Pretzel Logic's Market Charts and Analysis

SPX and BKX: One Chart to Rule Them All

2013-05-16T03:09:00.001-10:00

Before I even begin this article, I feel obliged to engage in a bit of a tangential rant which actually relates to my charts. If you're on the hurry-up, or if you find my sense of humor to be confusing and mentally frustrating, then you can skip right to the section titled "Market Update."

My story begins like this: A couple months ago, I purchased a new PC. I'll pause here while we wait for the Mac users to stop laughing, since they already know there is now no possibility of a good ending to this story. Anyway, like so many others who've bought new PC's recently, I had no choice but to "upgrade" to the latest mutant version of Windows, which is called simply Windows 8 (an inside joke at Microsoft, code for: "Windows ate my desktop!"). As every PC user knows, every so often Microsoft's Crack Team of Windows Engineers feels it's their God-given red-blooded patriotic American duty to cram some new version of Windows down our throats. They refer to this as "progress," because that sounds better than "a way to continue justifying our expense accounts."

For those of you fortunate enough to have avoided Windows Ate, basically the iconic "Start" button is gone, and the desktop has been replaced with a series of apps pinned to a home screen. I was already familiar with the Windows Ate concept, since I've had a Windows phone for years -- and while I think the whole "app" concept is fine for phones, or tablets, or anything smaller than, say, a PC -- I think it stinks for PC's.

I believe the majority of us who do not presently earn our livings by developing software for Microsoft were entirely satisfied with Windows 7 as a stable, user-friendly OS. In fact, within two days of having Windows Ate inflicted upon me, I had already installed a program that forced it to emulate the Windows 7 navigation style. Apparently Microsoft had forgotten that a handful of us still use our computers for something other than watching South Park's take on central bank policy on YouTube all day.

But even with this productivity upgrade, Windows Ate still does not emulate Windows 7 in terms of reliability. And the point I'm getting at (if I remember correctly) is that ever since "upgrading" to Windows Ate, my charts act screwy. When I use Adobe Flash for annotations, the lines and numbers demonstrate all the orderliness of a preschool fire drill, and show no regard whatsoever for remaining in their assigned locations. Numbers seem to move around of their own freewill, often vanishing from the charts entirely at random -- sometimes magically appearing later on a completely different chart, as if they'd traveled through an inter-cyberspace wormhole. In fact, the numbers behave in such an incredibly random fashion that I'm fairly convinced I've secretly stumbled onto the exact same algorithm Bernanke is using to set Fed monetary policy.

Interestingly, when I use Java instead of Flash, almost everything works exactly as it's supposed to, except for one "minor" detail: with Java, I can only work on the charts at one-half normal size. Attempting to annotate these diminutive charts requires me to practically press my face directly onto the computer screen, while at the same time squinting really hard -- which makes me feel like some kind of Peeping Tom technical analyst, and I keep expecting to hear tiny screams of "Cad!" emanating from my computer.

These issues are a complete nightmare for someone who's as much of a perfectionist about charts as I am. So if you've noticed lately that my charts aren't quite as pretty as they used to be, it's not because I've gotten lazy, it's because Windows Ate them. I'm working to resolve this issue, with a hammer if necessary, and I'm sure eventually I'll get it all figured out... no doubt just in time for Microsoft to cram Windows? Nein! down our throats.

Market Update

Yesterday we discussed the possibilities for a whipsaw vs. a melt-up, and today I have a chart to share which should go a long way toward providing an early warning if the melt-up is underway.

One of the cardinal technical rules of Elliott Wave Theory is that wave three cannot be the shortest wave. If the wave we find in the third wave position is the shortest, then that tells us the pattern isn't what we think it is. The Philadelphia Bank Index (BKX) is currently providing us with an excellent tell in this regard.

The hourly chart of BKX below. The nice thing with the BKX pattern is it's telling us "either the rally ends here, or it's got a lot farther to run." There probably isn't much in-between.

SPX hourly below:

The five minute SPX chart notes the overthrow of the potential bearish rising wedge discussed yesterday.

In conclusion, we now have a solid pattern in BKX to watch for clues, and near-term confirmations, of a larger potential melt-up. Conversely, if the rally is going to end, then now's the time. Trade safe.

SPX and NYA: Whipsaw or Melt-Up Coming?

2013-05-15T02:52:00.002-10:00

In the last update, I noted that the market looked poised to move higher into the May 6 target zone of SPX 1640-1650, and the market staged a strong rally right from the open, ultimately reaching the upper range of the target zone with ease. I also discussed that the Philadelphia Bank Index (BKX) should tag 60 or beyond, and it experienced a blistering 2% rally and came within pennies of 60 during that very same session.

So what now? Well, whenever targets are reached, some order of caution is called for, so let's take a look at the charts and see what's going on.

Let's start off with the big picture, and a weekly chart of the NYSE Composite (NYA). For many years, I've been a fan of tracking this index, because it's a much better representation of the broad market than the indices which typically steal all the news coverage (like the SPX and INDU). It's interesting to look back now and see how well NYA has been pointing the way for the past 8 months.

On September 20, 2012, I wrote:

Moving on to equities, and starting with the New York Composite Index (NYA) weekly chart, there are two things that jump out from a price perspective:

1. The recent breakout above a 5-year resistance zone (bullish).
2. 8718 is still intact (not bullish -- not really bearish either, but important).

If you just take a "trade what you see" approach here, then this breakout can't be viewed as anything but bullish.

I tackled this exact same chart again in January 31, 2013, and my observations were as follows:

Finally, I'd like to revisit the long-term NYSE Composite (NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012. Note that weekly RSI is again overbought, and again has confirmed the rally to this point. This behavior typically implies a correction, followed by new highs.

The correction and new highs have both since happened, which brings us to the present. NYA's weekly RSI has reached the overbought zone again, and although in and of itself this doesn't guarantee a correction, it is something to be cautious of as one precursor. It is worth noting that the last two times I mentioned this indicator (same dates as above, see chart), the market corrected almost immediately thereafter. Doesn't mean that's going to happen this time, but we should stay alert for any signs of said correction (there are none so far).

In either case, there's still no reason to be anything but bullish about this chart from a longer-term perspective.

The Dow Jones Industrials (INDU) have broken out slightly over the upper boundary of the intermediate channel. In a moment, we'll see that the S&P 500 (SPX) has done the same.

The SPX hourly chart shows a similar breakout. This is an inflection point, and if bulls can hold the breakout, they have melt-up potential. Bears will need to whipsaw this breakout if they are to get anything going -- and I do think they have a shot at doing exactly that, based on the 5-minute chart which follows (after this chart; SPX hourly below).

I find the near-term pattern in SPX interesting, since it's currently a bearish rising wedge. This pattern suggests there's some hidden bearish "potential energy" in this picture, and rising wedges often return to the point at which they began. Thus, referring back to the channel breakout above, the potential does exist for a whipsaw. In this market, who knows though, and a melt-up wouldn't surprise me one bit either.

In either case, while I'm not always certain what the market will do ahead of time, these are the inflection points I look for as a trader. Prices could move a bit higher over the near-term, possibly to overthrow the upper trend line slightly, but there are already enough squiggles to count the waves as complete.

In conclusion, the market has now reached my targets from early May, and also appears to be reaching a larger inflection zone. The next few sessions should help us determine whether the recent channel breakouts will whipsaw, or lead to a melt-up. Trade safe.

SPX, RUT, BKX: Market Ignores Fed's Doublespeak

2013-05-14T03:22:00.000-10:00

The big news over the weekend came from the Wall Street Journal's report that the Fed is mapping out an exit strategy from their $85 billion per month bond buying programs. However, it seems concrete details on such a strategy are a bit vague or nonexistent at this point. This got a lot of play over the past few days -- but in reality, I sincerely doubt anyone was expecting massive Fed stimulus would continue completely unabated for the rest of eternity, so this news was hardly a huge surprise. And given the vagueness of the details, it seems to be the Fed simply trying to remind us of something we already knew -- undoubtedly at least partially in an effort to forestall inflation. The Fed is fully aware that inflation has a strong psychological component, and can be compounded or decreased by managing the public's future price expectations.

And, if the Fed wants to continue printing money with abandon, the one thing it can ill-afford is high inflation showing up within the metrics they track. So, counter-intuitively, I am of the opinion that these types of statements from the Fed are actually efforts to continue their programs as long as possible. This Fed seems well aware of the PR game involved in monetary policy, and has engaged in misdirection before.

Along the lines of mass psychology, I actually found yesterday's headline on MarketWatch somewhat comical:

U.S. stocks start week in red as investors consider Fed policy shift

If you just looked at this headline, you could be forgiven for thinking the market reacted in panic to the weekend news. Instead, the S&P 500 (SPX) actually closed marginally green yesterday, notching a new all-time record closing high; and the Nasdaq Composite (COMPQ) also closed green. Hmm, where did this "stocks start week in red" thing come from, anyway? Oh, here we go: The Dow Jones Industrial Average (INDU) closed down a whopping 26.81 points (-0.18%), which, these days, practically qualifies as an outright crash. I can only imagine the sheer confusion experienced by retail bulls across the country last night, when they turned on the evening news and saw this strange "-" symbol in front of 26.81. No doubt Google was soon swamped with search queries as bulls sought to determine the meaning of "-" and whether it was a good thing. Maybe "-" meant the market went up even more than they expected!

Kidding aside, I've made it no secret that I think the Fed is a huge driver of this rally, so obviously we're going to need to keep an eye on this going forward. But I think some type of more immediately "negative-sounding" information will be needed before the market reacts overly significantly -- after all, right now the money is still flowing freely. It's not exactly "last call" from the Fed yet -- it's more like: "Hey bulls, the bar's eventually gonna have to close at some point, so... have another drink on us!"

Moving on to the charts -- one of the things I sometimes ask myself when I'm trading is, "Which side of the trade is harder to take right now?" I mention this because sometimes the market pulls a bit of reverse psychology on us. On the one hand, usually right about the time everyone figures the market will go up forever, it reverses. But there's another type of market, and that's the one that has everyone thinking exactly what I just mentioned, and thus looking for that "it can't go up forever!" reversal. That type of market does the exact opposite: it just keeps going up, because everyone is watching for a reversal and afraid to position long. It's entirely possible this is that type of market, and until we start seeing some form of sustained reversal, I would advise bears to stay very nimble.

I haven't updated the Russell 2000 (RUT) in a while. Since before Christmas, I've opined that this chart has been pointed upwards, and once it claimed 902.30, it activated an even higher target of 1000 +/-, which it's now finally approaching.

