Cloudy with a Chance of Meatballs

Regular readers know I talk about the Philadelphia Bank Index (BKX) a lot.  Well, not out here in the real world I don't.  People don't exactly consider you a brilliant raconteur if you start off a lot of conversations with:

"So... how 'bout them banks in the Philadelphia Bank Index, huh???"
or: "Did you see BKX today?  Wowzers!"

You'll find their eyes rapidly glaze over (and sometimes they suddenly remember they have an appointment to get to) if you attempt to use random factoids about BKX as "ice-breakers" at dinner parties.  Believe me, I've tried.

Anyway, the chart below is a performance comparison chart of BKX, the S&P 500 (SPX), and the Dow Jones Industrial Average (INDU), going back to the 2009 low.  SPX and INDU have performed similarly, while we can see BKX has pretty consistently led the broad market higher since '09 -- except in 2011, when BKX peaked with a lower high and led the broad market down into the mini-crash.  So my theory is if BKX starts making lower highs again, then trouble is probably brewing.  BKX is lagging the current SPX rally by a small margin, so I think it's wise to observe whether that continues.  Plus this stuff makes a great ice-breaker!

The market is pretty fractured right now.  NDX has soared to new highs (validating my concerns about that pattern from back in August); SPX has cleared the 1670 zone, but is still a ways from new highs; the NYSE Composite (NYA) is somewhere in-between; and BKX is lagging.  BKX has just barely cleared its first resistance zone, as seen below:

 
SPX looks like it may do some backing and filling, but the pattern suggests it will chop higher over the next few sessions.  The big inflection point will come when it's formed a cleaner ABC rally.  I'm presently leaning toward the bears winning the battle at that next inflection point, but the market's picture has definitely changed somewhat with this week's breakout.

I would be remiss not to make mention of today being 9/11, though I'm unable to think of much to say which wouldn't come off as sounding trite.  I'll simply keep those of you who lost loved ones in my thoughts and prayers today.

In conclusion, bulls have reclaimed the first important resistance levels, and the pattern suggests further upside bias over the near-term.  A test of the 1695-1700 zone looks reasonably likely, and from there, I'm presently modestly inclined to favor the bears will take over.  The market reserves the right to change my mind, so we'll see how the pattern looks over the next few sessions.  Trade safe. 

Market Stops in Whipsaw City

Friday was a pretty wild session, with a dramatic intraday reversal.  The S&P 500 (SPX) has been Whipsaw City (which is near Chicago) since 1627 -- and so far, the failure to break below that level has kept alive the alternate count that 1627 marked a significant bottom.  The market is compressing now, and preparing for a sustained directional move.

Trading anything but the edges of the range can be dangerous in a market like this, because patterns that form within the range are often worthless noise, and typically fail.  The "job" of a pattern like this is to continue whipsawing both bulls and bears until one side throws in the towel -- at which point, they trend strongly away from the pattern.

Trading these, I try to stay away from the middle of the pattern.  The main way I've had success with this type of pattern is to buy the breakdowns and sell the breakouts, which is the opposite of what one normally does.  And those are risky trades, because you're basically playing for a rather direct whipsaw -- and meanwhile, there typically isn't a clear stop level.  In fact, you're essentially taking the opposite end of the trade from the people who just got stopped out. 

And that only works until it doesn't.  At some point, the compression reaches a crescendo, and the market either launches or collapses strongly.  The only reasonably clear levels which indicate much of anything (beyond the next five minutes) are outside of the noise zone: 1627 and 1670.

The fractal in the Nasdaq Composite bears similarity to the pattern from May and June -- it will be interesting to see if it reaches a similar resolution:

Contrasted with Nasdaq, which is flirting with the summer highs, the Philadelphia Bank Index (BKX) is presently still stuck below its topping pattern:

Bulls Throw a Wrench in the Mix

As traders, our toughest opponent, and the hardest one to beat, is ourselves.  We all know that humans have a rational side (or like to think we do) and an emotional side.  And most of us like to think that we're rational beings, and that we make well-reasoned decisions.  But the reality is different.   

