The Wall Street Examiner » Bulls

SPX Update: Key Overlap at 1292 Leaves the Bulls Feeling "Facebooked"

Pretzel Logic — Mon, 21 May 2012 09:52:00 +0000

Before I get into the update:

Please be aware that the real-time intraday and after-hours trading discussion section has moved.

We're in the process of transitioning to a new board, and while it's still a work in progress (I started this project about 3 months ago) -- it had to happen sometime.

If you haven't checked out the new board, feel free to join in the discussion there, although all new members must be approved by yours truly (for guidelines/requirements to join, please see this thread). I'm really working hard to maintain a pleasant and collegial atmosphere, and a much higher level of security appears to be the only way to accomplish that. Thanks for understanding.

The board itself can be found here: http://deepwaveanalytics.com/forums/ though you can also simply navigate out of the thread I posted above -- it's da same place.

The daily market updates will continue to be posted here (for the time being -- there's another section of the new website that's still under construction, and eventually when I can find another seventeen hundred hours of "free" time, I'll finish the rest of the site and move the updates too). But at present, only the real-time trading discussions have been moved.

We now return to your regularly scheduled update.

Market Update:

While I managed to get a great deal accomplished on the new site, apparently the stock market is still out there, lurking. I checked my account and saw that the futures are, indeed, still trading. Have they no decency? Since I've only managed to get about 4 hours of sleep, I'm going to keep this relatively brief, though I still put together a number of charts. (EDIT: At least, that was my intention... fail!)

Friday was a smashing success, as the market opened higher and appeared ready to rally, but instead quickly collapsed back into the preferred count's target zone.

But the big news is that a key overlap occurred on Friday, as the market overlapped the October high of 1292.66, thereby ruling out the ultra-bullish count that the October high was Wave 1 of a new bull market wave.

Regular readers know it's been my opinion all along that this rally was just an extended correction in an ongoing bear market, and Friday's action has gone a long way toward vindicating my long-term outlook. The market is now closing in on retracing almost all the gains of 2012's "monster bull market."

Considering that this came on the back of the much-anticipated Facebook IPO, the outcome of this situation has left me with the urge to coin a new term:

Facebooked: [feys bookd] verb Facebooking noun Facebooker
To frustrate, trick, and deprive of something expected:
"Dude, your boss totally Facebooked you out of that promotion!"
Synonyms - swindled, tricked, cheated, bilked, screwed

Without a doubt, the bulls definitely got Facebooked on Friday.

The first chart we'll examine is whichever one I upload first. Let's see... oh yeah, this is a good one. It's the SPX monthly chart, and shows how the market has now broken down through several solid support levels. For some time, I've been talking about 1290-1310 as a level which I believe is critical to the bull case, and the market's there now. Let's see if the bulls can get anything going beyond a quick bounce.

Bears should stay cautious, because if the bulls are going to manage some type of solid counter attack, this is the level from which they should try.

Moving onto whichever chart I happen to upload next, we have... support and resistance! The market has further broken down through a "theoretical' channel drawn by connecting the October/April highs and adding a parallel copy of the line at the November lows. This breakdown is not a particularly bullish sign, and the bulls need to recover this channel quickly.

If all the market can manage here is a bounce back to the lower channel boundary before turning back down, that would be quite bearish. This channel break is another potential sign which seem to verify my preferred outlook of an intermediate trend change.

Next up we have the intermediate targets, which have tracked nicely so far. My first target was the low 1300's, and that's been reached. The next target appears to be 1240-1260. This outlook would need to be re-examined if the bulls can solidly reclaim the 1365-75 area.

Next up, I took a crack at deciphering the 5-minute charts, but it's a bit fuzzy. These types of declines are similar to parabolic rises, in that the waves become so compacted that they're quite difficult to sort out. At times like this, it's often better to focus on the intermediate projections and the larger key levels (such as 1337, outlined below).

The current expectation is that, regardless of which wave degree this rally is, new lows will ultimately follow.