The Philadelphia Bank Index (BKX) can be counted as five complete waves, but normally we'd still expect to see it run higher before it finishes off the current wave:

SPX now looks poised to capture the preferred near-term targets from May 6. I am not ruling out the possibility that this count is too conservative, and may be more bullish than shown.

In conclusion, the market has now completed the minimum upside expectations for the wave structures, but it hasn't quite reached the price targets and there are no signs of a reversal yet -- so normally we would still expect to see the pattern continue at least somewhat higher. Trade safe.

Two Recent Indications that Long-Term Strength for Equities Should Continue

2013-05-10T01:12:00.000-10:00

I had planned a lengthy commentary for today, but then my personal life stepped to the fore and cut short not only my trading session, but also just about everything else. So, I have a number of charts to share, but with less words than I originally intended (some readers actually prefer the pictures anyway). Also, there are a fair number of words on the charts themselves, which provides an ongoing cover for those who tell their spouses that they read my work "for the articles," and not just to drool over the pretty pictures.

First up, there is some recent noteworthy behavior in the Dow Jones Bullish Percent Index (BPINDU). I can't recall updating this chart since November 2012 (See: SPX Update: Intermediate Buy Signal Triggered), because there's really been nothing to say about it since -- at least, until now. While the current reading is characterized as "overbought," this type of overbought reading also typically suggests a strong trending move in price which will ultimately continue higher.

Next of note is the Philadelphia Bank Index (BKX), which briefly exceeded the 2010 print high. Earlier in the month I opined that if BKX cleared 57.6 then it was likely headed to the high 58's in fairly short order. This event now breaks some of the potential bear waves, which further limits the bears' long-term options. It also made for a quick easy-money trade if you played the breakout.

This is a brand-new signal that the long-term remains bullish:

The hourly BKX chart below:

I also want to discuss a bit of terminology, because it's very relevant to these outlooks. Probably the most important is a discussion of the term "correction." While the mass media tends to use "correction" as a way to describe "pretty much any decline," I do not use that term generically, as it has a specific technical meaning in Elliott Wave. "Corrections" are waves which run counter to the prevailing trend of the wave at next highest degree. In other words, bull markets experience downward corrections, while bear markets experience upward corrections. Corrections are thus, without exception, always expected to be fully retraced; so please keep in mind that when I say "the market looks likely to experience a correction," I am always referring to a counter-trend move.

Also, be aware that counter-trend trading is generally not a good idea for the inexperienced. The practical difference between trading with the trend versus against the trend is that if you're trading with the trend, the market will eventually bail you out of a bad trade entry. If you are truly with the trend, prices will eventually come back to your entry at some point. However, if you are trading against the trend, the market can leave you high and dry and not look back for weeks, months, or years. A bad counter-trend trade entry will almost always cost you money. If you're trading counter-trend and you're late to the party, then fuggedaboutit -- skip the trade. Please choose safe entries and use the provided analysis accordingly.

Also, briefly, since we're discussing my personal nomenclature: "short-term" means hours to days; "intermediate-term" means weeks to months; "long-term" means months to years. There are really only so many relative terms out there, which can sometimes make finding proper descriptors difficult, especially since the market itself seems to necessitate some degree of vagueness in time-frames.

Anyway, while the end portion of last month's attempt at catching an intermediate correction fell flat, the long-term S&P 500 (SPX) preferred outlook still remains bullish, as it has all year (updated chart below). I'm wondering if now that the rally's true strength has become more apparent, bears might find additional solace and/or enlightenment in my January article A Survival Guide for Bears in a Bull's World, which was based on my own personal journey (in 2012) to reconcile my fundamental bearishness with my technical bullishness. I now suspect the article was a bit too far ahead of the mass sentiment curve at that time, but might be better-received now.

The SPX hourly chart notes the near-term reversal from the upper boundary of the trend channel.

In conclusion, markets don't go straight up forever, so a fourth wave correction in the near future would not be out of the question -- however, the indicators continue to suggest that there is no long-term top on the foreseeable horizon. (And I see now that we've ended up with more words than I originally thought I'd have time to write... which is good, because that means the "but I read this for the articles!" excuse remains fully intact.) Trade safe, and have a great weekend!

SPX and US Dollar: A Great Time for "Value" Investing. (Bwahahaha!)

2013-05-08T03:13:00.001-10:00

The S&P 500 (SPX) has continued to drift higher over the past couple sessions, as expected on Monday. Now that the market has broken out to decisive new highs, there's nothing in the way of horizontal resistance for the market to struggle with, there's simply channel resistance and Fibonacci zones. If bears can't reverse this fairly directly, then there's no reason to believe the market won't reach my longer-term targets from January (the mid-to-high 1600's -- and ultimately the mid-1700's). To be fair, I didn't anticipate we'd get there this directly; I thought we'd see more backing and filling first.

This is a strange market environment, and if you haven't been trading for a long time, you may not realize exactly how strange it really is. Due to the Fed's bubble pumping, the market technicals are now deeply detached from the economic fundamentals. And while the Fed points to things like the "good" jobs number last week as signs that they're doing something helpful for the fundamentals, the reality is that the growth rate in jobs has held steady at the same level it was before the QE-Infinity days. As I wrote when QE-Infinity was first announced, there's been no statistical link to the QE programs and job creation.

Beyond that, the jobs we're actually creating in this economy are the types of jobs you might have thought were pretty cool back when you were 16 years old because of their "awesome" benefits, such as the benefit of being able to take home an unsold pizza from work, after a grueling night of delivering them. But if you're an adult these days, you may not be as excited as the Fed is about this "new job growth" -- especially if you have to feed a family, or a particularly large dog. But the government doesn't differentiate all that in the jobs numbers: There's no category for "Number of new jobs created which would still leave you eating a ton of Ramen Noodles."

What I (and many other traders) find particularly flummoxing about this market is the fact that the Fed has managed to completely obfuscate the value of everything. What are equities actually "worth" these days? How about the dollar, or metals, or oil? With $85 billion of Nuevo Dinero being pumped into the markets out of the raw ether each month, how on earth can anyone have the faintest clue what anything is actually worth? It's an auction where the fat cats are playing with Monopoly money -- so the players who actually move this market don't need to be bothered with petty details like "value" anymore. Maybe that's what the Fed wanted all along.

As long as this money flood goes on, without at least a larger crisis of confidence, bears are probably going to continue having a hard time getting anything to stick.

Speaking of value, I haven't updated the US dollar chart in a long time. I was consistently bullish on the dollar from September 2011 until July of 2012, at which point I shifted to neutral with a slight bearish bias. That's where I remain today. Since July 2012, the dollar has spent those 10 months trading in a very large range. It's an interesting pattern now -- note the similarity of the moves highlighted by the red boxes.

Last week I noted the Philadelphia Bank Index (BKX) might serve as a warning to bears, and it has now broken out to new highs. It's now approaching 58.83, the peak of 2010; this is the first time this market has challenged that high since. Unlike SPX, the BKX has not recovered anything approaching its nosebleed levels of 2007, when it traded at more than double its current price (the peak was 121.16). As a result, also unlike SPX, BXK does still have lots of horizontal resistance left to contend with, and will continue to be important to keep an eye on.

No change in the SPX count at the hourly level:

And no change at the 5-minute level:

In conclusion, unless the recent breakout whipsaws, there's really nothing in the charts for bears at the moment beyond random speculation. Trade safe.

SPX Update: Fed Cash Trumps the Prior Sell Signals

2013-05-06T03:23:00.001-10:00

On Friday, the intermediate thesis I've been building for a couple weeks (of a larger fourth wave correction) was at best forestalled, or at worst completely blown up. The signals I noted in April constituted the first serious batch of sell signals I've seen since the Fed started feeding QE-Infinity money into the Primary Dealer accounts back in 2012, and I apparently made a mistake in thinking those signals might work anyway.  Lesson learned.

There's an outside possibility Friday may have been the exhaustion gap of an unpredictable extended fifth wave -- however, there's danger at times like this for an analyst and a trader, because there's always a temptation to latch on to whatever might "prove you right in the end." So I'm going to override my own slight hesitation and stick to the discipline of the equation: This breakout must be respected as bullish as long as it sticks. Accordingly, I'm going to publish the "most obvious" bullish wave count until proven otherwise -- but to be fair, we won't really know one way or the other for a session or two.  In this update, I'll outline a few of the signals and key levels to watch.

Even though I've written extensively about the potential for upside surprises during third wave rallies, and about the bullishness of the unprecedented liquidity the Fed is pouring into the market, I myself sometimes forget to "expect the unexpected."  The mini-crash in precious metals during the second week of April got my attention and suggested there might be some underlying cracks in the foundation, but apparently if there were (or are), the Fed has so far been able to print over them.

One of the challenges in Elliott Wave is the fractal nature of sub-dividing waves. Though I wasn't favoring this view, I mentioned last week that the market had formed five waves up, but it was possible those five waves only marked wave i of a larger five wave structure. That now appears to be the case, but the even bigger surprise for bears was the extremely shallow nature of the second wave. Normally second waves will retrace 50% or more of the previous wave -- this one barely corrected at all.

There were numerous indicators suggesting a correction was due, but as I've discussed many times previously, we must at least consider the possibility that this market may simply not behave in line with historical sell indicators until QE-Infinity begins tapering off, or until there is a larger crisis of confidence.  Speaking of, now that May is upon us, there's the historical seasonality factor for bears to ponder (the old "sell in May and go away").  Whether that type of seasonality will work in a Fed-driven market where bulls are endlessly backstopped, and "risk" is a four-letter word, is another question entirely, though.

Things always become a bit tricky this far into a strongly-trending wave, because the smaller waves we'd normally use to triangulate the pattern are compressed and harder to locate. This is my least favorite portion of any pattern for a number of reasons.  In any case, I made it no secret that I expected more from the recent fourth wave correction, and I won't pretend I wasn't surprised by Friday's action. But in the bigger picture, the long-term preferred wave count is materially unchanged since January/February (back when everyone thought I was complete loon for favoring it). This will remain preferred unless the price action gives us some reason to stop favoring it, or until the Fed files for bankruptcy.

(Note: Updated the numbers, but forgot to update the annotation, which should read "BLUE wave 4.")

The near-term count I published on Thursday was invalided before the session closed, which was the only warning cash traders had before the S&P 500 (SPX) gapped open on Friday's job number. As promised, I'm now showing the most bullish wave count as the preferred interpretation until proven otherwise. Keep an eye on that blue trend line -- it's one of those "stealth" trend lines that the market's reacted to every time it's touched it.

Note the extreme momentum in RSI on the chart below: normally, that type of reading suggests the next dip will be bought.