I was a pretty successful sales manager and trainer in a prior life, and one of the things I used to teach my reps was that people justify their actions with logic/rational thinking -- but what actually motivates people to take action in the first place is emotion.  When a person makes a purchase, be it a house or a car or a new watch, they usually have a list of the "reasons" they're doing it ("It's a good value; it will save us money in the long run; it's safer; it's better for the environment; it gets good gas mileage..." etc.), and some people actually believe that's why they're buying something.  But the reality is that -- outside of the basic necessities -- people buy things for only one reason: because they want them.

Don't believe it?  Ask yourself how many times you've walked away from a purchase that you knew made perfect sense on every level, including financially -- and then ask yourself how many times you've bought things that made no sense at all.  If we were truly rational beings, neither situation would ever happen.  Our purchases would be logical and consistent, and we'd own a house full of useful and practical items that Mr. Spock would buy (Vulcan Q-Tips and such), not the bunch of useless junk we actually own, much of which was purchased on a whim (are you ever going to actually WEAR that shirt?  Why?). 

As humans in our "natural state," what drives us to take action, or to remain paralyzed, is emotion.  If we don't actually want something, a salesperson can make all the logical and practical arguments they can imagine -- and those can be good arguments; arguments which make all the sense in the world -- but in the end, we ain't breaking out the credit card unless we feel the product fills an emotional need (security, safety, pride, whatever).

The point is:  Despite what many of us like to believe about ourselves, the vast majority of our actions are driven, first and foremost, by emotion.  And this is one of the factors that makes trading so difficult.  Money controls almost every aspect of our lives, so decisions that involves fair sums of money are almost always laced with heavy emotion.  This is why discipline is such an important part of successful trading -- left to our own natural devices, we'd jump in and out of the market almost at random, based on how we felt on the spur of the moment. 

These same emotions are hurdles faced by analysts as well.  Reading a chart is as much an art-form as it is a formula, and there are times it's hard to sort out the legitimate gut instinct/subconscious-warnings (that something is amiss) from the typical fear and greed-type thoughts.  That's essentially what happened to me yesterday, and I actually wrote about the fact that I felt the market had behaved "too well" and it bothered me -- but in the end, I chalked this concern up to normal worry... instead of listening to my gut.

Meanwhile, the market promptly broke above Tuesday's high, which keeps the bulls, and the alternate count that i/A is complete at 1627, alive.  There's nothing new to add for this chart, except to note that the S&P 500 (SPX) has reached the upper red down-trend line.  Bears can tolerate a quick trip outside of that line, but sustained trade above it would strengthen the bull case.

At this point, the pattern could be a number of different things, and there's simply nothing obvious that jumps out as "oh yeah, this is what's happening."  I'm somewhat inclined to favor the near-term pattern shown in blue below, but I wouldn't get married to that expectation.  At times like this, I'll  take quick stabs at a play if the market gives me a good low-risk entry -- if not, I'll sit on the sidelines until things clarify.

On the Dow Jones Industrials (INDU), I've detailed the bearish and bullish resolutions to the pattern.  As noted, I'm somewhat inclined to favor the blue path, but I'm not married to it -- if bulls can reclaim noted resistance, then that would open up the game for them considerably. 

Bears Still Have the Ball

So this is where I always get nervous -- I figure I have no right calling a double-whipsaw that accurately (hitting both sides within three-point target ranges) two days in advance.  I always assume the market must have something else up its sleeve.  It's like when you're going to ask your spouse something they normally wouldn't agree to, so you head in expecting an argument -- but instead of arguing, they cheerfully say, "Okay, hon, sounds great!"  You're immediately suspicious.  "Why on earth did she agree to that?  She must be up to something!"

That's exactly how I always feel about the market at times like this.

Be that as it may, we should probably stick with the plan until the market proves otherwise.  The key level for bulls is yesterday's spike high; as long as bears can hold that level, they're cleared for a solid decline.  A bit more backing and filling first would be normal.  In the event the market's up to something, though, and breaks above that level, I've roughly outlined one alternate count on the chart below.

I've used the Philadelphia Bank Index (BKX) to illustrate one way the market could throw a curve-ball here, to shake more bears out and draw more bulls in.  Again, unless the market can break yesterday's high, there's no reason to expect these other outcomes -- but we always have to try and see both sides of the trade. 

