Saturday, 3/9/13 update

The preferred count on the ES/SPX has the market closing in on a very significant long term top.  If correct, we're seeing Minute W5 of  Minor Wave c of Intermediate W5 of a diagonal C wave in a long term zig-zag that commenced in July, 2010.

 And that zig-zag is the 2nd of a double zig-zag "X" wave correction off the Mar '09 lows.

Zooming in, the current Minute W5 is also in it's later stages:

However, this count has declined in probability a little with the very recent action.  There is a cluster of fibonacci based targets that exist from ES 1535.50 to 1546.25.  The ES has pushed through these levels and appears to be headed towards the next cluster of fib targets at 1578.50 through 1594.00.  In the process it is losing the wedge type appearance that is characteristic of an ending diagonal.  It certainly seems to have a decent head of steam, and thus it wouldn't be all that surprising to see it push past that next target area as well in coming weeks.

So it is appropriate to start considering more bullish alternates to the preferred count.  When examining the long term picture, it could be the case that the double zig-zag count is still valid, but that the internal labeling is not.  I had intended to develop a long term chart illustrating this idea, but my trading platform (TOS) pumped in an update this morning that for some reason restricts daily/weekly futures charts to three years of data.  Thanks guys.  So I'll try to talk my way through it.  The alternate would reclassify the initial move off the Mar '09 bottom into the Apr '10 high as Major Wave A of Primary Wave W (the 1st of the long term zig-zag structures), with the drop from Apr '10 into Jul '10 being Major Wave B and the rally from Jul '10 into the top of Feb '11 as Major Wave C to complete Primary Wave W.  The ensuing flat type corrective structure into the Oct '11 lows would be Primary Wave X.  Since then we've had Major Wave A of Primary Wave Y topping at the Mar '12 high and Major Wave B bottoming at the Jun '12 lows with Major Wave C currently in progress.  And this is where the major difference comes into play - we would thus now be in Intermediate Wave 3 of Major C in this scenario, which allows for some distance yet to be traveled.  Hopefully you followed all that, if I get time in the coming week I'll try to lay this out on an SPX chart.

The other bullish alternate is uber-bullish.  That count has a radically different long term perspective.  It maintains that the 2007 equity highs represented a "Super Cycle" Wave I (!!) and that the Mar '09 lows were the bottom of Super Cycle Wave II.  Since then, equities are viewed as being in Cycle Wave I of Super Cycle III.  Further, in order to accommodate all the overlapping in the structure since the Mar '09 lows it is necessary to tag the structure as a series of nested waves 1 & 2 of declining degree.  Thus the market is currently in Intermediate W3 of Major W3 of Primary W3, and accordingly has quite a lot of work to do before arriving at any significant long term top.  I did take time today to work up an SPX chart of this alternate:

I know, I know - hard to accept this possibility given the bearish economic constraints, but it is what it is - and maybe (if this alternate is correct) the market is telling us that those bearish constraints are going to be resolved favorably.  I do know that I have a very difficult time getting the market to behave to my expectations, so maybe it would be better for me to let the market indicate what it wants to do.

One final thing.  After a little head fake Feb 22 when it moved up slightly from a reading below 1.00, Al's Indicator gave a very solid buy signal on Feb 26 when it spiked up from a low of .85 on Feb 25. 

Saturday, 3/2/13 update

The preferred count on this site has the ES/SPX in the 5th wave of an ending diagonal, which by definition should be a three segment structure.  Minor Waves "a" and "b" of that structure are complete and Minor Wave "c" is in progress.  Further, Minute waves 1 thru 3 of Minor "c" appear complete at the ES 1530 high on Feb 20.

The three wave move since the Feb 20 top into the low of 1481.75 on Feb 25 is either Minute W4 or the first segment of Minute W4.  It's clearly a zig-zag, and since Minute W2 was a flat the sequence satisfies the EW rule of alternation.  If Minute W4 is complete at the Feb 25 low then Minute W5 is now in progress.  5th waves generally travel a distance that is related to 1st waves in terms of a fibonnaci ratio.  On this basis, possible targets for Minute W5 are at 1531.00 where Minute W5 = .50 x Minute W1, then at 1542.75 where Minute W5 = .618 x Minute W1 and finally at  1580.25 where Minute W5 = Minute W1.