No additional comments for the hourly chart:

Finally, the Philadelphia Bank Index (BKX) is lagging a bit here:

In conclusion, unless bears are able to stop the advance more or less immediately, we probably need to favor the most bullish wave count until proven otherwise. Trade safe.

The Trouble with Bubbles

2013-05-03T02:00:00.000-10:00

I hope readers don't mind, but I'm diverging a bit from my usual today, because a) I spent way too much time on this article and b) I'm actually running out of ways to say the same thing over and over regarding the intermediate outlook. The market outlook remains essentially unchanged on an intermediate basis -- it's still watch and wait at the pivotal 1600 +/- zone. So today, I'm going to embark on a more overarching economic commentary.

The U.S. Government made big headlines recently by announcing it will pay down a portion ($35 billion) of the national debt this quarter, the first such pay-down in six years. $35 billion sounds like a lot, until you consider that the national debt has been increasing by an average of $3.83 billion every single day since September 2007. I guess we're making progress by reversing about 9 days of the past 2,000+ days of debt, but that means we're still left with... let's see, carry the zero... 2,000+ days of debt to go! If Uncle Sam can maintain this strict level of discipline, we'll be completely paid off by the 23rd century.

I maintain that our policymakers are creating a massive debt-driven bubble, and in this article I'm going to outline why I feel this is a mistake by analogizing some of the unintended consequences in depth (in "debt-th"?).

Briefly, the historical chart below is from the always-interesting Sentimentrader.com, and shows the current ratio of mutual funds and ETF assets to money market assets. The chart suggests equities are approaching the upper range of the Bubble Zone. We can see the current ratio of 3.31 has only been reached once before, in 2006-2007; and we can also see in that instance, equities continued to rise for a while afterwards -- so these types of signals can take time to work. But they're hard to ignore. As Edmund Burke said, "Those who don't know history are destined to repeat it."

The x-factor impacting all of our lives and driving the equities bubble has been the Fed's printing press and Quantitative Easing. The majority of Americans don't even know what QE is, much less care -- but I believe there are genuine consequences awaiting the Fed's current policy, which will ultimately impact the lives of virtually all Americans.  (The fact that you're even reading this suggests you're probably more informed than the average American, and already know what QE is -- but in case you don't, here's the Wiki explanation.)

The Fed's stated goal with QE-Infinity is to improve the labor market -- and yesterday, new jobless claims came in at a five-year low, which undoubtedly has the Fed Governors secretly high-fiving each other in the restroom. As I see it, though, there's a problem here (beyond hygiene): they are attempting to grow our economy through debt-driven consumption.

My contention is that there can be no lasting growth though this type of debt expansion.  It will seem to work for a while, because the Fed's printing press is creating a liquidity boom, and that excess liquidity is driving an increase in certain asset prices. This is not unlike the way they created the housing bubble. Excess central bank liquidity sends false signals to the market -- essentially, the market sees all the extra cash floating around and incorrectly concludes that the economy is better than it actually is.

To illustrate the impact of these false signals on the future economy, I'm going to draw an analogical story about a poor man who's suddenly (and erroneously) granted a big line of credit, which he begins using immediately and irresponsibly. Purely for sake of illustration in this story, let's give our hypothetical big spender a name: We'll call him "Benny B" ("B" stands for "Big spender"! I have no idea who you're thinking of here.) Benny B has no job and no assets, but he's mistakenly granted a humongous line of credit by our hypothetical credit card bank, which we'll call simply, "The U.S. Government."

For a while, Benny B can use his line of credit to run around town spending like crazy.  People see him cruising in his limo, dressed in his new Armani suit, and eating at the finest restaurants every night. The community naturally assumes he's rich, and in short order, Benny B gains a good reputation. Eventually, Benny B's favorite fancy restaurant even decides to extend a very large monthly tab to him.

Never one to miss an opportunity, Benny B starts treating all his family and friends to dinner at this restaurant every single night. He runs up his tab higher and higher. Of course, the restaurant owner sincerely believes Benny will eventually pay his debt -- so each night after the restaurant closes, he includes Benny B's latest tab in the restaurant's asset column as "uncollected profit and revenue."  And since Benny B has an abundance of "friends" nowadays, the owner notes there's an awful lot of new business coming in, night after night. He decides he needs to hire more chefs and waiters, and also begin an extensive remodel.

Benny's heightened consumption is sending the restaurant false signals about the overall state of the local economy -- and with the owner now taking action based on those false signals, they have officially been sucked into the Benny B Bubble.

This all seems to be working out great for everyone, for a while anyway. Benny is living high on the hog and local businesses seem to be benefitting.  Even when it's time for Benny B to start paying down a portion of his debt to the restaurant, there's no crisis right away, because initially Benny can pay some of that debt with his US Government Credit Card (USGCC). By doing so, he effectively "kicks the can" on a portion of his restaurant debt straight into someone else's "uncollected profit and revenue" column. Now the restaurant and the credit card company are both inside the Benny B Bubble -- but still, neither of them know it yet.

For most people, the real trouble would begin when it's time to pay off the debt they kicked over to the credit card -- but not for Benny B! He's a financial genius, so by the time the first credit card payment comes due, he's managed to finagle a loan from the -- again, purely hypothetical! -- Credit Bubble Bank of China (CBBC), which he uses to pay the interest (but not the principal) on the debt he owes to the credit card company.  He's kicked the can again, and now involved yet another company in his debt scheme. The bubble grows larger.

The root problem here is that Benny B isn't producing anything at all; he is only consuming, which temporarily increases demand and thus seems to be stimulating the local economy. But because his consumption is debt-driven, it is unsustainable, which means the signals it sends to businesses are false.  And, as one example of a direct unintended result, the restaurant owner is now unwittingly doing two things which will actually hurt his business down the road:

1) He's counting Benny B's debts in his asset column.
2) He is relying on Benny's large nightly "revenue" to justify certain forward-looking expenses.

Other businesses are in a similar conundrum -- for example, Benny purchased a new Ferrari on credit, and he's having a new McMansion custom-built by a small local homebuilder (via minimum down payment, of course). Due to Benny's debt-driven consumption, these other business also mistakenly think things are going better at the moment -- but they too will be hurt down the road.

Without even consciously thinking in these terms, these businesses naturally assume that, somewhere up the line, Benny B is producing something, which he's exchanging for the money he will then give to them. After all, money is simply a convenient tool which stores value from one form of production to another, and thus allows us to bypass direct barter. If we remove its use as an indirect exchange of my goods/services for your goods/services, then money has no intrinsic value of its own.  Benny B's money isn't coming from production (current or future) in any form at all -- in fact, Benny B lacks the ability to produce anything himself -- thus his money is, in effect, completely worthless.

Still: no one in our story realizes that just yet.

We could go on and on with the can-kicking (if Benny B obtained yet another loan), but for sake of time, let's bring this to conclusion here and assume the CBBC is Benny's lender of last resort. It's finally time for him to pay that loan -- except he can't, because he has no income.  Thus the CBBC is the first to have Benny's bubble pop in their face. And since Benny also has no real assets, they have no choice but to write off Benny's debt completely.

Soon after, the USGCC learns that Benny B had been maintaining the interest on his debt to them with that now-defunct CBBC line credit. All the money they lent to Benny is gone forever, and they too have to write off his debt.  At this point, Benny B's banks are suffering, but their suffering is not immediately driven home to the local economy.  That's about to change.

Sadly, as Benny B's massive credit scheme falls apart, he will bring real people down with him. The restaurant owner is one of the last to learn what's been going on, and he suddenly realizes that the $250,000 line of credit he extended to Benny B will never be repaid. He sits down that night with the books, recalculating his balance sheet without that $250,000 "asset" (which just vanished back into the thin air from whence it came). He realizes he can no longer afford the restaurant's new staff, they must all be fired. Worse, he realizes he's now overcommitted on his debts, because he thought he had additional assets, and -- with the restaurant packed with Benny's friends every night -- he thought his business had reached a new permanently-high plateau.

The false signals Benny B sent caused him to conclude the business was doing much better than it actually was, and much better than is actually sustainable.

He checks the numbers several times, but there is no way around it. Without Benny B's nightly business, the owner realizes he is overextended to the point where he can no longer stay afloat at all. He must close the restaurant, firing everyone. Benny B's temporary "stimulation of the work force" has backfired in the end.

The small local home builder, who just completed Benny's McMansion, won't go bankrupt immediately, but his future hangs on whether or not he can sell the house quickly and recoup his capital. The Ferrari dealership is able to repo the car, but it's completely thrashed and littered with empty beer cans and old beard clippings. They take a write-off. Not all of the businesses who acted on Benny B's false signals will go bankrupt -- but all will suffer to one degree or another.

Every one of the businesses Benny purchased things from was producing real goods and services, so his demand for those things briefly seemed to stimulate the economy -- yet because Benny's money came from debt and not production, there was no way his spending spree could have any lasting positive impact. In fact, in the end, it hurt more than it helped.

The problem is debt does not help when used as an end in itself; debt can only stimulate the economy when it is used as the means to invest in future production. If Benny had taken his loan and built a successful business, instead of simply consuming, this story would have a much different ending. The same is true of our story out here in the actual world: In the first decade of the 2000's, each dollar of new credit has produced a mere 18 cents of new GDP, which is ridiculously low from a historical standpoint (contrast that with more than 59 cents per dollar of GDP growth in the '60's), which suggests that most new debt is being used for consumption and speculation.  Debt-driven consumption always backfires in the end, for the same reason it would backfire personally if you simply ran up your own debts endlessly without increasing your income.

To drive this all home to our current situation:  the Fed and our government are "creating" money through debt and from thin air, and this will seem to work for a time. But real money simply can’t be created from thin air, any more than we can create the tangible things money represents, like cars and houses, from thin air.

The market presently believes there's more demand than there actually is, and is thus expanding accordingly (or, in some cases, shrinking slower than it normally would), which makes this a bubble. They can’t continue this debt expansion indefinitely; it must end eventually.

At some point they will be forced to stop consuming, because of fiscal problems or due to rabid inflation, or due to something presently completely unforeseen -- and this whole grand economic experiment will fall apart. Exactly when the endgame arrives is anyone's guess. But when we finally reach the end of the Fed's rainbow, we'll find there's no mythical pot of gold -- only a pot full of worthless IOU's, which are redeemable for nothing. Trade safe.

SPX and BKX: Will Bears Capitalize?

2013-05-02T03:15:00.001-10:00

Tomorrow's article is going to be titled "The Trouble with Bubbles," and will be a bit longer on words, so today's article is going to focus more on charts. Of course, I'm assuming I won't die of exhaustion between now and then -- if I don't make it through 'til tomorrow, then that article will probably be really short.