The chart below 2nd guesses the count I published on Friday, which expected blue (3) was nearing completion, and is slighly more bearish than that count. As of the time of this writing, ES (the E-mini S&P futures contract) is up about 10 points, but I never give that too much weight in my analysis. You'll recall that the futures were up 7 points when I published on Friday and everyone was excited about the coming Facebooking, yet the market still reversed back down and into the target zone.

I'm sure some of my readers were around for the 2008 crash. In 2008, I was trading ES, but also holding overnight SPX put positions in anticipation of the crash -- and I recall several days where it looked like some type of bottom would be in (based on overnight ES action), and then the cash market would open and tank. ES traders tend to be much more short-term oriented and technical, and focussed on things like "due" oversold technical bounces, which become self-fulfilling prophecies to a degree. Cash market traders tend to consist of more "mom and pop" investors who are ready to call their broker first thing in the morning and say, "I can't stand this anymore, you blasted Facebooker -- get me out NOW!"

So we shall see who wins Monday's battle. I consider this count at least somewhat speculative, and believe that it's crucial to pay attention to the market's behavior near the thrend channels and resistance levels to get a feel as to whether it holds any water or not. I will outline some of the key short-term levels in a moment.

For contrast, below is Friday's preferred count updated with the current price action. We're in one of those zones where we need to see another larger degree wave to really sort out the counts with higher confidence -- as I said, when the minute waves become this compacted, it's hard to sort out one very short-term option from another, so we'll simply have to watch how the market behaves at key levels.

Over the very short-term, the first key horizontal hurdle for bulls is 1300; if they can hold that, then 1307-08 is the next hurdle... above that 1310, and then 1312-13. It's not enough to just break above one of these levels briefly, they need to maintain it. At this point, I assume it goes without saying that the trendchannels are critcal as well -- but I'm trying to learn not to "assume it goes without saying." So there ya have it. :)

I view the black alternate count shown below as low probability, but I've been surprised before. If a rally starts to grow legs here, then we might consider that count more seriously. However, Friday's low is one of those lows that you would normally expect to see retested at the minimum.

In conclusion, the expectation remains for further downside, and the expectation remains that we've seen an intermediate trend change. Over the short-term, there are a couple paths the market could take to get there, so on Monday it would be wise to pay attention to the key levels outlined. Trade safe.

Bulls Make Last Stand At Critical Major Support Level

Newswires — Sat, 19 May 2012 14:56:29 +0000

The market has fallen to a major support convergence at 1295 and is in a bottoming window time wise. That window stretches across the next two weeks. If the 1295 level breaks, ugly could get uglier. Here’s how much.

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Facebook IPO With ~10 Billion War Chest Could Just Buy Apple And Grow – Forbes

Newswires — Thu, 17 May 2012 16:53:51 +0000

Globe and Mail

Facebook IPO With ~10 Billion War Chest Could Just Buy Apple And Grow
Forbes
The Facebook IPO will deposit somewhere between six and 20 billion dollars into cash. Facebook could ignore all the naysayers (about how this IPO is the most foolish in the history of IPOs) and just buy a huge position in Apple and see its stock ...
Facebook prepares for $100bn share saleBBC News

What is the Business Model for 'New Media'?Techzone360
Okay, Here's Some Encouraging Inside Information For All You Facebook Bulls...San Francisco Chronicle
CNBC.com (blog) -The Deal Pipeline -TheStreet.com
all 87 news articles »

SPX, RUT, and VIX Updates: Market Placed on Crash Watch

Pretzel Logic — Thu, 17 May 2012 12:12:00 +0000

A person is placed on suicide watch when he or she displays certain self-destructive patterns and behaviors. Likewise, a market is placed on crash watch when it displays certain destructive patterns and behaviors. As I've been warning about for the past couple weeks, this market has displayed certain "red flag" behaviors, and the pattern is now becoming quite dangerous if not reversed quickly.

I should add that I use the term "crash" in the sense of "a strong, unrelenting decline that really messes up your portfolio." Some people envision 1929 when they hear the word -- and while that's always possible, the charts below tell the story of my current expectations.

All hope is not lost yet for the bulls, as they have one major line of defense remaining, which we'll discuss in a moment -- but first, an explanation of why the market is being placed on crash watch.

