Not exactly what I had in mind...

Well the market took a quick turn for the worse during the asia session only to bounce right back by the open and give us a tight range day. Today's price action had triangle written all over it, and since it broke to the upside that gives the bears one small chance to take this down. With tomorrow being a half day, I'm not sure we get any real movements until January. Either way, I expect the market to test the 1113 printed on the ES early this morning during the cash market.

I've put up my best two scenarios and they basically depend on how much upside the market gets tomorrow morning. BTW, a gap down tomorrow would be bearish and essentially confirm the bearish count.

Will Santa's rally go missing this year?

We're at a very interesting crossroad with today's price action. We've completed a 5 wave pattern (based on the overnight futures we have a price high ~1132 cash) that ended right at key resistance. We accelerated down into the close as a key trendline was violated. Financials and Energy have been lagging significantly as of late. Even healthcare seems to have put in a double top, and key technology leaders may have rolled over as we have a number of potential reversal candles on the daily charts. And to make it even better, we have the santa rally (last 5 days of 2009 + first 3 days of 2010) that most people seem to have already baked in.

Seems like a perfect time to wipe out the buy the dip bulls. Key support sits at the 1113/1116 area. If we slice through it, then you know primary wave 3 has finally arrived.

Another completed 5 wave pattern just ahead...

While the low volume and tight range made for boring action, the price pattern appears to have completed a 4th wave (subminuette) at today's low. We should see higher prices tomorrow as we complete a 5th wave of an extended larger wave. The degree of trend of this larger wave is key to what happens in the market next.

If this next wave completes

- Minute wave C / Minor wave Y / Primary wave 2, then....look out below!
- Minuette wave 1, then...look for a minuette wave 2 to hold in the 1110/1115 area

Of course you already know that I favor the first scenario. Time will tell us as key support levels will hold or get blown out of the water.

On the upside: 5th wave target starts at 1131, with 1133 and 1136 also acting as key resistance.

On the downside: 1120 should signal that our wave is over. Look for key support at 1110/1115 to hold if the market is going to stay together. 1094 is the key pivot to signal a change in trend from up to down.

Update on the March Rally

While I don't have much to say here except we continue to the move up during the low volume holiday trading period, I thought I would post my daily chart with the labeling. We have yet to violate any of the sell triggers, so it looks like up we go. It appears that we'll be reaching the swing target of 1133 very shortly.

One more high?

The low volume push higher continues. After a nice push to ~ 1124 (cash index) during the overnight futures, the market took it in the chin and sold down the .786 retracement area where the bulls picked it up without missing a beat and grinded it higher the rest of the day. Since we still don't have a completed 5 wave pattern, the market should make one more attempt at a higher high before finally rolling over.

Because of the disparity of the futures market during the overnight session, I've included it as one of the charts. Divergences continue, and I'm still watching a 1115 sell trigger.

Bulls pushing higher...

Well, so far no move down. If the market continues to ignore this divergence, then you should expect another big gap and run to the upside. Any gap up that closes would likely signal that the market has decided to respect the divergence and should push the RSI(5) into oversold territory.

As of now there is no obvious completed pattern as the market looks like it might be putting in some 1-2, 1-2 pattern either up or down. I would say triangle but it is appearing so high that it throws off the 'look' of the chart. Once it resolves one way or the other I'll worry about labeling it.

Upside buy trigger: 1120 with a target of 1133.
Downside sell trigger: 1115 with huge bearish possibilities.

Quick update...

Divergence has showed up on the hourly charts triggering a sell signal with a break of the lows from this morning (1114/1115). Otherwise it's bullish as usual...

Without a subdivision the bulls are in trouble...

...today's action was exactly what the bulls needed to get their 3rd wave. The problem is that it ran out of steam before breaking to new rally highs. That means that the bulls have to fight all of the overhead resistance in a 5th wave. I'm not saying they can't, but the 1133 mid target is looking increasingly far away from here. Watch for divergence sell signals on the hourly chart. The next move down should be for real.

I've put up a daily, hourly, and 5 min charts for the perspective.

Key Support Levels for trend reversal confirmation:
- 1107
- 1100
- 1095
- 1080

Friday thoughts...

Note, I first started writing this on Saturday, but with all the Christmas prep activities, my time was cut short, so I'm just going to finish it off this Monday morning before the market opens (with the benefit of the overnight futures).