However, it's possible that Minute W4 is not yet complete.  Minute W2 lasted 11 days. If Minute W4 was complete on Feb 25 it's duration was only 3 days, so there is room for Minute W4 to drag out a bit longer and not be out of proportion.  It's entirely possible that Minute W4 could be in the process of forming a double or triple zig-zag with the low of Feb 25 being only the first zig-zag in the sequence.  Also, it could form a triangle as conceived in the chart below.

Wednesday, 2/27/13 update

Saturday, 2/23/13 update

I hear bears growling in the woods.  And well they should.  In recent weeks some cracks have begun to appear in the market's foundation:

1) 4th Qtr 2012 GDP growth reported as negative;
2) Wal Mart reporting sharp sales drop off in February;
3) MOST IMPORTANTLY rumblings from the Fed that QE Infinity may not be infinite after all.

But as usual for the market, successful trading not only needs to answer the question of what but also has to answer the question of when.  And the "when" in this case may be "not quite yet".  A good EW case can be made that the ES 1530 high of Wednesday was the final thrust high of an ending diagonal, which in turn was the final move in a double zig-zag "X" wave bull market dating back to the Mar '09 lows (Alternate 2 below).  However, the preferred count is that the 1495 low on Thursday was either a Minute W4 or wave "a" of a Minute W4 - also in an ending diagonal which is the final move in the run up from Mar '09, but dictating a Minute W5 rally yet to be completed (Alternate 1).

Alternate 1

Alternate 2

At this point the alternates are pretty close to a 50/50 shot IMHO.  Alternate 2 is pretty much eliminated on any move up through last week's highs, so that answer could come fairly quickly as those highs are still very nearby.

The bounce into Friday's close off of Thursday's lows was instructive.  It started as a very corrective looking move with a lot of overlaps and sluggish momentum.  But it started gaining a more impulsive look after mid-morning on Friday.  Follow through buying first thing next week will be important to the bull case.

Also of note is that Al's Daily Indicator generated a weak buy signal on Friday when it bounced up off a low of .96 established on Thursday.  A weak buy signal at that juncture would be expected to kick off a 5th wave, which in equities is usually a weaker move.

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Some random thoughts.  Ben the Beard certainly has a quandary.  Matter of fact, our country as a whole is facing that quandary.  Anybody with half a brain is aware of the ominous facts, but let's review them anyway:
- Our government is running continuous deficits of incomprehensible proportions - a trillion dollars is $1,000,000,000,000 - I don't know about you, but I have a hard time wrapping my head around that number;
- The accumulated debt is at $16 trillion;
- The Fed has been financing that deficit on an ocean of liquidity;
- This ocean of liquidity will have to be sopped up at some point or risk hyper-inflation and a collapse of our currency and thus our economy;
- A possible solution is to raise taxes significantly - and regardless of White House propaganda those taxes will have to be on everyone to gain enough revenue to be meaningful - but that risks economic collapse as well;
- Another possible solution is to make significant cuts in the Federal budget, but that appears politically impossible;
- If the Fed ends QE Infinity and begins sopping up the liquidity that has been created, then interest rates are almost certain to rise, which also invites disaster (more on that below).

And that's where we get to the real rub.  One solution beloved by conservatives is to "grow ourselves" out of the problem by effecting a major tax reduction to goose the economy.  History has shown that this has actually worked, and quite effectively.  The problem this time is that mountain of government debt.  If the economy were to take off, then interest rates are bound to rise regardless of what Ben the Beard wants.  And an increase in interest rates to more normal levels will blow up the federal budget via higher interest payments on the debt, and thus an ACCELERATION in the deficit accumulation and thence even higher interest payments, and so on.  So rather than getting out of the soup, we stay in it as it gets even hotter.