In Elliott Wave Theory, one of the things we pay attention to is called the "base channel." The majority of corrective moves remain (approximately) within this base channel, so when the market stays within the base channel, we can then expect the prior trend is more likely to resume. However, when the market falls out of the base channel, it is strongly suggestive that the move is no longer a correction, but a new trend.

There's also a name for the channel which is expected to follow the base channel -- it's called the "acceleration channel." Pretty self-explanatory.

The chart below shows the base channel in purple. Yesterday, I thought the bulls might make a run at recovering that channel, but we can see in this chart that they were unable to do so.

Unless the market finds support quickly and recovers the channel, the move has strong potential to accelerate lower.

So, while the market remains outside this channel, it is officially on crash watch. Long positions should be considered high risk as long as the market remains beneath the lower channel boundary, which now crosses roughly 1345.

As I talked about yesterday, the market has yet to see anything even approaching the level of strong selling that we'd expect to see at a meaningful low -- which means this strong-selling phase is most likely in the market's future.

Another indicator which agrees with the danger discussed above is the Volatility Index (VIX). VIX effectively measures the amount of fear present in the market, so when VIX goes up, it means the market is going down. A couple weeks ago, I talked about the fact that VIX had built a solid-looking base from which to launch a rally. It has now broken out of that base and, so far, successfully back-tested that base.

The Russell 2000 (RUT) has also lost key support. It is in a similar postion to SPX: unless it can rally back above the red trendline, it's in real danger.

The short-term picture has been extremely difficult to sort through, as the market has formed a number of somewhat unusual and unpredictable fractals filled with excessive overlap. At this stage, a small bounce would fit nicely into the picture, but certainly isn't required. The short-term pattern that's now formed is either:

1) An ending pattern (ending diagonal) which will find a near-term bottom quickly (not necessarily an intermediate bottom)
2) The prelude to a strong decline.

Unfortunately, the two patterns look almost identical at this phase in their development. Paying attention to how the market behaves near the upper trendlines should help provide clues. The blue "(2)?" annotation illustrates what could happen if this is an ending pattern.

The alternate count (in black) considers the potential of a decent bottom forming in the near future, possibly in the low 1300's (as discussed in a moment), which would allow the market to recover the base channel and thus be taken off crash watch. I currently consider this count to be the underdog.

Now let's discuss the bull defenses. The last major line of defense for the bulls comes in near the 1290-1310 zone. The two charts below illustrate this.

First is the S&P 500 monthly chart, which shows a series of support zones crossing just beneath the current price levels.

Next is an hourly chart, with a more detailed look at shorter-term support (and resistance). This chart also echoes the importance of the 1290-1310 zone. Bears should be alert to a bounce from this zone.

In conclusion, what happens in the next few sessions could be critical to the market's longer-term health. Since May 4, I've been stating that the market is in a dangerous position -- but in the last couple sessions, the market's position has grown exponentially more troublesome. If bulls want to have any hope of staving off a much deeper decline, they are going to need to stage a strong defense soon, and recover some key levels. My expectation remains that the intermediate trend has indeed changed to down, but, as always, the market is the final authority. Trade safe.

This Decline Isn’t a Selling Panic, It’s a Buying Strike

Pretzel Logic — Wed, 16 May 2012 11:56:00 +0000

A few signals are finally starting to reach oversold levels, but there's nothing to mark the extreme levels normally associated with more meaningful bottoms.

As I was looking at the charts earlier, particularly the down volume to up volume ratio (chart below), it struck me that the market hasn't seen any terribly strong selling yet. This seems to be more of a buying strike than a selling panic. Usually, we would expect to see some type of capitulation to mark a low that will last more than a few sessions, but we've so far seen nothing of the sort. As I stated yesterday:

What's interesting about this market is that it's managed to grind lower without reaching any extreme levels in bearish sentiment, or extreme oversold readings in certain key indicators such as the McClellan Oscillator (NYMO). As long as this situation persists, it is completely plausible for the decline to continue essentially unabated.

