Yesterday performed perfectly in accordance with the expectations of the preferred count, which needed the market to show some upwards momentum. That’s exactly what we got, and it’s always tempting to be lulled into a sense of complacency when the market performs as anticipated. The good thing about the complacency approach is that it saves a ton of time — the problem with that approach is that the market usually eats complacent traders.
So I constantly re-evaluate the market and my expectations, and I never assume that the move will continue to perform as expected simply because it’s done so up to this point.
Along those lines: the market rallied convincingly yesterday, but has so far only produced three waves in the upward direction. The preferred count does expect it to go on to form a fourth and fifth wave, but we can never assume the market to be completely “deterministic” — so I’ve spent tonight actively looking for reasons why it might not perform as expected, and I’ll present some of those counter-arguments, along with some levels to watch, in this article.
In examining the charts, let’s start with the highest probability outcome. It appears that the market closed Monday within a small fourth wave correction (red iv, chart below), and it would not be unusual for this correction to last a bit longer into Tuesday, or even into Wednesday’s session.
The chart below roughly depicts what to expect if the standard impulse plays out. Please note that my charts are almost never intended to be time accurate — I simply work within the available space.
The two levels to watch which would provide warning that the impulse was going astray are noted on the chart: 1409 and 1401.
Next we’ll take a look at the “still impossible to predict” potential diagonal. Even here, and even if the market is only in one of the c-waves up for the diagonal, it would be unusual for the upwards movement to be complete yet. Barring a break of the 1409 level, the waves seem to point to 1427-1431 at the minimum.
In looking for alternate possiblilities, the NDX caught my eye. It’s failed to make a new high, and spent a good portion of yesterday bouncing along the underside of its most recent uptrend line. This behavior does leave open the possiblility of weakness in the near future. Levels to watch are noted on the chart.
Since SPX has only formed three-waves up, let’s consider how it could play out if this is not part of an impulse up, but is instead still part of an ongoing corrective wave. That option is shown below in more detail.
It’s important to note that both the impulse (first chart) and the correction shown above ultimately suggest that there should still be new highs — the question is more which path the market will take to get there.
I’d like to use that thought as a segue to discuss one of the challenges in this business. Regular readers know that for roughly a week, I’ve been predicting that the SPX would make new highs, which it finally did yesterday.
You really have no idea how difficult these calls can be sometimes. Especially now — with the market massively over-extended, sentiment at ridiculous extremes, and most markets flirting with long-term resistance. Additionally, I’m well-aware of the underlying fundamental weaknesses in the whole system.
As a result, sometimes it’s actually painful for me to “have to” make calls like that, because deep down I know that if everything fell apart immediately, we’d all look back and say, “Well, duh. Obviously. What were you thinking suggesting higher prices?” At times it feels like I’m going against every ounce of common sense in my body, so it’s a big relief when these types of calls play out as predicted.
It’s one thing to be an oblivious perma-bull whose knee-jerk reaction is always “buy!” — but I believe it’s difficult for any thinking man to be bullish at this juncture. For some of the reasons I feel that way, please review the long-term resistance levels covered in yesterday’s article.
The point being, I will continue to do my best to give an honest and objective read of the waves — and if they seem to be pointing higher, then that’s what I’ll present. In that context, please do bear with me if it all suddenly falls apart five minutes from now… because while my best read of the short-term waves doesn’t suggest that will happen — and even suggests some out-and-out bullish potentials — at the same time, because of the massive over-extention of this rally on so many levels, it wouldn’t surprise me either. Trade safe.