Saturday, 12/29/12 update

The equity market has given it's opinion on the prospects for success of the "fiscal cliff" circus, and it's a thumbs down.  But truthfully that situation could break either way, and whichever way it breaks is almost certain to lead to a very steep move in the market.  If it resolves bullishly then it's this author's opinion that any bull move is going to be relatively short lived.  The economy is going to continue to be inundated with massive amounts of government debt for the foreseeable future under any of the fiscal cliff proposals being aired, and long run that can only lead to disaster. 

The bull alternate is still alive and well even with Friday's late plunge.  In fact both the bull and bear counts have arrived at the cusp of a potentially explosive move at exactly the same time, which fits nicely with the fiscal cliff background.  However, from an EW point of view the pattern up from the mid-November low into the Dec 19 high is pretty choppy - much more typical of a corrective wave than an impulse - and this would throw the odds to the bear case.

The bull alternate has the ES close to completing an irregular flat 2nd wave, which should lead to a strong and sustained 3rd wave move up.

Bull alternate

There are two ways to view the current bear alternate.  The 1st is as a series of waves 1 & 2 of declining degree since the top of Dec 19, in which case the market is right on the edge of a 3rd of a 3rd wave collapse.  The 2nd is not as immediately bearish.  It has the pattern from the Dec 19 top classified as an almost complete leading diagonal, in which case a wave 2 bounce in the very near future is dictated.

Bear alternate

OR

Sunday, 12/23/12 update

Last week the ES continued the choppy upside action that's been evident since the mid-November low.  Seasonally equities have an upward bias, and the general trend has been up - but there has been a lot of hesitation along the way.  So the intermediate term picture remains a little obscure.

Last week the bullish EW count had a very awkward looking 5 wave pattern topping with the high on Dec 12.  The action since then has clarified things - the move up from the Nov 16 low into last Wednesday's high now looks to be a leading diagonal 1st wave.  The drop off from there into Thursday evening's mini-crash low was either Minute Wave 2 or Micro wave "a" of Minute Wave 2.     

Bull alternate

The bear alternate has a double zig-zag Minor Wave 2 complete at last week's high.  The sell-off into Thursday's low could be either the start of Minor Wave 3 down or an "X" wave preceding the 3rd and final zig-zag for Minor W2.  The severity of Thursday's mini-crash certainly fits what can be expected in a 3rd wave.  

 Bear alternate

OR

One thing of note on the very short term is the recent behavior of the Vindicator Buy/Sell.  This is a proprietary indicator that measures equity market buying and selling pressure using Advance/Decline and volume statistics.   The notable behavior in this index is the failure of the Buy line to cross below the Sell line during the sell-off of last Wednesday through Friday - this is normally what happens when the market rolls over.  This suggests that there is a higher likelihood of rising prices over the very short term.

 
 

Friday, 12/21/12 update

So far today the world hasn't ended, although if you're trading the ES you might feel like it has.

There is an apparent 67 week cycle in equities that this site has been tracking.  As you can see in the charts below, five of the last seven iterations over the last ten years have marked significant long term lows.  It's next due to bottom the week of Jan 7, 2013.  So we could have a wild ride over the next few weeks or so. 

Thursday, 12/20/12 late update

Updated EW bear count on the ES:

Mayan apocalypse anyone?

Saturday, 12/15/12 update

Two observations can be made about recent action in the ES:

1) The pattern from the Nov 16 low at 1340.25 into this last week's top at 1438.75 was pretty choppy.  Although a 5 wave count can be deciphered in the pattern it is not clearly impulsive - you have to really work to tease one out of the chart.  If it is in fact an impulse then the intermediate term should be bullish on balance.  The other interpretation of the pattern is that of a double zig-zag, which is a corrective sequence that portends a bear market in progress on the intermediate term (and maybe longer).  

2) The selling from the Dec 12 top has been impulsive with a clear 5 waves down apparent.  Although a bottom of some sort is quite likely at Friday's low, any rally here should be short and quick and should be followed by more selling.  How far that further selling will go depends on whether the bull alternate or the bear alternate is the correct point of view. 

Bear Alternate

Hourly chart

 Daily chart

Bull Alternate

Hourly chart

 Daily chart

Wednesday, 12/12/12 update

The EW bear alternate in the ES looks like it completed the 2nd zig-zag up off the Nov 16 low today.  EW rules allow for up to 3 zig zags in a multiple zig zag correction, so it is possible for more rally to occur before the correction is concluded.  Obviously a rally to new highs (only 30 points above today's high) invalidates this alternate.

