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SPX Update: As the Market Grinds Lower, Complacency Abounds

Yesterday, both counts expected more downside, which the market provided.  The picture has clarified just a little bit, and, as I see it, there are two main options for the short-term resolution.

What’s interesting about this market is that it’s managed to grind lower without reaching any extreme levels in bearish sentiment, or extreme oversold readings in certain key indicators such as the McClellan Oscillator (NYMO).  As long as this situation persists, it is completely plausible for the decline to continue essentially unabated.

It seems everyone is looking for a bounce, and I must admit I’m starting to look for one as well.  But when everyone’s expecting a bounce… well, you know how I feel about the situation where everyone’s looking for something.  Generally speaking, the more people who are expecting a certain outcome from the market, the less likely that outcome becomes.

This occurs for the simple reason that people position their trades in anticipation of what they believe is coming — so if everyone’s looking for a strong decline, then most traders have either already sold, or are positioned short — which in turn means there’s no one left to sell to drive the market lower. The same applies in reverse for rallies. The majority of traders simply need to be on the wrong side of the trade for a strong move to occur in either direction.  Keep that in mind next time you’re on the wrong side of the trade:  so was most everyone else. 

Accordingly, I’ve prepared only two charts today, in an effort to keep things a bit simpler than yesterday’s article.  I searched through approximately 20 charts, looking for a Holy Grail to unlock the market’s intentions, but came up with nothing.  Virtually all the charts seem to be showing the same level of veiled intentions.

The first count I’d like to share examines the possibility of an a-b-c expanded flat to complete wave ii.  The market left this option on the table at Monday’s close by failing to form a complete 5-wave decline.  The decline is currently 3-waves, and it may or may not stay that way.  Obviously, I can only see what’s actually present in the charts each day.  If the decline goes on to form another new low, that will give it a 5-wave structure (see 2nd chart).

The second chart examines a much more immediately bearish view.  This remains viable because, as discussed, there is absolutely nothing screaming for a bottom here.  Usually we would expect some extremes in either sentiment or reliable oversold indicators before seeing a trade-able bottom.
The chart below also quietly notes the possiblity of wave (5) sneaking in near the 1330-1335 zone (shown in black, “alt: (5)”).  In this regard, I’d suggest watching the lower blue trend line/channel.  If the market blows through that line, then there’s probably more selling ahead, since the inability of bulls to hold that level would indicate renewed selling pressure.
Even under this more bearish count, I suspect another small wave up, but make no guarantees regarding the wave c of 2 bounce.  The one minute chart is indecipherable to me in that regard and the wave labeled as blue-a could instead mark ALL OF blue 2, in which case the 1347 print high will contain any rallies. 

It bears mention that, contrary to what most traders believe, crashes most often start from deeply oversold levels, when everyone’s looking for a bounce; they rarely happen when a market is overbought.  I’m not saying we’re necessarily going to see a mini-crash here, but the ingredients are present, and I continue to believe this market is in a much more dangerous position than is commonly being acknowledged.  I suppose that’s how it needs to be — once again, if everyone’s on the lookout for something, it rarely happens. 

In conclusion, there are some key levels to watch for clues on Tuesday, and potential targets for each count.  Note that both counts continue to believe the intermediate trend is now down.  Trade safe.

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