One enlightening conclusion that can be reached here is this:  it appears that a sluggish economy is actually less risky than a booming one in the context of current constraints.

How do we get out of all this?  I don't know, but I fear that an economic disaster precipitating a major reset is in the cards.

And that's why I'm long term bearish.

Sunday, 2/17/13 update

Sideways drift this last week in the ES/SPX so not a lot of new information to add to the scenario presented in last weekend's post.  Prices were restricted to a very narrow 14 point range so not a lot of push from either direction.  As they say, bottoms are made and tops are formed, and the ES/SPX certainly looks like it is forming a top. If correct, the wave count on the ES has the pattern from the Feb 7 low interpreted as a 5th wave ending diagonal that terminated at Friday's high, and that 5th wave is the last move in the steady up of a 3rd wave that kicked off right after Christmas.  If so, we can expect a 4th wave correction over the coming days.  A correction at this point is dictated as the steady up over the last 7+ weeks hasn't seen any real break.  A likely target area for a correction at this juncture is in the ES 1490 area which has been an area of support for several 4th waves of lower degree. 

What's really interesting is what's been happening in the underlying technicals over the last couple of weeks.  This author has a daily indicator developed back in the '80's before the advantage of today's electronic trading and charting platforms.  It's a mish-mash of daily NYSE adv/dec, volume and other statistics (and not exactly a jealously guarded secret, if anyone's interested contact me @ sunset@mwt.net and I'll forward the formula).  It doesn't identify tops very well, but it's excellent at nailing bottoms.  A weak buy signal occurs from a spike up from a low below a reading of 1.00, and a strong signal is generated at a low below .50.  As an example the most recent buy was generated in mid-November with a spike up off a low of .75 - and that turned out to be pretty darn good.
Anyway the indicator has been diving down towards buy territory in recent days with a reading of about 1.25 on Friday's close.  A couple of strong down days will get it below 1.00 and possibly below .50.   I know this is hard for the bears to accept, but we might possibly see a decent buying opportunity develop in the coming week.  One final note: this is not a day trading tool, it's based on daily statistics - but it does have value in a position trading approach or as a means of identifying a trend change.  Also, a spike can only be identified after it is established, so it won't give you a "real time" signal unless you trade the ES after regular market hours. 

Sunday, 2/10/13 update

The year is 409 A.D. in Rome.  The Visigoths have been sweeping west out of the Balkans for a couple of years and getting ever closer.  But in Rome, it's PARTY ON!!  After all, Rome is so powerful, it can never fall.  Right?  Except it did, to the Visigoths in 410 A.D.

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The direction in the ES continues to be up, a little choppily of late, but up nevertheless.  ROCK ON BABY - the party will never end!!  After all, this is the good ole U.S. of A., and we're too big and strong to fall, right?  Right.

Target for the move up from  Dec 28 is ES 1525 - 1530, after which there should be the 1st significant selling of the year. 

 

Sunday, 2/3/13 update

Concerning Thursday's post about a possible significant top in the ES: never mind.

Actually, that analysis still might be correct, but for that to be the case the ES can't travel too far in both time and price from this point.  I'd say no more than 10 or 15 points higher and another week out.

There are a couple of coal mine canaries giving warning right now.  First is the  iShares HYG fund, an ETF which contains high yield corporate bonds.  The HYG has tended to lead the general equities market, which makes sense because interest rate movements will effect the HYG in a dramatic way and also will have an impact on equity valuations.  The HYG has been collapsing in the last week - and meanwhile equities have kept on chuggin' up their hill.

The other is the relative value of the Russell 2000 (RUT) to the SPX.  In the bar chart below, the RUT is in black and the SPX in purple, and the indicator below is a ratio of RUT/SPX.  This ratio also has a tendency to lead.  As can be seen, in the last week the ratio broke an uptrend line that has defined it since last November's low and may be in the process of forming a double top.

However, as they say "Bull markets climb a wall of worry" and it could well be that these two indicators are just plain wrong ( as well as a number of others that are flashing yellow at this time). 

For in depth Elliott Wave counts and other charts click the link at the top of this page.