Sunday, 12/9/12 update

There are two things that happen with regularity in Washington that just annoy me to no end.  One relates directly to the current market environment and the second doesn't.

So let's take the second one first.  That is a thing called "baseline budgeting".  In baseline budgeting an increase is proposed in federal spending - that new level is termed the "baseline".  Then the politicians propose a reduction in the rate of increase and claim that they have reduced spending!!  As a simplified example lets say that last years expenditures in the Dept of Nonsense were $100 billion.  The Dept of Nonsense then proposes a budget for next year of $110 billion.  The politicians confer and then announce that next years Dept of Nonsense budget will be $105 billion and that they have thus cut spending by $5billion!  Hooray for you oh brave politicians.  What a lying pack of thieves.

The other annoyance is a thing called static analysis.  This refers to a method of analyzing the economic impact of tax policy that assumes a straight line relationship between a change in tax rates and the resultant increase or decrease in tax revenue.  So if tax rates are increased by 10% it is assumed that there will be 10% more revenue gained.  No consideration is given to the thought that people will change their behavior as a result of changes in tax policy.  But it is a historical and provable fact that the more tax rates increase the more people will alter their economic behavior in an effort to mitigate the impact of those higher rates.  This is called dynamic analysis. 

Further, individuals are likely to take steps to avoid higher tax rates that they anticipate will occur.  Which brings us to the current situation in equities.  It appears likely at this point that there will be an increase in tax rates in 2013, to include a drastic jump in the capital gains and dividend tax rates.  So it would seem reasonable to expect people to liquidate assets and book the capital gains in 2012 where the cap gains tax may be significantly lower than in 2013.

The pattern in the ES/SPX since the Nov 16 low has been much more corrective than impulsive to this point.  Lots of choppiness and wave overlaps.  You get the sense of a bearish undercurrent, and the thinking above may be what's in play.  The bear alternate below translates that bearish looking pattern into a double zig-zag.  Multiple zig-zag corrections can contain up to three zig-zag formations, and since the ES appears to be in the 2nd zig-zag since the Nov 16 low it is allowable for the market to continue to grind out more choppy action with an upward bias for a while yet.  This may be the way that the normal holiday bullish bias gets expressed.

Bear alternate

The bullish alternate shows a series of waves 1 & 2 of ever less degree unfolding since the Nov 16 low.  If this is correct than prices should embark on a strong ramp up in a 3rd of a 3rd of a 3rd wave in the immediate future.

 Bull alternate

 

Sunday, 12/2/12 update

In the ES/SPX choppy week last week but prices up by the end of the week nevertheless.  The sideways chop of most of Thursday through Friday looks like the market consolidating for another stab higher.  Both the bull and bear alternates appear to confirm this idea, with the ES half way through the second zig-zag off the Nov 16 low in the bear count and  working out a Micro Wave 2 of Minute Wave 3 in the bull count.

Bear alternate

Bull alternate

The question yet to be answered is how far will the holiday rally carry things.  If the ES should rally significantly up past 1440.00 the bear alternate will be in serious jeopardy.

Saturday, 11/24/12 update

If you just look at the chart of the last week's activity in the ES/SPX it seems apparent that a bull move is in progress and thus that the low of Friday Nov 16 was quite significant.  But Friday's strong up move has to be qualified - volume in the equity markets was less than half of what has been typical.  It was thus the usual holiday market situation - the boys in the pits running stops and cackling all the way to the bank.  This isn't to say that there is not a legitimate bull move in progress, it's only a note of caution.   Follow through buying will be necessary over the next week or so to provide confirmation. 
There is a very strong seasonal up bias in the period of Thanksgiving through the end of year holidays, so a bull market of some sort should be no surprise.  The question is, what sort of bull will it be?  i.e. are we going to see a choppy corrective type sequence that will fail and lead into the next downstroke of a major bear that commenced at the Sep - Oct highs?  Or will it impulse up with new  highs in the offing?
This author can think of several very solid arguments, both technical and fundamental, to buttress both the bull and bear case.  So as usual events have transpired in a manner to obfuscate what is most likely in the intermediate term.  However, from a very short term perspective the market ended the week in a very "overbought" condition, so a quick pull back is likely sometime in the next two days or so.

Current short term EW counts look as follows:

Bull alternate

Bear alternate 

It should be noted that in the bear alternate the top of the current rally off the Nov 16 lows may only be the first leg of Minor W2 (red numbers) rather than the entirety of the move.  In this case this move is only the first zig-zag of a double or triple zig-zag sequence or it is the "a" leg of a 3-3-5 flat type structure.  This thought occurs when comparing the duration of Minor W1 at 21 days to the duration of Minor W2 of 4 days to this point - it is likely that Minor W2 will unfold in a manner that chews up more time.  This would also allow for a continuation of the usual holiday season rally sequence deeper into December.