Bulls Need to Hold it Here

An interesting situation has developed during the holiday weekend.  In the last update, I discussed that my preferred count for the S&P 500 (SPX) was an expanded flat, which would decline to 1627-1630, then rally to 1649-1652.  On Friday the market declined directly into that three-point zone -- then on Monday, while the cash market was closed, the E-mini S&P futures (symbol: ES) rallied straight up into the (cash-equivalent) target zone, and promptly reversed.  The chart below shows the futures action:

This means the futures may have done the "work" and completed the pattern while the cash market took a holiday.  This has left me a bit uncertain about whether to expect the cash market to also complete the pattern or not.  On the chart below, the more bearish option is shown in blue.

It should be noted that the potential does exist for this to be a more meaningful bottom.  The charts suggest a market that's teetering on the edge, and sustained trade below 1627 is likely to precipitate a strong sell off -- however, as I noted on Friday, as long as bulls hold that zone, they could conceivably begin the larger wave B/ii rally from here.

SPX Update: Short and Sweet

I'm going to keep this update as simple as possible.  The S&P 500 (SPX) is hinting at the potential for a base to form in this zone.  There are several options for the near-term, and I've done my best to detail and outline their paths and what to watch for, as well as their first target zones.

We have a three-day weekend approaching, and the session prior to three-day weekends is often light volume, which gives those sessions a bullish bias.  Fund managers know they can't put big sell orders into a light-volume market without causing major havoc.  As a result, approximately 70% of the time, the session prior to a three-day weekend closes green.

The chart below covers the most likely possibilities for the short-term.  I'm slightly partial to the expanded flat (shown in black), since it would burn the greatest number of participants -- it allows for a retest of the 1627 low, while whipsawing the 1630 low. 

On the hourly chart, the market has so far found support at the noted black trend line, which is the red ii/iv trend line -- an important intermediate support zone.  This allows the possibility that the wave ii/B bounce will develop from here.   

In conclusion, I remain bearish on the intermediate term, but the market is hinting at the possibility of at least a short-term sideways-up phase.  Depending on how that develops, there's potential for the larger wave ii/B bounce to develop from here.  Ultimately, though, I expect the next bounce will be sold to new lows.  Trade safe, and have a great weekend!

Reprinted by permission; Copyright 2013 Minyanville Media, Inc.

Bears Holding Most of the Cards

(NOTE:  I've had major technical difficulties this morning, which is why this is being posted after the open (if you missed the last post), and Blogger is acting awful funky -- so if this update posts in a strange format, blame Google! (GOOG))

In yesterday's update, we talked about the fact that a new low would give the decline off the all-time-high a pretty solid five-wave structure, which would go a long way toward confirming a trend change at intermediate degree.  This is because one of the key tenets of Elliott Wave Theory is that the market moves in five waves when it's traveling in the direction of the next highest degree of trend, and in three waves when it's moving against the larger trend.  The five-wave decline therefore suggests that the larger trend is down.

There are only a few exceptions to this rule, and one such exception is a pattern called an expanded flat.  I talked about that pattern in some detail last week, so I won't rehash it here.  Suffice to say this is a game of probabilities, never certainties; so there are always potentials which are more bullish or bearish than whatever presently appears most likely.  Presently it appears most likely that the trend has shifted.  The market reserves the right to blow that up, of course, and if that starts to appear probable, I'll certainly discuss it in more detail when the time is right.

For the moment, though, there's not much to give me a warm-and-fuzzy feeling toward the intermediate bull prospects.

Let's start off with the Philadelphia Bank Index (BKX), which has been an excellent bellwether of the market for quite some time.  BKX has overlapped the prior peak and completed a head and shoulders top.  We'll start off with the daily chart, then zoom in a bit on the second chart, with some additional detail on the alternate count.

Unlike the Dow Jones Industrial Average (INDU), for example, BKX has not yet formed a large five wave decline, and has still left open the option for an ABC.  However, on the 30-minute chart below, we can see that even this more bullish alternate ABC count still suggests lower prices for the near term.

Speaking of INDU, the Dow has a very clear five wave decline.  Yesterday I talked about the potential that the current decline (which hadn’t technically happened yet) could be wave five of the larger structure.  When we look at INDU’s chart, that leg probably “looks” best as a fifth wave.  If yesterday’s drop was the fifth wave, it could complete this first leg relatively soon.  From a near-term perspective, it appears the current leg has at least a bit further to run -- but we should stay alert to any pending noteworthy bounces as a signal that the larger wave B/ii relief rally may be beginning.