Below is the chart of the NYSE down volume to up volume ratio. Note how most meaningful lows are coincident with signficant selling. So far, this decline hasn't even reached the selling levels of the April 2012 low. This of course doesn't preclude short-term bounces, but it's hard to see an intermediate-term bottom forming yet.

This tells us that the real selling hasn't even hit this market; it appears the bulls are holding "long and strong" for the time being. I've said it before: markets don't need tons of sellers to drop -- all they need is a lack of buyers.

Perhaps ironically, this is when the market is the most dangerous. Few realize that crashes usually start when the market is already oversold, not when it's overbought. The numbers are telling us that the real sellers haven't stepped in yet -- so it appears the decline is currently being driven primarily by short-term traders and algo-bots.

This is a market ripe for an "event." If things continue to muddle along and the real sellers don't ever step in, then the market will most likely continue to move in a reasonably orderly manner. But if this market gets spooked by something while in this position, it could easily spark a panic wave.

As I've said for the past couple weeks, the market is still in dangerous waters.

Moving on to the projections, my intermediate term outlook has remained unchanged for the past couple weeks, and I've continued (and still continue) to expect lower prices for the bigger picture.

The question now is exactly how we'll get there. Up until a couple days ago, the short-term targets were being hit perfectly... then the charts got a bit messy, and have stayed that way. The chart below shows two potential short-term wave counts; one is immediately bearish, the other is short-term bullish. Both roads are assumed to lead to the same intermediate term outcome, as shown above.

I'm favoring the count shown in blue and red by a very slim margin. I have labeled the black count as the alternate, but there's really nothing in the charts to give me a reason to strongly favor one result over the other.

I should also mention that there is a third option not shown on the chart below, and that's for a repeat of the fractal shown between red ii and blue (2) (called an "expanded flat"). I'm sorry the short-term charts are so messy right now. Blame the market -- I don't make the charts, I just read 'em. Things should become clear again soon.

In conclusion, it will be interesting to see if the bulls can get anything going here, or if the buying strike will continue. As of this moment, there are some reasons to suspect a short-term bounce may be in the cards, but as yet still nothing to indicate a substantial bottom. Trade safe.

Oil slides 4%, tumbling below $100 after jobs data – Futures Movers – MarketWatch

Newswires — Fri, 04 May 2012 16:50:23 +0000

SAN FRANCISCO (MarketWatch) — Crude-oil futures on Friday fell to their lowest since mid-February as data showed that the U.S. economy created fewer jobs than expected in April, adding to worries about the health of the recovery.

Crude for June delivery CLM2 -4.82% dropped $4.32, or 4.2%, to $98.21 a barrel on the New York Mercantile Exchange. Weekly losses were hovering above 6%.

“The jobs data was the bulls’ last hope. Now the market realizes that with a slowing economy and weak demand we might drown in an ocean of supply,” said Phil Flynn, a vice president with PFGBest in Chicago.

via Oil slides 4%, tumbling below $100 after jobs data – Futures Movers – MarketWatch.

SPX and INDU Updates: Bulls Win Again

Pretzel Logic — Wed, 02 May 2012 12:48:00 +0000

Recently it seems that virtually everytime there's a choice between a bearish count and a bullish count, the bullish count wins. This was once again the case yesterday, as the bulls did what they needed to in order to knockout the bear count (in the Dow, at least).

There now appears to be a complete five-wave form on multiple time frames, so it's likely that a correction is due at the minimum.

The bears will hold out hope that the recent highs will mark ALL OF wave (v) up, but given the track record of bearish vs. bullish counts, I'm going with the more bullish count as the preferred view, which would see the recent highs as marking wave (1) of (v), with more upside to come. We'll have to watch the decline carefully, and if it seems to be turning into an impulsive form and starts breaking some key trendlines, then we'll consider the more bearish option in greater detail.

The bullish Dow triangle count, shown on Sunday, appears to have played out to perfection. Below is the original chart, followed by the updated chart.

Again, since the rally has now completed five smaller waves up, there is always the possibility of a larger top in this position. Current expectation is that these five waves are only completing wave (1) up, but any trade beneath the E wave low would be a big red flag to bulls. Barring that, we should probably continue to give the benefit of the doubt to higher prices.