Yesterday's near-term ending diagonal count appears to have been correct, although it ended a bit abruptly, about 4 points shy of the exact "perfect world" target, and the S&P 500 (SPX) declined directly off the open. With yesterday’s decline, bears have a good opportunity to shift the momentum, and have a defensible position at the 1600 zone -- now they have to continue to run with it.

If my intermediate thesis is correct, then we appear to be wrapping up multiple degrees of fifth waves, which should be followed by the first lasting correction of 2013. It's too early to paint targets with anything but broad strokes -- in fact, to be fair, it's too early to confirm an intermediate correction has started at all. This is unabashed analytical front-running, and the bullish option is that this fifth wave is sub-dividing into a larger five-wave structure, which would mean we've only seen wave i of v so far (shown in black). I'm continuing to favor the more bearish intermediate view at present.

It's also still not impossible that yesterday's decline was simply another micro fourth wave unraveling, with one more thrust up still to come. This is why I'm still watching the 1606 +/- zone, and depending on the shape of the next move, would probably not remain bearishly biased if the market can sustain a breakout.

There's one chart which doesn't exactly "contradict" the bear case yet, but which does underscore the point that any breakouts should be respected; and that's the Philadelphia Bank Index (BKX). This chart really seems to be saying that bears probably don't want to stand in the way if there is a sustained breakout. The recent small correction in BKX also looks like an ABC at this exact moment, and there wasn't a significant momentum divergence at the high -- so BKX is worth watching going forward.

In conclusion, while the near-term pattern played out well, the market hasn't done anything to confirm the bear case at intermediate degree yet. We're a bit at the mercy of the market at the moment, since it hasn't given us anything solid in a while, and we've simply been cycling in a large trading range. Bears do have an opportunity to shift the momentum here, so the next few sessions will be important. Trade safe.

SPX Update: FOMC Day

2013-05-01T03:16:00.000-10:00

The SPX made a new all-time high yesterday, which resets the wave count at one degree, however, I continue to feel that the 1600 zone is an important inflection point and that there's good potential for a turn here. We also have the FOMC announcement coming up today, which adds to the possibilities for an inflection point. In my perfect world, I'd like to see the market embark on a deeper correction in the near future and begin to unravel some of the fourth waves which need to be unwound. Since all I've talked about for the past couple weeks is the idea of a decent intermediate correction developing soon, I've also updated the big picture chart, with a focus on the bullish long-term wave count.

From a big picture standpoint, I would consider myself neutral at this exact moment. I was bullish up until recently, but I'll be the first to admit I make a terrible bull, and the potential of a triple top here is hard for me to ignore. Especially since I'm fundamentally bearish on the massive systemic debt the world has accumulated, and believe that the only "reason" to be bullish is because the Fed has created another bubble by pumping ridiculous amounts of liquidity into the market.

Since I do believe this is a bubble and that it will ultimately end like every other bubble does (i.e.- POP!), I intend to watch corrections carefully to try and determine if they are only corrections, or if they are the start of the popping phase.

Unless SPX can sustain trade above 1606, I continue to feel that an intermediate correction remains likely. The chart below also roughly outlines the longer-term bull count at this stage -- to be honest, the long-term bear counts are a bit spotty with the market in this position, hence they bear the alternate labeling (red "alt.") and are not detailed on this chart. They would jump to the fore if any forthcoming corrections were to overlap the black wave 1 peak.

From a near-term perspective, my preferred interpretation of the pattern is a bearish ending diagonal (shown below). To position this in the chart above, this wave would represent red 5 of black 3. It's worth noting that this wave does not need to go any higher. Fifth waves in ED's can be quite unreliable, and it has already fulfilled the minimum requirements.

Since we have to be aware of the if/then nature of the market, this pattern would be called into question if the market were to sustain trade above 1606. If that were to happen, there are several bullish options we'd need to consider, including the potential that this is wave i of red 5, which would target the total wave toward the mid-to-high 1600s. From a classic technical analysis standpoint, the pattern is a cup and handle, which further argues bears should probably get out of the way on a sustained breakout.

In conclusion, the 1600 zone remains an important inflection point, and I still feel the odds are good that an intermediate correction will begin in the near future. If the market instead sustains trade above 1606, then it will be time to re-examine that outlook. Trade safe.

SPX Update: The Moment of Truth

2013-04-29T03:09:00.001-10:00

I was recently reminded by a reader that sometimes people can have very short memories, as I was accused of the dreaded "top calling." So, to clear the air, let's take a quick stroll down memory lane. On April 16, I wrote:

As long-time readers know, I have been primarily bullish on equities since November 2012 -- but for the first time since then, I truly have no desire to "buy the dip" for anything longer than a short-term trade. There are some disturbing early warning signs that the market may be undergoing a fundamental change of character. I don't presently know how long this will last, but when I see signals like this from the market, I don't screw around and risk gambling away my financial future.

On the chart I published within that article, I projected a rally to the 1570 zone, followed by a decline toward 1540, followed by a rally to 1580 -- all of which have since happened. If we ignore the (correct) projection for that roundtrip lower and only look at the "top call" of April 16, basis the 1570 projection of that same day, then the S&P 500 (SPX) is now up almost an additional 13 points.

To go back even farther, I was exceedingly bullish from the very first trading day of the year (see: SPX and US Dollar: Rally Likely Only Halfway Through) and continued outlining the bull case for several weeks after. I stayed unequivocally bullish until my adjusted target zone of 1520-1530 was reached, and since then, I've hit several of the turns with pretty darn good accuracy. If some readers are expecting more outta me than this, then I'd like to state, quite matter-of-factly, that I simply can't do much better. I'm quite sure somebody out there can, but this year overall has been about as good as it gets for me personally.

So I would like to take this opportunity to lovingly remind less-experienced traders that there simply is no such thing as an infallible crystal ball in market projection. If one is expecting the impossible in terms of prediction, then one is certain to be disappointed. Make sure your trading goals are realistic and achievable, or you are doomed to an ever-shrinking account caused by repeatedly pushing your luck to the breaking point (also known as "overtrading"). Todd Harrison has a philosophy called "hit it and quit it," and I think that sums it up just about as succinctly as possible.

Since April 16, I have been systematically outlining the bearish signals which have popped up, including things like overly bullish sentiment, and the smack-down in IBM on their earnings miss. These don't guarantee another leg down, but nothing guarantees anything in this business. The only thing we're ever "guaranteed" is an interesting ride. Well, that and a ludicrously Keynesian economic policy, of course.

The rally feels like it will never end, which, ironically, is exactly how it should feel if it's going to end. Tops never look like tops until they're in the rearview mirror, otherwise nobody would have bought a single ounce of gold near $1900.

Note the daily chart of SPX below, and think back to how many of those tops "felt" like tops at the time. Incidentally, if you're an intermediate trader, there is almost never any need to front-run a top. While I will frequently front-run tops (and bottoms) in my analysis and projections, my philosophy as a trader is generally (not always, but usually) to wait until the market retraces at least 61% of the assumed first-leg down before going short -- again, this applies, for me, when looking at things from an intermediate basis or longer (short-term is another matter entirely). That approach not only seems to be in line with "the way tops work," but also helps minimize risk by providing a clear zone for stop-losses. I'll never understand the subscription services who tell their subscribers to front-run by selling into the teeth of a high-momentum rally (seemingly) every other week. I see no need to take on that level of unmitigated risk.

As I mentioned last week, if the market breaks out convincingly over 1600, then we probably need to set our sights on the mid-to-high 1600's as the next target zone.

The rally has now exceeded my initial expectations, and the moment of truth has finally arrived.

The 10-minute chart notes one of those amazing "coincidences," when the market turned perfectly at the upper boundary of the blue trend channel I drew for Thursday's update. Note the melt-up channel has finally broken.

I feel reasonably confident publishing a bearish sell trigger with today's update, as shown on the chart below. I would be a bit cautious about this trigger target if the SPX exceeds 1589 before turning back down, though. Although, to my way of thinking, 1589 would actually be a significantly better entry (with a tight stop) than "waiting" for the trigger to actually become active. As mentioned earlier, I'm a fan of buying and selling retests, because that allows me to more clearly define my risk.

In conclusion, the rally has now exceeded my expectations and left a few question marks in its wake. If bears are going to get anything going, they need to make a final stand at these levels, otherwise, I'll probably need to dust off my recently-shelved bull horns. Trade safe.

SPX Update: Bears vs. The Fed

2013-04-25T03:22:00.000-10:00

This market remains a question of historical indicators and the "real" economy vs. Fed liquidity injections. QE-Infinity (incidentally, I do believe I was the first to actually coin this term) is still in full effect, and even as I write this column the Fed is feeding the market via its primary dealer accounts, to the tune of almost $36 billion over the short-term. As expected, Bernanke's policy of "no banker left behind" has worked wonders for equities up to this point, though seems to be doing little to help the actual economy.

Now for a bit of market history which may fight the Fed -- I haven't mentioned this statistic in about half a year, but it's relevant to share it with readers again today. Last week, IBM announced dismal first quarter earnings results; shares have taken a beating ever since, and dropped about 8%. This bears attention because the S&P 500 (SPX) and IBM have a correlated history when IBM trades down on earnings: 70% of the time this has happened in the past, SPX then trades lower over the next five weeks. It bears noting that the last time I mentioned this correlation was on October 22, 2012 -- and almost exactly five weeks later, the SPX reached the November bottom.

That said, I'm reiterating this next point, because it's a discussion I seem to have awfully frequently with newer traders: even 70% odds still mean that exactly 3 out of 10 times, the market will end up doing the exact opposite thing. Nevertheless, it makes no sense to me to take the 30% stance -- so unless the market breaks out over long-term resistance here, I'm continuing to favor the idea that there's at least one more leg down coming.

My outlook isn't coming from any sense of moral conviction about what the market is "supposed" to do next, it's purely based on the odds.  To go back to my poker analogies of the past: when I'm dealt a pair of aces before the flop, I raise the bet not because I'm "predicting" the hand will win, or even because I think it "should" win -- I take action because the odds favor it will win, so raising is the correct play. Yet, as anyone who's played serious poker will tell you, the odds never guarantee anything (except frustration when they go against you!). Point being, when I see signals like I've seen in the current market, I'm inclined to sell the rallies for the same reason. A minority of the time, though, I'll be dead wrong -- but I can't actually control that part of the equation.