Saturday, 11/17/12 update

Lots of technical damage has been done to equities in the last month.  In the ES/SPX prices are down roughly 9% from the Sep/Oct high points.  Along the way some important uptrend lines have been broken and also some bullish EW counts have been disqualified.  At this point the argument that we've seen the top of the bull market that commenced in Mar '09 now outweighs the possibility of a continuation of that trend.

From an EW standpoint a Cycle degree "X" wave can be counted as complete into the Sep/Oct highs.  In the ES/SPX it can be counted as a double zig-zag.  The 1st zig-zag sequence ran from Mar '09 through the top at ES 1217 in Apr '10, followed by an "X" wave into the low at ES 1003 in Jul '10.  The 2nd zig-zag ran from that point into the Sep/Oct highs and included an ending diagonal for it's C wave.

  

There's a fair chance that Friday's low at ES 1040.25 marked a short term bottom of some sort.  The EW count since the Oct highs can be counted with a Minor Wave 1 complete at that low (Alternate 1 below) or with Minute Waves 1 through 3 of Minor Wave 1 complete at that low and Minute Wave 4 in progress (Alternate 2 below).

Alternate 1

Alternate2

Alternate 1 would dictate a decent corrective bounce in the form of Minor W2.  Alternate 2 would lead to a shorter and more shallow bounce (Minute W4) followed by another wave of selling (Minute W5) before the onset of Minor W2.

The bullish alternate here is that the sell off of recent weeks is a Minor Wave "b" of an Intermediate W5 in the bull series dating back to Mar '09.  However this possibility is pushing the envelope of what seems likely.  A move below ES 1262 before any new highs would completely eliminate this alternate.

Sunday, 11/11/12 update

Lot's of carnage in equities this week.  The ES/SPX saw some pretty significant technical damage.  Prices broke down through the uptrend line connecting the low of Oct '11 and June of this year.  Also they broke down through the 200 day MA which is an indicator followed by a lot of folks.  Didn't break through that MA in the NYSE but it's right on top of it.  Also there was a significant surge in volume that accompanied the selling.

It's been said that market bottoms are made but tops are formed.  That jumps out on the ES daily chart of the last year.  The lows of Oct '11 and this past June are made and the market immediately jumps up and away.  But the triple top of mid-September through mid-October looks like a kid on a trampoline.  Was a pain in the neck to trade as well.

Of course the big question is whether we've seen THE top of the bull run dating back to the crash lows of Mar '09.  That certainly is one of the possibilities here, but the bull case is not yet completely dead.  When will it be?  Hard to answer that question.  What can be said is that there are levels which if breached would significantly diminish the odds of a continuation of the bull market.  The 1st of those would be the June low at 1262.

Daily EW counts of the bull and bear alternates currently look like this:

Bull alternate

Bear alternate

Zooming in to the very short term and assuming the bear alternate, the drop that started at the Oct 18 highs is either a Minute Wave 1 & 2 followed by a Micro Wave 1 with Micro W2 in progress or it's Minute Waves 1 through 3 with Minute W4 in progress.  Either way more selling should materialize in the very near future.

Wednesday, 11/7/12 update

The next few days in the ES/SPX are going to establish market direction for the next several months or longer.  If there is significant follow through selling then the idea that a major long term top was established over the last couple of months will go a long way towards being proven.  However, if that follow through selling doesn't materialize then we may have seen (or will shortly see) an Intermediate term low that will be followed by at least 100 points of bull market.  The alternates look like this:

BEAR COUNT

 BULL COUNT

Seasonal tendencies over the holidays and into January are bullish.  However, market technicals have a bearish cast to them.  The McClellan Oscillator and Summation Index both diverged against the recent highs and are in downtrends that appear to have some distance to go:

Same can be said for Al's Indicator which has momentum, volume and Adv/Dec components:

Saturday, 11/3/12 update

Last week's storm shortened trading provided a couple of nice rallies in the ES/SPX, but it was Friday's steep and sustained selling that deserves attention.  It could be the start of something significant, especially since it was accompanied by matching sell offs in the precious metals, commodities and certain currency/US$ pairs (such as the EUR/US$).  It's a fair bet that follow through selling will occur early next week.

This site is not a big fan of time cycle analysis, but there is one cycle that was noted here earlier this year that deserves a re-visit.  It's an apparent 67 week cycle that has defined some pretty significant bull-bear sequences in recent years.