Below is the short-term SPX chart.

And the bigger picture SPX chart, with an initial target possibility. We'll narrow down targets after the assumed wave (2) bottoms.

On a bright note, yesterday's Euro/US dollar call was a big winner, as eur/usd dropped substantially. This is the one thing which is causing me to give some serious consideration to the more bearish alternate count -- the dollar appears to have put in a base and could be due for a lengthy rally. Now, dollar/equities correlations come and go -- however, a bullish dollar indicates that traders view QE3 as significantly lower probability. And no QE3 hope is bearish for equities.

In conclusion, we'll have to watch this next decline carefully for signs of an impulsive move. If that happens, the possibility of a fifth wave failure will loom large. But if we get a garden-variety scary (to bulls) a-b-c down, which is currently the expectation of the preferred count, then it becomes quite likely that the SPX is on its way into the mid to high 1400's. Trade safe.

SPX, COMPQ, Eur/USD Updates: Today Could be a Critical Day

Pretzel Logic — Tue, 01 May 2012 11:25:00 +0000

Today could be a key day toward gaining more confidence in one of the two main counts, because -- as those of you who own digital watches already know -- today is the first of May. The first of any month is frequently bullish, since there's often a big bag of fund money moving into the market.

If the bulls are able to show some strength today, it's probably time to start betting on the alternate count. Conversely, if the bears can keep control, then the preferred count will gain a bit of a confidence boost. There are two main reasons I remain in favor of the more bearish count, and I'll outline my reasoning in a moment.

Yesterday's decline appeared impulsive, meaning it appeared to complete a five-wave move. So there might be a small bounce, but if that was wave a or 1 down, it should be followed by more selling. A material break of 1394 should get the ball rolling.

Conversely, if bulls can take the market back above the recent 1406.64 print high, then the alternate count is probably unfolding. I'm inclined to favor the alternate if new highs are made today, because that would then mean the market was up 6 out of the last 7 days, which is often (not always, of course) indicitive of a more meaningful bottom. So if new highs occur, the favored odds shift to the bulls -- but currently the odds still remain with the bears.

As such, on the chart below, the blue count is still the preferred count, and suggests that the entirety of the recent rally is part of a corrective structure, which will be followed by new lows.

The alternate count would view the recent lows as a base from which a larger five-wave rally will unfold. As I said, I think tomorrow will go a long way toward adding confidence toward one view or the other.

One of the reasons I remain in favor of the rally being corrective is the Nasquack, which looks to have formed a clear five-wave decline. That suggests that another five-wave decline will follow, though it does not preclude further sideways corrective action first.

The Nascrack also looks like a small impulse down, to be followed by new short-term lows after any bounce completes.

As a refresher, here's what the big picture looks like. There are already targets for each count, but no confirmation. As I've been stating, I continue to feel that the preferred count is slightly more probable.

Yesterday I mentioned that the Euro/US dollar currency pair is trading just beneath intermediate and long-term resistance levels. If it does break out here, then equities bears are probably going to need to come to terms with the alternate count. But again, odds here favor that it won't break out, since it's facing dual resistance -- and since it's formed a descending triangle, which leads to a bearish resolution 64% of the time.

A descending triangle indicates that sellers are coming back into -- and taking control of -- the market earlier and earlier, which is why the peaks become progressively lower. So sellers are getting stronger, while buying interest remains flat.

The Euro/Dollar chart is another reason I remain in favor of the more bearish equities count.

However, 64% odds are just that -- and there's no rule to guarantee that the 36% odds won't come to play on this particular occasion. In either case, today's action could go a long way toward telling us if the higher odds will take the intermediate-term prize, or if Uncle Ben's loaded dice will once again guarantee that bears lose to the house. Trade safe.

SPX, INDU, and Employment Updates: Looks Like the Shoe is on the Other Hand Now!

Pretzel Logic — Mon, 30 Apr 2012 03:57:00 +0000

No one can deny that many indicators look bullish right now. The bears are rapidly running out of real estate, and the Dow in particular is within a stone's throw of making new highs.