This has sparked another thought that's probably worth sharing. In order to be successful at trading, I think one has to learn to become comfortable with the idea of uncertainty.  Most of us have some difficulty with uncertainty, so we seek out ways to avoid or eliminate it, sometimes going to great lengths to do so, even if that requires we cling to a false sense of certainty.  I believe this is why some analytical services have decided to take the approach of: "Mortgage the house today, because our prediction is most definitely going to happen in the market tomorrow! No doubt about it!"

Personally, I view that approach as moderately irresponsible, but strangely, I believe it actually makes some people feel safer -- especially less experienced traders -- which means that approach probably brings in new subscribers for those services.  Ironically, to my way of thinking, less experienced traders are exactly the people who don't want to be feeling any level of over-elevated conviction. Trading is hard enough already -- but it's ten times harder once a sense of conviction engages our emotions and our egos.  Anyway, that's just how I view it.

So let's talk about what is most definitely, without a doubt, for sure going to happen today! Get set to mortgage the house, because I'm givin' ya gems here! Ready? What will most certainly happen today (and there is almost no doubt in my mind!) is: the sun will rise. You heard it here first! As far as the market goes, though, we're still in the inflection zone -- so the bears will either get it done here, or they won't.

The hourly chart remains materially unchanged, though I was able to correct the ChiOsc in the lower panel (yesterday, the Java program simply wouldn't let me draw the signal line where I wanted it.)

I've detailed two 10-minute charts of SPX. The first one notes a confluence of resistance sitting just overhead, in the 1585-1590 zone I talked about yesterday:

The second 10-minute chart attempts to interpret the near-term wave structure. This is actually a pretty funky wave form going back to the 1536 swing low, so if you're trading this, then please do so cautiously.

In conclusion, I remain in favor of the bear view, but it's make or break time for that view. Trade safe.

Yesterday's Flash Crash Fit the Wave Structure

2013-04-24T03:23:00.002-10:00

Over the past week, I've outlined about half a dozen reasons why the odds favor the bears should get another leg down after this rally, and now the market has finally entered the critical "retest" zone for the 1597 high. Elliott Wave is extremely particular about exact price points, whereas classic technical analysis allows a bit more leeway, and in classic TA, a "retest" is considered as something of a zone which extends somewhat below and above the prior swing high (or low). I tend to focus more on Elliott Wave analysis within this column, but in practice I blend the two disciplines. In either case, the market is now at an inflection point.

Yesterday made for an interesting session, as the market experienced a mini flash-crash after AP had their Twitter account briefly taken over by terrorists, who sent out some frightening false news items. The market experienced several minutes of sheer panicked free-fall, when the terrorists falsely tweeted that Ben Bernanke had just been spotted reading a copy of The Road to Serfdom by Friedrich Hayek. But it recovered almost immediately, as investors quickly realized this Tweet was so incredibly unbelievable, it had to be a hoax. I think they also Tweeted something about explosions at the White House, but the market probably shrugged that off as irrelevant.

The hourly chart remains unchanged, and the "best guess" projection I detailed on April 16 has since tracked with far more accuracy than it had any right to. Note the levels of the Chaikin oscillator in the bottom panel (also note that for some reason, Java refused to draw the red sell signal line in the correct place! It should be drawn higher on that chart than it is, close to the indicator's current level.)

On the one-minute chart below, there's an amazing little tidbit for those of you who love math and the harmony of the markets -- and it's especially interesting given the events of yesterday's session. On the chart below, the rally from blue B to blue wave (3) (from 1548.19 to 1560.18) is 11.99 points. I am interpreting yesterday's rally as an extended fifth, and extended fifth waves often target the 1.618 extension of waves 1-3. Waves (1) through (3) were 11.99 points. If we multiply that by 1.618 (the expected extension), it calculates to be 19.40 points.

19.40 + 1560.18 (the peak of blue (3)) = 1579.58 -- which was the exact to-the-penny high of the wave before the flash crash. (Insert Twilight Zone music here...) I find this all the more fascinating given the "unpredictable" event in the form of terrorist activity and the market's subsequent 16-point plunge.

While I remain in favor of the bear view, the 10-minute chart shows the near-term bull count in rough detail.

And in the interest of presenting a balanced view, there are indeed bullish interpretations to the present pattern at longer time frames. I have detailed the long-term bull view on the daily chart below:

In conclusion, the market has still not deviated from the projection of more than a week ago, so there's as yet no reason to switch to a more bullish footing. The market's now reached the inflection point, so what happens in the next few sessions should give us a great deal of information. Trade safe.

SPX Update: Clues from a Proprietary Sell Indicator

2013-04-23T03:16:00.003-10:00

Yesterday's article was long on words, so today we're going to focus more on charts. There's been no material change in the outlook, since so far the market hasn't done anything even vaguely unexpected, but I've refined a few charts and potential targets.

The first chart I'd like to share is one of my proprietary signal indicators. While I'm not publishing all the constituents which actually make up this indicator, I have noted the prior few years of signals on the S&P 500 (SPX) chart below. This is one of the signals which is presently keeping me in favor of the bears for another leg down. Note the present similarities to the examples of 2011 where two sell signals fired off in close succession.

Today, we're going to start off with the one-minute chart and build from there. One of the challenges in market prediction is the anticipation of how a corrective wave will unfold. Corrective waves can be quite complex and thus extremely difficult to anticipate perfectly in advance. Beyond that, the "easiest" market reads are almost always done in real-time, since the market gives off new information by the minute. It's almost impossible to anticipate every potential turn which will come down the road in a given session (and even more impractical to try and outline them).

But since a static published column obviously doesn't have the luxury of speaking in real-time, what I try to do is look several steps down the road to give readers some idea of what I'd watch during the session. Assumptions have to be made in order to do this, and the first assumption I'm making is that this is indeed a corrective rally, as opposed to a new impulse wave which will head to new highs. Accordingly, I've noted the two most likely possibilities for a corrective wave on the chart below. If the market sustains trade above 1577, then we'll have to look more seriously at other angles.

In the event that my thesis of a corrective rally is wrong, on the 10-minute chart below, in black I have noted the rough turning points I'd watch for an impulsive rally. Again, presently the only invalidation level for a corrective wave is the prior high -- so all we can do is watch key resistance at 1577 for our first clue that something more bullish may be afoot.

The hourly chart of the SPX builds on the one-minute chart and notes the rough turning points for the alternate ABC in black.

In conclusion, the rally has shown no signs of abating yet, so all we can do is watch and see how the market responds to the next resistance levels. In my perfect world, I'd love to see this wave complete in the 1572 +/- zone and turn lower from there, but I'd have to see how it unfolds in real-time to have more confidence. It remains noteworthy that this rally was entirely anticipated -- so the rally in and of itself is so far not a reason to switch back to a more bullish intermediate stance. The market of course reserves the right to show enough strength to change my mind going forward, but presently I continue to feel this rally will ultimately be sold to new lows. Trade safe.

Why Barron's Prediction of Dow 16,000 Favors the Bears

2013-04-22T03:09:00.002-10:00

This weekend's Barron's Magazine cover features the exclamatory prediction of "Dow 16000!" and depicts a bull (replete with a huge Cheshire cat grin) on a pogo stick bouncing over a fat, slow, and apparently confused bear. Clearly, the message this cover wishes to convey is:  "Have another margarita, bulls! There's nothing at all to worry about!"

If I were still bullish, I'd worry about that. (And it goes without saying that one should never drink more than two margaritas before hopping around on a pogo stick.)

This cover is the lead-in for Barron's latest Big Money Poll, and the following quote is found within:

“The stock market isn't the only thing that has set records this spring. Barron's semiannual Big Money poll of professional investors also is setting a record -- for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks -- an all-time high for Big Money, going back more than 20 years.”

Barron's has a bit of history with bullish magazine covers, and it isn't terribly encouraging. There are some logical reasons that publications such as Barron's sometimes make great contrarian indicators, and I'll cover these in a moment. Unlike my column (and many other columns here on Minyanville), publications like Barron's are generally more focused on reporting the past than they are on predicting the future.  This is not to imply any kind of slight against them, or that there's anything wrong with news-based publications -- we have to get our news from somewhere. To be honest, sometimes I'm envious: Writing about the past allows an infinitely higher degree of certainty -- and involves a lot less head-scratching, fewer sleepless nights, and virtually no potential for "getting one wrong" (or criticism about the same, for that matter). As Yogi Berra once said, "It's tough to make predictions, especially about the future."

Interestingly, Barron's Big Money Poll in May of 2007 was also quite bullish in tone, and predicted Dow 14,000 -- and that prediction was featured on the cover in a similar way in 2007. This level wasn't actually too far off, and was reached in October 2007 after a rally of about 6%. We all know what happened after that. The bullish cover of 2007 was a whole lot closer to the top than it was to the bottom.

When market publications which usually stick to reporting the past decide instead to predict the future, there is somewhat of an intrinsic "conflict of interest." Barron's didn't become hugely popular by publishing stuff nobody wants to read -- so by the time they're willing to boldly predict something on the cover, it's at least partially because they feel that cover will make the majority of people want to buy their magazine. Bears obviously don't want to read an article about "Dow 16,000!"  People who own equities do. This tells us, in a roundabout way, that "bullish" has gone very mainstream -- and in this way, these types of magazine covers help indicate when sentiment levels are approaching extremes.

The problem, and I've written about this many times, is that by the time everyone "knows" something about the market, it's usually dead wrong.  When we're talking about bullishness, there are only so many buyers out there -- and it obviously takes a constant influx of new buyers in order for any stock to continue heading higher. Even if a stock were the Greatest Most Amazing Stock in the World (just as a "totally random example," let's say this amazing stock were, ahem, Apple (AAPL)), once everyone who wants to own Apple already owns it, then at that point, the share price has nowhere to go but down.

Think of it like an auction where -- unbeknownst to the buyers ahead of time -- there will be 50 of the exact same item auctioned off sequentially, one at a time.  Further imagine that no one at this auction knows in advance that there are only a total of 49 buyers present for this particular item.  In this situation, the first few times the item comes up, the bidding will be hot and heavy since the majority of buyers are still competing with each other. This drives the bid higher each time, and, more importantly, establishes a psychology of "fair market value" for the item in everyone's minds. Since the price is continually being bid higher anyway, each subsequent auction then commences with a higher starting bid, and the buyers naturally take no issue with this.

