On Monday, the S&P 500 (SPX) made it into the 1320-1325 target zone I suggested on Friday and reversed; so hopefully the short term wave structures are finally starting to clear up again. There’s been no material change in the counts, however there’s now enough structure to target some key price markers for the bulls and bears.
The preferred count believes the rally completed in the target zone yesterday, so the bears’ line of defense is fairly obvious: the recent 1322 print high. If the market moves above 1322.28, then 1330 becomes the next target; and if that falls, then 1345-1350 becomes the target. The preferred and alternate counts are both reflected on the chart below.
The first alternate count would see yesterday as the completion of wave 3 of c, with 4 down and 5 up still to come — to rule out that possibility, the bears need to take control of 1296.46. If the downward movement (assuming we continue down after yesterday’s reversal) looks tepid and overlaps the same price territory repeatedly, then I would suspect that this alternate count is in play.
A number of markets ran into resistance yesterday, including the NYSE Composite (NYA) and Dow Jones Industrials (INDU), so this seems like a natural area for bulls to take some profits, and for the remaining sixteen bears to make a stand. Below is a daily chart of the INDU; the horizontal resistance faced by the INDU yesterday goes back to the 2007 top.
Yet another top indicator triggered on Monday, as the put/call ratio reversed its downtrend from near-historic lows. This reversal is (yet another) bearish signal. I’d like to quickly rehash the numerous other top indicators we’ve covered over the past couple weeks, counting backwards from the most recent:
1) VIX:TNX closed outside its lower Bollinger band, while COMPQ closed above its upper band.
2) Nasdaq volume as a ratio to NYSE volume reached unusual highs.
3) The NYA has formed (and continued) a negative price divergence with the SPX.
4) Daily RSI is in the upper “bear-market bounce, heavily over-bought” zone.
5) Daily MACD remains on the cusp of forming a bearish divergence.
6) My 12-year study on investor sentiment suggests that the current and severe lack of bearish investors is virtually always consistent with a top of some kind.
7) SPY has 4 unfilled gaps below the current market, all within the prior 100 trading days. History suggests that these gaps will be filled 90% of the time.
These are some of the statistics and indicators which have kept me bearish recently while the bulls ran amok. Granted, some of these indicators began triggering early, and have kept me from participating on the long side of the market since roughly the 1269 area. Even if an indicator works 90% of the time, there will always be that 10% of the time when it fails. I can live with that. I don’t need to trade every move, and when things start to look dicey, then it seems to me that being cautious and patient is not unreasonable. I’ll happily take the 90% odds all day long.
To reiterate another factor, I am virtually certain that QE3 will not be announced this time around. Currently, my “no QE3 today” record is flawless, and I’d like to keep it that way if possible. Given all the liquidity flowing into the U.S. from Europe, I would be absolutely shocked if the Fed decided to flood the system further. In fact, indications suggest that the Fed has quietly been taking steps to contract liquidity. So they’ll probably give more jaw-boning to the numerous “tools” they have available to continue ruling the world, but I strongly doubt they’ll take any significant action at this time.
In conclusion, with several rare, once-a-year (and some even less frequent) top indictors triggering recently, I have to continue to stay with the odds here. I believe there’s a very reasonable chance that the top is now in place. Ultimately, however, top calling is the toughest racket in trading, and this one has been less-than-kind to me — so until bears can break the rally channel and begin taking over some key price levels, conservative traders may want to give the uptrend the benefit of the doubt. Trade safe.