However, the burden of proof is now on the bulls. Anybody can run the market back and forth in a trading range, but until it breaks out, it's just range racing.

It's worth remembering that things looked fairly bearish a week ago, but bears failed to get it done when they needed to, as discussed on April 22:

I think one of the key trendlines right now is visible on a longer-term chart, and it's not too far below the current market. If that red trendline breaks, the market could start the next big leg down. If it doesn't break, the market should continue to bounce higher.

Bears were unable to break the red trendline, as shown below, which did indeed lead the market to bounce higher.

Now the market has reversed roles, and the onus is on the bulls. Things look fairly bullish (as they looked bearish recently), but the bulls now need to "prove it" by making new highs. Until they do, the danger of a bearish reversal can't be ignored.

The Dow chart illustrates the levels a little more clearly.

There are a few different ways to view the rally on this chart. The bearish view basically needs a top immediately. The bullish view suggests another new high, which would also invalidate the bear count. It seems reasonable to assume that if the bulls get a new high, then that will probably mark wave (1) of the larger (v) and at least a couple weeks of new highs would be forthcoming. It's also possible it would mark ALL of (v), but that seems less likely at the moment.

The SPX looks like it either has formed, or is very close to forming, at least a short-term top. It's completing either its C-wave or first wave up.

Zooming out a bit, the SPX counts look like this:

The advantage the bulls have, of course, is that they are continually backstopped by the Fed, whose goals of making the dollar worthless have, thus far, largely been successful. A worthless dollar makes everything else worth "more" in dollars: from stocks to precious metals, to oil/gas and food. So it seems like things are going up in value, when in actuality the dollar is simply going down in value.

In reality, it's a zero-sum game that only damages the American public with higher prices. The upside is that we all "feel better" about things while they're doing it.

However, I propose that the Fed should at least buy us all a nice dinner. And I'm talking about a good restaurant, no greasy spoon joints. I think this is only common courtesy, as the majority of us Americans appreciate being taken to a nice dinner before getting royally screwed.

Of note, the Fed recently announced a new motto, which I think is a sad, but excellent, example of Truth in Advertising:

The Federal Reserve: Saving the World Daily by Destroying America

I'll stop ranting about the Fed now (until next time!), but it's hard not to get depressed about this stuff from time to time.

Segueing back to the market: There is an interesting psychology that's developed among bulls and bears alike regarding the Fed. The bulls have been backstopped for so long, that if/when that safety net ever goes away -- or fails to work -- I wonder: how far will the market fall before the masses realize it's not working anymore?

And what will happen then, when they do realize it no longer works? I doubt it will be pretty. It will probably resemble a first grade fire drill, with everyone rushing about chaotically, failing to take their "place" in line, and most making a mad dash for the exits completely out of order.

It's hard to say with any certainty how far away that day is... it might be next week, it might be next year. But it does seem that, at some point, this fiat fiasco must end.

Along those lines, another interesting chart I want to call attention to the euro/dollar. Euro/dollar has some pretty serious intermediate and long-term resistance not too far overhead. Again, the onus here is on the bulls to break out.

I'd like to end this article with a couple charts and comments from my friend Lee Adler at the Wall Street Examiner. Lee's comments in italics below:

Improvement in first time unemployment claims is slowing. Actual, not seasonally manipulated data, including an adjustment for the usual weekly upward revision, shows that the year to year rate of change is on the cusp of a possible upside breakout, which would be good news for stock market bears if it happens.

Here's why it's mind blowing. I've plotted it below on an inverse scale with the S&P 500 overlaid.

That speaks for itself. As the improvement in claims has slowed, so have the gains in stock prices.

I found this data quite interesting, since it fits with both counts quite well. Sometimes we get so focussed on the short-term that it's easy to lose the big picture; the counts are really just nit-picking in the grand scheme of things. Assuming the SPX drops back below 1000 at some point in the future, what's the practical difference if the top was at 1422 or 1452? Trade safe.

Bears with a win,but bulls still fighting

The Daily Stool — Mon, 23 Apr 2012 20:01:04 +0000

Off the lows,but could go either way here.....