There will continue to be some degree of competitive bidding, and accordant price increases, right up until the second-last buyer (buyer number 48) secures his item.  Then, with no more buying competition, buyer number 49 will simply pay the high starting bid -- and for a brief moment, this last buyer will actually think he got a "really good deal" because no one bid the item any higher.  But trouble starts (seemingly out of nowhere) when the auctioneer tries to sell item number 50, because suddenly nobody wants it at the opening bid.  He lowers the asking price -- but still, no buyers. What no one there realizes just yet is that all the potential buyers have already been converted into "owners," so there's simply no one left who's interested in the remaining inventory.  The auctioneer looks around in surprise, and drops the price again, but still no buyers step forward. And now a new kind of trouble begins, because at that point, all the people who just bought this item feel like idiots.  They're not "happy owners" anymore -- in fact, now they're thinking they probably paid way too much!

The feeling that we got "ripped off" -- or that we own something nobody else wants (especially an "investment" nobody wants!) -- brings up strong emotions. These emotions can be exceptionally powerful when it comes to the markets, because emotions in that arena are tied to our sense of financial security, which in turn is tied to our deepest, most primal instincts for survival (none of us can survive for long without any financial resources!). As a result, when the above analogized situation occurs in the stock market, it can actually generate an outright selling panic.  The panic psychology is further compounded by the fact that equities have absolutely no practical use whatsoever in the physical world. You're essentially buying a really fancy piece of paper, solely because you're hoping you can sell it to someone else for more than you paid for it. This "greater fool" psychology makes the stock market much more emotion-driven and volatile than the markets for most physical items. In any case, once a "no more buyers" situation is reached, the asking price will have to continue dropping until such a point as either new buyers find the lowered price attractive, or previous sellers find it attractive once again, at which point a new price floor can be established.

Do note that I'm not predicting a selling panic tomorrow, I'm merely noting that the sentiment precursors are in place, and a 20-year high in bullishness shouldn't be ignored. Since I always try to see both sides of the argument, though, I think it's also important to note that these types of sentiment indicators are purely relative, and that makes them difficult to time trades with. For example, I remember some contrarian investors talking about what a great time it was to buy equities in 2008 when the polls came in showing bears numbered around 60%. They said it again when bears numbered 65%, and again at 70%, and again at 75%... and so on. The market didn't end up bottoming until bears numbered over 90% -- so the key takeaway is that numbers which look extreme this week can end up looking mild by comparison in a month or two.

Moving on to the charts, I continue to feel it's more likely that this is a reaction rally and that bears will take the market back down again after it's over. The 10 minute chart shown second has a bit more detail about upcoming resistance levels.

It's worth mentioning that last Tuesday's projection (reprinted in the red breakout box below) has played out exceptionally well since. Hitting three turns in advance on a "best guess" isn't too bad -- especially considering SPX traversed more than 80 points during that time, and the market's now right back to almost exactly where it started (!). That projection correctly anticipated about 85% of the move in terms of points captured, as well as the correct turning points -- so if you traded that roadmap, then you probably did okay. Hope it helped anyway!

We'll see if the original roadmap continues to track or if Friday's slightly altered view comes to pass. On Friday, while I (correctly) projected the rally into the blue target box, I also slightly favored the idea that would mark the end of the upwards correction. I noted that I didn't feel I could see "two turns down the road" at the moment, and what would happen after that rally wasn't entirely clear to me. After studying the charts over the weekend, it does appear there may be some additional upside momentum left, so I've noted the next resistance levels on the chart below.

In conclusion, last week I outlined a number of reasons why it appeared that bears were gaining control of the market, and I presently continue to feel that the current rally will ultimately stall and be sold. The preferred wave count shows this as a higher degree wave ii/B, which means that sentiment should remain bullish throughout this rally, and it will do its best to convince us it's headed to new highs. At this point, sustained trade above 1577 would indeed call the bear view into question. Trade safe.

More Warning Signs for Bulls

2013-04-19T02:57:00.003-10:00

On Tuesday, I outlined some of the reasons why I felt the market was undergoing a fundamental change of character, and discussed why I believed the power had shifted to the bears. Since then, even more warning signs have cropped up for bulls.

The most obvious is the fact that most indices have now broken their intermediate uptrends.  Additionally, the decline in the S&P 500 (SPX) appears to be a five wave impulsive move, which suggests that the trend has shifted, and the next highest degree trend is now pointed down. Whenever we see a new five wave leg forming in the opposite direction of the prior move, we can generally anticipate this first leg will be followed by at least one more leg of similar length, or longer. There are other warning signs as well.

The chart below shows the 5, 10, and 20 day exponential moving averages of SPX and the Dow Transportation Average (TRAN). This is based on a trend-following system which was popularized by Gerald Appel, who rose to stardom by developing the now-ubiquitous MACD indicator. Okay, maybe "stardom" isn't the right word, since us traders belong to a pretty specialized subculture -- it's probably unlikely that your barber or landscaper has posters of Gerald Appel hanging in the garage, and I doubt he's ever hounded by paparazzi.

Anyway, the last signal from this indicator was a buy, back in November 2012. As we can see on the chart, TRAN has already given bearish crosses, and SPX is now extremely close to joining in. Of course, there are no "magic bullet" indicators, and this one can be prone to whipsaws around tops, which is another reason I use multiple indicators and charting systems. Nevertheless, this is one more potential red flag in the making for intermediate traders of the bullish persuasion.

The short-term wave structure in SPX is open to a few different interpretations, but I'm presently inclined to favor a path similar to the one shown below. We'll have to see what today's session brings, but I suspect we'll see a green close today.

Tuesday's "best guess" projected path has since tracked nearly perfectly, but as mentioned above, I'm not certain if it will continue to do so. I have left it unchanged on the chart below, but right at this exact moment I don't necessarily feel that I can see two turns down the road for the market. I do somewhat prefer the path outlined above, which would see a rally for today, then a decline into Monday, then a bounce for Turnaround Tuesday. Let's get through today's session first, then we'll take another look at the near-term path in Monday's update.

Do note that the red iii/C is not presently intended as a "final target," it's merely a general outline of expected direction at this stage. Note that the trend line off the November lows has been broken for the first time since then.

In conclusion, the market has not only fulfilled Tuesday's predictions, but also added confidence to Tuesday's bigger-picture thesis that the larger trend has shifted into the bears' favor. Over the near-term, this would be a great spot for a bounce -- but the near-term trend is still solidly down, so while both charts depict a bounce developing here, that bounce isn't a foregone conclusion yet. In either case, I believe further downside awaits before the market reaches a more significant bottom. And while intermediate targets would only be guesswork at this point, the ultimate downside potential is considerable. Trade safe.

SPX and Gold: Song Remains the Same

2013-04-17T03:16:00.004-10:00

In the last update we looked at some of the reasons why lower lows are likely to follow Monday's low, while I noted that a snap-back rally could begin immediately. The market spent yesterday's session in rally mode, and closed near the high of the day, which fit the pattern -- so as yet I have no reason to alter my thesis that lower lows await.

It's currently unclear to me if yesterday's high will mark all of the (assumed) corrective rally, or if the rally will turn into a two-legged ABC -- in either case, I expect SPX to close in the red today. There's no material change in the outlook for the S&P 500, so my best-guess projected path remains exactly the same as it was yesterday (though the price action did allow me to delete the rising blue line which was previously drawn in the place where Tuesday's rally has since occurred).

While I expect lower lows, we can't ignore the fact that SPX and the Dow Jones Industrials (INDU) both remain in technical uptrends. A breakdown of the rising green trend line on the chart below is the next step for bears to gain confidence.

Incidentally, for those who still doubt the value of technical analysis, I would like to note that I charted the blue channel (below) a pretty long time ago -- yet the rally was rejected immediately upon running into the upper boundary of that "imaginary" channel, and the same occurred in reverse when it fell back to the rising green trend line. The next break of either will be telling.

Finally, given the recent volatility in gold, it's time to update the long-term chart. Once again, simple trend lines worked their magic, as the recent decline found support at the rising blue trend line. Given the wave structure, I would be surprised if gold does not ultimately break through that support level. I've outlined next support and some potential targets -- trade above key resistance is required for me to re-examine that outlook. Given the numerous failed retests of the all-time high and the subsequent breakdown of the topping pattern, it's hard to view the last couple years as anything other than a significant top.

In conclusion, I continue to believe a more extended correction for equities has finally begun. The first important upside level for SPX remains the same as yesterday, at 1580 +/-. Trade safe.

The Market May Be Undergoing a Fundamental Bearish Shift

2013-04-16T03:06:00.002-10:00

As long-time readers know, I have been primarily bullish on equities since November 2012 -- but for the first time since then, I truly have no desire to "buy the dip" for anything longer than a short-term trade. There are some disturbing early warning signs that the market may be undergoing a fundamental change of character.

I don't presently know how long this will last, but when I see signals like this from the market, I don't screw around and risk gambling away my financial future. One of my trading mottos is "when in doubt, get out." I have often likened trading to poker -- and one of the mathematical concepts required to become a winning poker player is an understanding of "pot odds," which is the ratio of the current pot to the cost of calling a bet. Simply put: if the pot is $100, and calling costs $10, then the pot odds are 10:1. Trading is all about odds as well.

While I'm simplifying this analogy by overlooking concepts such as implied odds, etc., the next mathematical requirement in poker is to calculate the odds your hand has of actually winning the pot. Then one compares those odds against the pot odds, and folds or calls (or raises) accordingly. For example, if your hand will win 1 in 5 times, and the pot odds are 10:1, then calling a bet is a winning play over the long term. But if your hand will only win 1 in 20 times while the pot odds are still 10:1, then the correct play is to fold if someone bets, and wait to try again next round. (Incidentally, this is also why you want to bet aggressively and don't want to "check" a winning hand; if you don’t bet, you are giving your opponents infinite odds to draw to their long-shots for free against you.)

In order to become a winning poker player over the long-term, one doesn't gamble, but plays each hand with discipline and according to the odds. Oftentimes, inexperienced players will stay in the game despite the odds stacked against them -- usually this is because they either don't understand the math, or because they like "being in the action" and lack discipline. Sometimes, in spite of their poor play, they'll win in the end -- odds are only odds after all, so even bad odds are mathematically required to win occasionally.

Unfortunately, the thrill and reward of these occasional wins encourages bad players to continue playing incorrectly, and -- worse -- often leads them to conclude that their lack of discipline was actually pure, unadulterated brilliance. The problem is, over the long haul players who have no discipline will, without exception, eventually end up 100% dead broke -- and that is a mathematical certainty. I view trading in much the same light, and traders who lack discipline and overplay their weak hands will certainly end up broke as well.

