For several weeks, I’ve been talking about the Fib zone at 1376-1378 and how I felt that could act as a magnet for the rally. Yesterday, the SPX hit 1378.04 and reversed. Could it really have been that simple all along? There’s no way to know for sure yet, but the market has now satisfied the requirements of the preferred count’s 5th wave up — and it may finally be time for the larger correction bears have been waiting for since Santa was in town.
Even though the market only closed down a handful of points, yesterday had a lot of things going for it to give bears some hope:
1. Yesterday formed a bearish engulfing candle in SPX
2. Commodities took a beating.
3. The dollar formed a bullish engulfing candle.
4. The ECB “anticipation” is over. Sellers don’t have to be scared of it anymore.
There are a couple ways to view the very short term structure, but I’m sticking with the expanding ending diagonal as the preferred count. This count says the top is in, though it may not be the monster top bears are hoping for — I’ll discuss that big picture outlook in more detail in the final chart.
The wave structure at micro degree is a total mess, so it’s also possible this is part of a contracting ending diagonal with one more new high to come. Below is the alternate short term count. I like the preferred count better, for the reasons previously mentioned, but the only way to rule out the alternate is with trade beneath 1352.28. Normally, I’d use the wave (ii) bottom, but the structure’s messy enough that I’m allowing leeway for counting errors.
If the alternate short-term count below ends up playing out, it’s fairly common for wave (v) to overthrow the upper trendline in a false breakout. If that happens and it keeps rising, bears should get out of the way — but if that overthrow happens and the market then breaks back below that upper red trendline (whipsaws), then that’s an excellent place to get short with stops at the newest highs.
Now, if the alternate count shown above is invalidated, it does not mean with certainty that the preferred count is correct. These are not the only two options for this market. Because of that, I’m recommending that the support and resistance lines on the 10-minute chart below be used as better trade indicators. Yesterday, the market closed right on trendline support. Below that, the next important support comes in near the 1352-1355 level, then at 1337 below that. The blue line is overhead resistance, as are the recent highs.
Finally, the big picture count below. The preferred view is that wave (iii) is wrapping up, and the market is now entering a fourth wave correction, with another leg up still to come.
There are two big picture alternate views I’m considering. The first alternate (shown in gray on the chart below) is that the market is actually now in the process of forming a major intermediate top, and from here would head down to test or break the October lows. I would give that count maybe 40% odds vs. the preferred big picture view.
The second alternate (not shown — for the 2nd alternate, see the last chart in this article) is that the market is in the process of forming a very large ending diagonal (c) wave. In that 2nd alternate scenario, the market would bounce around significantly, but still remain above the October lows for some time.
Final confirmation of trend change occurs at 1267 SPX. So the market could conceivably fall 100 points, and still be in a larger uptrend. It’s also important for bears to note the three rising trend lines, which should theoretically act as support — although neither the blue nor black line have been tested recently.
In conclusion, there are reasonably good odds that we are on the cusp of at least a short-term trend change. This was the zone we’ve anticipated for most of the month, and the micro structures now seem to be confiming the larger wave count we’ve been watching since February 8. The supporting evidence across other markets is encouraging as well.
There are no clear invalidation levels right now, but the support zones are pretty clear. If you didn’t get short at the Fib 1376-78 target yesterday, then it’s usually advisable to wait for a retrace rally before shorting, since most half-way important tops are retested. Conversely, one could play off of the support and resistance zones, using them as entry and exit/stop loss points. Trade safe.