As can be seen, there have been seven complete iterations of this cycle in the past ten years, and out of those seven two were failures.  But the other five outlined some fairly significant footprints.  This is especially true of the last three.  The current cycle started at the lows in October of last year and is due to bottom again in early January.  If this cycle is going to have a significant effect in it's current iteration then a bear sequence of some import should start anytime, and may already have done so with the mid-September highs. 

Concerning short term action the EW picture presents equally valid and opposing possibilities as usual.

Alternate 1  The bear sequence from the Oct 18 high into the Oct 29 low is counted as a 5 wave impulse with the 5th wave being a sloppy ending diagonal.  In this alternate the rally from Oct 29 into Friday morning's high is considered a double zig-zag correction and would dictate lower lows to come.

Alternate 2  The Oct 18 to Oct 29 sell off is counted as a completed zig-zag.  After that the rally into Friday morning's high followed by the sell off during the rest of the day on Friday are a 1st and 2nd wave of a developing bull market impulse.

Alternate 2 is eliminated by a drop below the low of ES 1393.00 of Oct 29.  At this point that eventuality seems likely to occur.

Click here to access in depth EW charts and analysis.

Saturday, 10/27/12 update

Last week the ES/SPX followed through on the selling that started the prior week, but the action towards the end of the week was pretty difficult to analyze, much less trade.  The market seemed pretty trendless starting on Wednesday, and it would be a fair guess that it's going to stay that way for another week and a half.  Two factors might put a damper on any potential big move.  First is the "100 year" storm projected to hit the New York City area this coming week.  Second is the major election coming up on Nov 6 - one would expect that market participants will throttle back pending the results of that election.

The selling on Tuesday last eliminated one of the three possibilities presented in last weekends post when the ES dropped below 1416.50.  That leaves the two alternates that consider that the 1459.75 high for Oct 18 represents the top of a failed 5th wave.  The big question is whether that 5th wave marks THE end of the bull market that commenced at the Mar '09 lows or whether that bull has yet a bit more to run.  Possibly the election results in 11 days will be the deciding factor: death & doom if the current administration retains power or a short term burst of optimism if the incumbents are sent packing.

The two alternates currently look as follows:

TOP IS IN:

Daily Bars

 

 Intra Day

MORE TO GO:

Daily Bars

 Intra Day

Saturday, 10/20/12 update

First off, please excuse the braggadocio of Wednesday's post.  I guess I got what I deserve with Friday's strong sell off.

The key to an EW analysis of the current situation is the classification of last week's rally into the Thursday top: is it a corrective 3 wave move or a 5 wave impulse?  If it's corrective then it can be viewed as an "X" wave in an ongoing correction sequence dating back to the Sep 14 high, if it's impulsive then it's either a 1st or 5th wave (more on that later).

Looking at an hourly chart it appears impulsive, and breaking it down into a 10 minute chart confirms that impression (btw the SPX is much the same):

So the odds on chance is that last week's rally sequence is an impulse.  Fitting that into the long term preferred count presents several alternatives.  The long term preferred count has the ES/SPX in an ending diagonal "C" wave of  2nd zig-zag of an "X" wave structure off the Mar '09 post crash lows. 

The 1st short term alternate has last week's rally counted as the 1st wave in the final 5 wave structure of that ending diagonal "C" wave:

Wave 1 alternate - 2 hour bars

Wave 1 alternate - daily bars

This alternate is eliminated with a print below 1416.50.  Friday's low of 1423.50 is perilously close to that point, so the market has to turn up almost immediately next week to keep this alternate viable.

The next two alternates count last week's rally as a failed 5th wave. 
Under the 1st of those views the failed 5th wave marks THE top of the entire bull move off the Mar '09 lows:

Failed 5th Wave - alternate #1 - 2 hour bars

Failed 5th Wave - alternate #1 - daily bars

The 2nd of the failed 5th wave views has the Thursday high marking the conclusion of wave "a" of Intermediate W5 of the ending diagonal.  If correct then Friday's selling is the 1st stages of wave "b", and the eventual low of wave "b" will usher in wave "c" of Intermediate W5. 

Failed 5th Wave - alternate #2 - 2 hour bars

Failed 5th Wave - alternate #2 - daily bars

Wednesday, 10/17/12 update

So far this week the ES is tracking almost exactly as projected in the weekend update.  Red dashed lines in the chart were drawn over the weekend.  At this point the market is overbought on any number of short term measures but has yet to show any waning of momentum.  So the sell off of the prior few weeks begins to look like one great big bear trap.