All that to say, while the market always reserves the right to prove me wrong and go on to new highs immediately, I feel the odds are very good that there are ultimately lower lows still ahead. Note that a near-term reaction rally could begin as early as today's session, but unless the market does something to shift the ball back to the bulls, given what I see today, I would expect the next rally will be sold.  Since the best we can do is attempt to play the odds correctly, here are a few statistics and observations to consider:

1. The Volatility Index (VIX) rose more than 30% in the last two sessions.  Nearly 90% of the time this has happened previously in the past 20+ years, the market has subsequently gone on to make lower lows before making higher highs. Interestingly, the ferocity of the recent VIX rally also argues for a near-term snap back rally in equities, beginning as early as today's session.

2. Precious metals have been absolutely slaughtered lately (I'll work up some PM charts over the next few updates), which means the market is at least considering the thought of a deflationary environment.  Further, the extreme volatility in PM's can often be a warning signal that things are about to become more volatile for equities as well.

3. The momentum lows we saw yesterday are rarely reached in exact tandem with the actual price low, and generally we'd expect to see a bullish divergence before price finds a meaningful bottom. Additionally, the up-volume to down volume ratio was high enough that we would expect to see further downside and new lows in the reasonably near future.

Let's start off with the S&P 500 (SPX) chart. I've outlined my best-guess for a market path that presently appears reasonable to my eye, but do please note that predicting an exact path with the market in this position is exceedingly difficult, so don't be surprised if it deviates.

As I mentioned yesterday, there is currently the potential of five complete waves up from the November lows, which usually means we can expect see a correction begin.

(If you're new to Elliott Wave Theory, I have written a primer article on the subject.)

I spent several hours working with the Philadelphia Bank Index (BKX) last night, since BKX has been a great leading indicator. The chart below outlines one of the remaining bear options for the long-term: If BKX is forming a massive triangle, it will ultimately go on to new lows beneath the 2009 low -- though it would first grind around sideways/down (relative to the size of the pattern) over the intermediate term. The chart below outlines the next important long-term levels.

BKX is one of the markets I've been keeping a very close eye on for several months. A few weeks ago, I made reference to the possibility that a number of markets may be completing extended fifth wave rallies, and BKX was one of the markets I had in mind during that discussion. I have never been satisfied with the summer-2012 rally as a complete five-wave structure, and the decline into November also did not overlap the potential red wave (i) peak, which keeps the extended fifth wave viable. Though it's too early to say with certainty, the chart below does outline some signals and price levels.

In conclusion, it's still a bit early to call an intermediate top, but there are numerous warning signals indicating that the "pot odds" seem to be shifting into the bears' favor. Accordingly, I think bulls will want to stay exceptionally cautious and nimble up here, and may want to consider standing aside entirely for the time being. In the next few updates, we'll also take a closer look at precious metals. Trade safe.

SPX Finally Connects 2000, 2007, and 2013

2013-04-15T02:30:00.001-10:00

A lot can happen in a week. As some of you know, I have been dealing with a family crisis recently, so I'd like to thank those of you who continue to offer your kind words and support.

A lot has happened in the market as well -- the S&P 500 (SPX) fell one point shy of my first downside target zone, then reversed strongly and went on to reach a new all-time high. Interestingly, on Thursday, SPX pinged the trend line which connects the 2000 and 2007 highs, then reversed (as seen, zoomed in, on the chart below). This is basically the last remaining horizontal resistance level, but it is a "doozy" as they say.

The market has done its best to make us forget the potential of a long-term triple-top by ramming into it at high speed and looking invincible -- ironically, sometimes this means we should be on higher alert for a reversal. I genuinely don't have a strong opinion as to what will happen next right here, since the market is basically at resistance but still above support -- but I feel neither side can afford complacency at current price levels.

There are a couple of signals in the chart below which bears may find encouraging: Note the Bollinger band indicator in the lower panel. These types of extreme readings are often found in the vicinity of tops. Daily RSI (top panel) is also continuing to throw off bearish divergences.

The 10-minute chart notes some updated trend lines and support/resistance levels.

In conclusion, the market has finally reached the very long-term trend line which finds its beginning in the same year the country was trying to figure out what the heck a "dimpled chad" was. I'm not going to make any grand sweeping predictions about this being the end of the line for the rally, because I simply don't know -- but this is a long-term resistance zone, and the potential is there for a complete five-wave rally. There are also a couple of indicator signals (shown in the first chart) which are often bearish. This is one of those markets where bears have everything going for them but the actual price action, which has continued to run higher. Some people refer to that as a bull market.

Presently, there are no new targets, and this is more of a watch and wait position at the moment -- over the next few updates, the market will likely allow me to calculate some new targets. Additionally, we'll take a closer look at some of the long-term potentials and the signals to watch along the way. In the meantime, trade safe.

Publication Note

2013-04-08T23:43:00.000-10:00

Unfortunately, I am dealing with a major family emergency right now, which has temporarily impacted the publication schedule. I'm hoping this crisis will be resolved by Wednesday, but I'm uncertain if that will actually be the case.

Thanks for your understanding... and thanks again to those of you who show your support openly and generously -- I can't tell you how much that means to me at times like this. You are surely the best group readers on the planet! <3

Good luck out there, and trade safe.

Why Do Some in the TV Media Still Insist "You Can't Time the Market"?

2013-04-05T03:04:00.003-10:00

The ending diagonal we started tracking in late March completed at 1573.66, about one-third of a point shy of the target zone. On April 3, I wrote:

It is worth noting that yesterday's action did fulfill the minimum expectations for this pattern, complete with an overthrow of the upper trend line -- so while one more new high would look better, it is not required.

I was leaning toward the idea that there could still be one final thrust up still in the cards, but it never came. It's rare that the market follows a projection that tightly, which is why most traders scale in and out of positions, as opposed to trying to time every move to the exact penny. Considering that many of the TV talking heads will tell you that "you can't time the market" at all, I think hitting a turn within a third of a point on a 7-point target zone probably argues otherwise -- especially considering that we hit the two prior turns leading into that within a couple of points as well.

Before we get overly excited about the bearish prospects, we do have to recognize the reality that, presently anyway, only the short-term trend is pointed downward. The intermediate and long-term trends are still pointed upwards -- for the moment.

In the last update, I outlined my expectations for the intermediate-term, so I won't repeat that here. For the moment, we'll focus on the more near-term and see how things develop. The first chart is the S&P 500 (SPX) 2-minute chart, and details my preferred interpretation of the wave structure, along with my first two targets. Keep in mind that if my wave count is correct, we're now entering the small third wave within a larger third wave -- which often means a relentless down-trend for the near-term. 1549 will become key short-term resistance if this plays out. (Incidentally, I ran out of space on this chart...)

The hourly chart notes an intermediate bullish alternate count, which still expects lower prices for the short-term. It also highlights the first target zone, and notes the second target zone in passing. If it becomes appropriate, we'll discuss those options in more detail sometime over the next few updates, after the market reveals a bit more of the near-term wave structure.

The 10-minute chart contains additional detail:

In conclusion, the preferred wave count of an ending diagonal was, in fact, correct and the pattern completed on April 2. I'm hesitant to get too far ahead of the market just yet, but have outlined the next near-term target zones. In the next update, we'll build from there. Trade safe.

The Pattern Nears Resolution as SPX Flirts with Its All-Time High

2013-04-03T03:18:00.001-10:00

The preferred wave count continues to track extremely well and, as they say, "worked like a charm" again yesterday. In this update I'll discuss the levels I'm watching for the short-term, and I'll also provide a bit more detail on my preferred intermediate outlook.

I remain bullish on the long-term, not because I feel the fundamentals support it, but because the central banks are still flooding the world with liquidity. And as long as that continues, it will drive up asset prices. The Fed seems to be trying with all its might to blow the biggest bubble it possibly can. Somewhere down the road, I suspect this will all end badly (just as the last two bubbles have) and Bernanke will end up with a huge, unruly wad of US Mint-flavored bubble gum tangled up in his beard. Then it will be time to break out the scissors. In the meantime, though, the bubble is what it is -- and there seems to be no reason to try and fight it at the moment.

Let's start with the short-term charts and build from there. The pattern I've been anticipating and tracking is called an ending diagonal, and so far it's done the "diagonal" part of the pattern perfectly. Whether it will do the "ending" portion equally as well is likely to be revealed in the next session or two.

It is worth noting that yesterday's action did fulfill the minimum expectations for this pattern, complete with an overthrow of the upper trend line -- so while one more new high would look better, it is not required. The key upside level to call this pattern into question remains 1582.82. I have mentioned this next caveat in the past, but not recently: when patterns such as this appear, if they turn out not to be ending patterns, then they are usually compression patterns which launch the market higher. It's rare that they're anything in-between, so we should keep that in mind if the market sustains trade above 1583. That's the caveat out of the way -- but because of the position of this wave within the larger structure, it is more likely that this is indeed an ending pattern.

To the downside, trade below 1558 would suggest wave v of 5 is complete -- or that the pattern was morphing into something entirely unexpected.

The hourly chart discusses the targets if 1582.82 is claimed. Ironically, the only thing bothering me about the pattern is that it's tracked so incredibly well. Whenever the market tracks this perfectly, I start suspecting that it's getting ready for a fake-out -- nevertheless, this pattern provides a clear trade setup that's hard to ignore.

From an intermediate standpoint, the risk/reward is solid. If the pattern completes cleanly, there's potential for a fair amount of downside. Don't forget to keep the more bullish alternate count in mind when looking at the chart below, as I have not detailed it here.

In conclusion, the market has so far provided a clean pattern and given us clear levels to watch. This is about as good as it gets -- all that's left now is for the market to perform or invalidate. Trade safe.

Make-or-Break Day for the Near-Term Projections

2013-04-02T02:57:00.000-10:00

Yesterday was a make-or-break session for the preferred S&P 500 (SPX) wave count of an ending diagonal, and today offers similar potential.  Heading into Monday's session, wave iii had a short-term invalidation level of 1572.56. The market not only reversed about two points shy of the stop, but then moved down to perfectly break the trend line which "needed to be broken." Thus this wave count gains a bit of confidence and continues forward. The 10-minute chart below is almost unchanged since 3/28, as the market has tracked the projection exceptionally well since. For short-term trades, this has provided a few excellent low-risk entries, with clear stop levels along the way.

It can be very tempting to get cocky after the market follows a projected path this well -- but these are exactly the times to be cautious as a trader. I can't tell you how many nights I've scalped a string of eight or more consecutive wins, only to grow too big for my britches and give back half my night's profit on one bad trade.

Just as life does, the market has a way of quickly humbling the proud; so moderation and discipline become the keys to lasting success. So often, after we achieve success, we become proud and careless -- but in so doing, we forsake the very qualities which brought us success in the first place. Failure is bound to be the result.  At times we seem unable to recognize that we are rising and falling on our own endlessly repeating inner cycles: We fail, so we decide to buckle down and work harder; then we work harder, which allows us to achieve success; then, after we achieve success, we become proud and careless again -- so we lose our hard-earned success only to find ourselves right back where we started. Rinse and repeat.  I've known a lot of traders (and beyond), myself included, who have fallen into this trap at times.

