options for the bulls.

Probably the main thing bothering me about the recent top is that it came on bad news.  Strange as this may sound, I generally don't like "bad news tops."  Bad news tops spark panic selling, and that can lead to "seller's remorse" shortly down the road, when everyone realizes that the world didn't end immediately.   As the old expression says:  "They don't ring a bell at the top."

Don't get me wrong:  I'm still going to proceed under the assumption that this is "bearish until proven otherwise" -- again, I'm just trying to bring some balance to the outlook.  Forewarned is forearmed, as they say.

For one look at a couple potential bull inflection points, here's RUT:

Below is a simple support and resistance chart for SPX, with the note that RSI has not yet confirmed this new price low.  Bears would like to see that happen sooner rather than later:

Finally, one of Friday's charts updated with only the new price action.  Note that bears broke and back-tested the first support zone:

In conclusion, beyond attempting to bring a little balance to the discussion (as I did above), there's nothing much to add to Friday's update.  Trade safe.