SPX, NDX, XLE Updates: SPX 1000 Here We Come (Right Back Where We Started From)

I believe this initial crash wave could move a lot faster than most are expecting.

Before going further, let me first state that I continue to be quite bearish both long-term and short-term.  The question I’m trying to answer now is whether this wave will start off a bit “slow” from here and bounce around for a few days, or whether the markets will breakdown extremely quickly.  I believe this leg will turn into a waterfall decline at some point; I’m just trying to determine whether that point is “now” or not.

I’m really just splitting hairs, because the preliminary medium-term target is 1000-1050 (SPX) under my preferred count (possibly as low as 800), no matter how we get there.

But the short term wave structure leaves a bit to interpretation, so I have prepared two short term counts: one is simply very bearish, the other suggests a waterfall almost immediately.  I’ll let readers decide which makes more sense to them.  After studying more charts than you can shake a stick at (believe me, I tried, and the stick wasn’t having it), I’m favoring the waterfall short term count by a slim 55% margin.  I should stress that it’s far from clear-cut, and I’ve gone back and forth on this half a dozen times.  This is one of those cases when another puzzle piece or two from the market would be really helpful.

Again, note that the larger count remains the same for both charts, this is just an attempt to nit-pick the tiniest waves.

The first count I’d like to present is the conservative count.  This is probably the one being favored by most technicians, because it has the market doing what “typical” markets do; namely, retesting the breakdown point.  I have used the S&P 500 to illustrate this count:

There are a couple issues I have with the blue “conservative” count.  The first is that the two corrections called out in the chart annotation are both sharp corrections; Elliott guidelines dictate that the corrections between second and fourth waves should alternate: from flat to sharp, or vice versa.  The fact that they are both sharps argues that they are both second waves.  Several markets are also suggesting that Friday was yet another second wave.  We may not even have seen an internal third wave on this leg yet; and if that’s the case, the decline will be brutal. 

Assuming my preferred count is correct, the second issue is that this is not a “typical” market.  This is a nested third wave decline, within a much larger third wave decline.  Expected bounces will probably go MIA (turning into nothing more than sideways grinds) and oversold indicators will become severely stretched to the downside.  As my friend Lee Adler likes to say, “There’s no such thing as support in a bear market.”

The second chart shows the more aggressive count, using the Energy Sector ETF (symbol: XLE).  This is the resolution I’m favoring, but the next couple sessions should shed some light on which resolution is unfolding.  It’s also possible that this sector may decline faster than the SPX, under either short term count.

One thing going against the aggressive immediate decline is Thanksgiving week.  The seasonality this week is traditionally quite bullish.

The one thing I’m uncertain of, in both cases, is whether the current corrective wave, which started on Thursday, is complete yet or not.  I suspect it is, in which case we may see a gap-down open on Monday — but I’m genuinely not sure.  Any further upside on Monday is probably a gift to anyone who takes advantage of it.  If we did get some form of rally, I would expect the 1236 +/- zone to contain it.

I’d also like to share another chart which supports the big picture preferred count.  This is a weekly chart of the SPX, and uses two indicators to confirm the market’s bearish position.  The top panel shows stocks which are trading above their 200 dma; the bottom panel shows weekly MACD.  The chart explains the rest:

The chart above references QE1/QE2 “Party Time,” and shows where the Fed’s printing press artificially supported the market.  Since QE3 has been a hot topic lately, I want to share another chart, this one from my friend Lee Adler at the Wall Street Examiner.  One of the many helpful pieces of info that Lee tracks is Fed cash flow to the Primary Dealers (among many other things; this chart is from his 89 page report).  I want to share this to emphasize just how much liquidity the Fed had to pump into the system to support the two-year rally off the March ’09 lows.  It’s somewhat shocking when seen graphically, and serves to underscore how little “fundamental” support the rally actually had. 

Below are Lee’s comments (and chart) regarding current conditions:

Fed cash to Primary Dealers remains flat. The slow growth, or no growth, of cash injections via the Primary Dealer route is as opposed to during QE1 and QE2 when the Fed was adding massive amounts of liquidity by purchasing large amounts of various securities, mostly Treasuries, from the PDs. The MBS purchases will begin to settle within the next couple of weeks. That should give the line a minor uptilt, which based on current conditions should not be enough to keep stocks in an uptrend without a lot of help from other inputs.