I believe one key to trading is to learn to act in accordance with the times, and to recognize that sometimes doing nothing is actually the most productive thing we can do. Trying to plant crops in frozen ground only wastes precious resources -- so avoid the trap of needing to "constantly be part of the action."  We can gain a great deal of understanding by learning to recognize not only the cycles of the market, but also the cycles of our own tendencies. And many days, the opponent we're trying to overcome isn't outside of us at all. I've said it before: I believe our biggest opponent in trading, and the hardest one to beat, is ourselves.

We currently have a pattern that appears reasonably clear -- and we also have some key levels to watch which will tell us where things become less clear.

It's now anticipated that SPX will form another thrust up, to a new high. Ideally, I would like to see this rally break the upper red channel boundary (but this is not required), then reverse back into it and rapidly retrace toward 1540. We are again presented with a very clear stop level for near-term trades, since the diagonal as labeled is invalidated above 1582.82.

The hourly chart notes the targets of the more bullish alternate count if 1582.82 is broken. This level is key because wave v in a contracting diagonal cannot exceed the length of wave iii. Every now and then, diagonals are transposed slightly from the most obvious count -- in other words, the wave which currently appears to be wave iii could conceivably be an extension of wave i (a diagonal is "allowed" to have a wave which is a double zigzag; a double zigzag is two connected ABC's). That presently appears markedly less likely, but it is not entirely outside the realm of possibilities.

In conclusion, the ending diagonal pattern has tracked quite well so far, now it remains to be seen if it will conclude with equal ease, or morph into something more bullish. Trade safe.

Intermediate Indicator on the Cusp of a Sell Signal

2013-04-01T03:18:00.002-10:00

In my opinion, for the last couple weeks, this market has been less about clinging doggedly to set-in-stone predictions, and more about figuring out the correct "if/then" equations and then trading accordingly. I believe it remains that way heading into this week.

Early in Thursday's session, the S&P 500 (SPX) edged up over the prior high, which invalidated the most immediately bearish short-term wave count (the "if" part of the equation), and moved into the next target zone of 1568-1571 (the "then" portion). This places the next if/then equation on the table, which I'll discuss momentarily. The near-term ending diagonal wave count has gained favor, while the intermediate wave count remains unchanged.

The intermediate wave count continues to believe the market is finally approaching a more meaningful correction, though I presently believe this correction will be a buy opportunity, and I remain bullish on the longer time frames. I still find this market environment unusual, however, so while I think it's important to remain cognizant of the long-term potentials, I don't necessarily think it's wise to get too far ahead of the market -- so we're just going to focus on the near-term and intermediate term right now.

Before examining the wave counts, I'd first like to offer the chart below as additional supporting evidence for the intermediate wave count, and my corresponding thesis that a larger correction is drawing near. This indicator has not yet given a complete sell signal -- however, we can see the full sell signals usually come after a correction has begun, so it's worth paying attention when the indicator is close to triggering, as it is now.

Looking at the intermediate-term, the preferred outlook is still that the rally is completing the fifth and final wave for this leg, and that a larger correction will follow. If you're new to Elliott Wave Theory, the underlying concept is that the market is fractal in nature, and when a five wave structure has completed, a correction is then due. (I've written a more detailed primer article on the subject, which can be found here.)

Something I like about the current charts is that the market has declared some key levels for us to watch, and those levels are providing our if/then equations. When I interpret the market using Elliott Wave, I take a detailed look at the current pattern and try to anticipate the fractal that's forming. If I can correctly anticipate the fractal, then I can correctly anticipate the market's next move. It's never cut-and-dried, though, because some fractals look identical in the early stages, which is one reason I often bring other forms of analysis to bear. However, the advantage I feel Elliott Wave provides during such times is that there are clear rules which allow us to invalidate certain fractals. While this doesn't always tell us exactly what the fractal is, it still gives us probabilities to work with -- and an invalidation level can most certainly tell us what the fractal is not, which can be very valuable information.

Based on the price action of the last few weeks, I'm inclined to believe the fractal forming in the chart below is a pattern called an "ending diagonal." In an ending diagonal, the market forms five waves (labeled i-ii-iii-iv-v below) -- and each of those five waves breaks down into three wave structures. There are two rules for contracting ending diagonals which would allow us to invalidate this pattern and favor the alternate count. In a contracting diagonal, wave iii must be shorter than wave i, but must be longer than wave v. This is why 1572.56 can invalidate this pattern -- crossing that price point immediately would make wave iii longer than i.

Ending diagonals make great topping patterns, because they are brutally choppy and keep breaking out just a little bit, only to reverse lower each time, and then reverse again to head back up. Short-term traders become conditioned to believing the market will come back up each time -- and then, finally, it doesn't come back.

Let's start with the more detailed 10-minute chart, and then examine the hourly for context.

On the hourly chart, we can see the rally appears close to completing the fifth wave of the fractal. Once this fractal completes, the minimum expectation for a correction would be a trip back into the 1485-1525 zone. That's a very broad target range, but we'll be able to narrow it considerably if and when the correction actually begins.

In conclusion, I'm not 100% certain that the near-term pattern is an ending diagonal, but the price action so far has fit. The best thing is that we have some clear levels to watch -- which, from a trading standpoint, actually makes the pattern productive to be aware of whether it plays out perfectly or not. Trade safe.

SPX Update: Near-Term Starting to Clarify Again

2013-03-28T03:21:00.001-10:00

The market has continued to grind within the noise zone -- but there is now the potential of a near-term problem developing for bears. There have been several attempts at the 1561-1564 zone, and the more times support or resistance is tested, the weaker it becomes. In the case of resistance, eventually the overhead supply of sell orders is exhausted -- and once the balance shifts to where there are more buyers than sellers, the law of supply and demand leaves the market no choice but to head higher... at least until it runs into a new layer of supply.

This is the reason there are no officially-recognized "quadruple" top or bottom patterns in classic technical analysis (to my knowledge, this pattern is only recognized in P&F charting). Shorting the first retest can work, shorting the second retest can work -- but shorting the third retest is usually a losing play for more than a quick trade, because odds are good that the market has already chewed through most of the sellers at that price level.

In other words, bears are basically facing their "final stand" at these levels. Another thrust back up here, and the sellers will likely become overwhelmed, at least for the near-term.

In regards to the intermediate-term, there has been no change in my outlook and, unless there is a material change in the market's behavior going forward, I continue to feel this is the final leg of the rally before a larger correction. The challenge of the past few sessions has been in trying to determine how we'd get there, and the market really hadn't been giving me too much to work with in terms of clarity.

Things are finally starting to clarify, though, and for this update I have a number of potential targets, as well as some key levels which would suggest progressively higher price targets if crossed.

There's now one obvious pattern in the near-term charts, and this is the pattern many technicians seem to be watching; it's called an "ascending triangle." In classic technical analysis, this is a continuation pattern, and suggests a target of 1588-1590 if the market breaks out above the upper boundary.

While I can't be certain, I suspect that pattern may not play out as most are expecting. I'll explain the pattern first, then I'll explain what to watch for to determine if it's "working" or not. Of course, the first thing that needs to happen for this pattern to have any validity at all is the market needs to break 1565 -- if that fails to happen, then it's a moot point.

While the triangle is more obvious, I'm still inclined to favor the idea that a top is closer than this pattern suggests. There are two near-term options for bears here: the first is that the prior high holds and the market continues lower immediately. The second is a pattern I mentioned a few days ago, called an ending diagonal. If 1565 is broken, the diagonal will become my odds-on favorite, with the next target (for wave iii) being 1568-1571. If the market then goes on to break 1573 during wave iii (on the chart below), I will then be sold on the ascending triangle pattern discussed above and be inclined to favor a trip to 1580-1600. Unless that happens, though, I think the diagonal shown below (or the more immediately bearish count) is more probable.

The hourly chart notes a bit more detail on some key levels. The most immediately bearish count continues to remain on the table until the market reclaims the prior high.

(NOTE: There is a typo on this chart: 1572.76 should be 1572.56.)

In conclusion, while numerous possibilities remain viable as of this publication, the market has now clarified enough that we have some key near-term levels to watch -- and this should at least give us an edge in determining the market's next target of higher probability. Trade safe.

SPX Update: The Market Just Raised Its Noise Level

2013-03-26T03:19:00.000-10:00

Two words keep coming to mind as I study the charts right now: "inconclusive noise." I think it's vitally important as a trader (and probably as a person, too) to "know when you don't know." The near-term possibilities having suddenly spiraled into infinity, so it's going to be difficult to project the market's next move until it gives us a bit more info. If you're a new trader (or a new reader), please don't be discouraged by this; the market alternates between moments of clarity and moments of ambiguity, and it will clarify again soon enough.

I studied a number of markets yesterday, and while I'm not going to publish charts on every one of them, there are lots of conflicting signals out there. Some updates leave me feeling that I put in a whole lot of work for a very limited reward (for readers), and this is one of those. I'm inclined to give the bears a near-term edge, but my confidence is low at the moment.

I'm going to start off with the Dow Jones Industrials (INDU), since the rectangle pattern here has some fairly clear implications using classic technical analysis.

On the SPX 10-minute chart, I've outlined the two near-term bull and bear potentials which presently appear most reasonable, but I have not shown the most bullish of the near-term potentials. I'll outline that potential briefly here in the body of the article (and on the Russell 2000 chart in a moment): It is possible that the rally from 1538 to 1561 is wave i of 5, and the entire move since is a corrective second wave. That count suggests a target in the 1580-1600 zone and becomes an option above 1565, while it would be invalidated below 1538. The annotations explain the details of the other two counts.

On the hourly chart, I've moved a couple labels, but the conundrum remains the same as it's been. I continue to believe that wave 5 has either completed or will complete with one final leg, at which point we should see a larger turn.

I'd like to share one last chart which is presently throwing the near-term bear count into disarray -- and it's one of the reasons I'm not ready to declare a high level of confidence yet. The count shown here is fairly bullish for the near-term, and I have listed the key levels. Sustained trade above 954 would suggest a target of 965.

In conclusion, yesterday's market has left the wave counts inconclusive at multiple degrees. This is often the function of trading ranges. The market regularly alternates between moments of clarity and moments of noise -- right now we're still in the "noise zone," and we're simply going to have to be content to watch and wait for the time being. Trade safe.