I believe it was Yogi Berra who said, “It’s tough to make predictions, especially about the future.”
The market has now reached a point where it clearly does not want to telegraph its next move. There are times, when the larger trend is clearly defined, that the short-term wave structure isn’t an issue. This is not one of those times. The larger trend for the year is still down. The question remains: is the intermediate trend still up, or has it turned? Early indications favored a turn, and I continue to believe that the top is either in, or very close.
Usually when the intermediate trend becomes hazy, an examination into the shorter time-frames can reveal some answers. But after Monday’s action, a short-term examination reveals total mayhem in the charts. Since the November low, the market has range-raced repeatedly, and generally refused to provide any meaningful pattern.
The market appears undecided. It’s as if the market is saying to itself, “Hmm. Well, Europe seems okay for the moment; but it’s still a disaster over there. The economy doesn’t seem terrible; but it doesn’t seem too good either. The Fed seems clueless; but at least they’re not doing too much damage right now. Decisions, decisions!”
At this point, there are so many potentials, it is very hard to narrow the future down to one likely path. Despite that, I continue to favor the view that the next move is down. I favor this due to sentiment, and also because that’s what appeared most probable the last time the market looked semi-clear. I must admit that my faith in this view has been shaken somewhat at this stage, so I’ve assembled a battery of charts for you to examine as well.
The first chart I’d like to present is an old favorite indicator of mine, which I haven’t had occasion to use in a while. This indicator compares the volume on the Nasdaq as a ratio to volume on the New York Stock Exchange. When investors get into “risk on” mode, more money pours into the Nasdaq. As a result, the ratio is low near bottoms, where investors are behaving cautiously and putting less money into the “risky” Nasdaq; and high at tops, when investors are feeling invincible.
As you’ll see in the chart below, when this ratio hits 2.6 or higher, it’s an excellent indicator that a top is very close. My speculation as to why: near the top, it seems the last bit of capital is racing in to chase the long-shot, high risk stocks. Over the past 3 years, this indicator has nailed tops (within a day or two) 9 out of 10 times. Also worth noting, the current reading of 2.96 is an all-time historic high:
The above indicator presents a very good argument that the top of this recent retracement rally is pretty darn close. Add that to yesterday, when we looked at Rydex funds, which are also showing sentiment is extremely frothy.
The next chart is a simple support/resistance chart of the Dow. Sometimes when the counts become temporarily hazy, it’s best to rely on classical technical analysis. The chart is self-explanatory:
The next chart is the updated Apple chart. Apple continues to look like it wants to make new lows. The red line is the knockout for blue i as labeled on the chart. I am convinced the blue “1” (below the red “ii”) is an impulse wave, so I would expect if the alternate count unfolds, price should not exceed the red “ii” top.
Next up, the SPX chart, which has devolved into a confusing mess, along with most of the other indices. I am favoring the view that we will see a little more upside on Tuesday to complete wave (z), of a rare formation called a “triple zigzag.” I would expect a reversal soon if this view is correct.
The alternate view, in black, sees the double zigzag, labeled (w) (x) (y) as having completed wave (a). Yesterday completed wave (b), and wave (c) is in progress now. If (c) = (a), that would target roughly 1288 as the high for this move.
The NDX is in a similar position, with similar possible outcomes. The difference is the NDX seems to be completing wave c of an expanded flat, which would then complete (z) of the triple zigzag. (Is everyone thoroughly confused yet? With the charts this messy, this is the best I can do for explanations, short of writing a book. Sorry.)
Next, the Philadelphia Banking Index (BKX). The BKX is one of the few charts that looks semi-clear right now. Interestingly, the BKX also seems to indicate that this is a fourth wave correction, not a second wave. I have labeled it accordingly. When the November decline first occurred, my instinct was that we still needed a fourth wave to complete the wave down. Although I have the retracement on the prior charts (SPX and NDX) labeled as red wave (ii), there is still nothing to rule out the fourth wave option in any of the indices. Note that the blue i and ii on the BKX chart represent the subdivisions of the larger wave 5.
Assuming the market heads down in the near future, we should be able to determine whether it’s the start of wave (iii) down or the end of wave (i) down based on divergences in RSI and MACD. For the fifth wave, we would expect positive divergences to develop in these indicators as new price lows are made. If it’s a third wave, we would instead expect to see momentum increasing.
And finally, the bullish alternate count. This count continues to hang in there at 30% odds. I am not yet favoring the bullish outcome. For me to begin expecting a bullish outcome, the market is going to need to put together a stronger rally, with more impulsive looking waves than it has done so far. It’s certainly possible, and I’m not ruling it out — obviously. Ruling it out would be 0% odds. But I’m not favoring it until the market gives me more concrete reasons to do so.
The final wave up in this bullish count could end beneath the October highs, or run as high as SPX 1330 or so. In ending diagonals, the final wave is almost completely unpredictable.
Short term, the market really needs to show some more structure before we can conclusively eliminate some of these counts.
I’m taking a stand anyway, and continue to favor the view that the next short-term top is very close. My preferred view is that we’ll see a reversal begin at some point tomorrow; my first alternate is that we’ll run up very close to the October 27 high before reversing. However, at this moment, I’m far from certain of those conclusions, and they may well be proven wrong over the next several sessions. Personally, when the market becomes this indecipherable, I don’t try to front-run the move with my trades. I stay in cash until the market reveals its intentions more clearly. Trade safe.