(From Friday) The overnight session would have filled the gap that was created in the cash market had the market been open. But once the market opened, it rallied to my initial sell point and immediately reversed. From there the market put in new lows very close to my buy target at 1090/1092 (low was near 1093) before reversing again and showing bullish signs as it closed nearer the high of the day.

This makes my primary scenario a wave 'B' triangle that finished at Friday's lows. However, the market has the tendancy to do the opposite of what is often times the obvious. I have seen MANY what appeared to be perfect triangles break the opposite direction in a series of 1-2, 1-2, so until Friday's overnight high is broken to the upside (it now has Since Sunday) and the gap filled, there is no surety of what will happen.

What is certain is that triangles are the wave form before a trend change. So the way I like to trade triangles is to wait for their confirmation and then start to build a position near turning point projections with an hourly negative divergence being my buy signals (for puts) or short signals (for stocks). My other entry is to go short on a break of Friday's low with a stop above the last high pivot.

(Monday Update)
Since the triangle pattern is pretty much confirmed now, the most the bears can hope for is some kind of a failed 5th wave in the 786 retracement area (1110/1112) area. Triangles are fast and furious on the way up and the way down. Once it turns over don't expect the market to hang around (remember March 2009? that was the last move down from, you guessed it, a triangle.

Is the market about to fall apart??

That is the question we bears have been asking ourselves day in and day out. With the market gapping down to key support at 1100/1103 and being unable to fill the gap, the market headed lower reaching 1096, which happened to be the highest of the unfilled gaps that the bulls have left in their wake. On the 5 min chart, the move has all the right moves to make it an impulsive wave. Was it just another 'a' wave or was it the kickoff of p3? Unfortunately the market left us with a couple of scenarios:

- We are currently in a 'B' wave triangle and in the process of completing our final 'e' wave.

- The top is in and will be confirmed next week with a drop below 1080.

Let's take a look at the counts for both scenarios. It important that regardless of the scenario I'm looking for a move up to at least 1103 tomorrow before we move to lower lows.



This is the near term bullish scenario. We should still see a lower low after breaking at least 1100 to the upside. The perfect 'e' wave finish would be in the 1090/1092 area. From there we should get quite a reversal with a move to new rally highs. The move higher should be fast and swift. The minimum target is 1124 with maximum upside target being in the 1133 range.



This is the short term, immediate term, and long term bearish scenario ;-). We should have a wave 2 tomorrow. Once again it should at a minimum get to 1103. It could try and close the gap at 1108, but if it does that, then I am more inclined to think we are in the triangle scenario above. Once we move to new lows we should only get a slight bounce at the 1090/1092 area before completely collapsing as all those buying the triangle scenario get stopped out and reverse. This should be followed by several days of intense selling and a quick stop in the 990/1000 area to finish off our first wave 1.

The back and forth continues...

I guess when the overnight futures take out the previous days' high it makes calling the previous wave structure corrective pretty easy. So much for testing 1100/1103 this morning. Well, we got the bullish tone in the market today, at least until the Fed announcement at 11:15 am PST when the market decided to sell off. It did close once again at key resistance, so we'll see what tomorrow brings. Traditionally, the market reverses the Fed move on the next market day, so if that trend continues we'll be looking at new stock market highs tomorrow, but if we don't....

Key support levels:

- 1108/1112 (currently closed right in the middle)
- 1100/1103 (if this doesn't hold, then there is a VERY high liklihood that the
uptrend is over)
- 1070/1080 (by the time the market gets here we will have a confirmed downtrend in many markets, broken trendlines, so buckle up)


Here are a couple charts for the different counts:



Bullish Count - rally through the end of the year.



Bearish count - begin to break down, but with the possibility of one more poke above the high before we turn down (if it is going to do it tomorrow morning).

Corrective or impulsive?

With the overnight session testing Monday's highs and failing came a gap down at the open. The gap was right at my key support area: 1108-1110 and quickly rallied in an attempt to close the gap. The rallied failed right near yesterday's close and turned over to a new low (1105) and then rallied to finish the day right beneath what is now a key resistance area (1108/1110).

This new wave structure is likely not over with a test coming of the 1100/1103 area with the rising support line right in that area. However, the wild card tomorrow is that its Fed day and those tend to be bullish days, so it should be interesting to see how it plays out. If I recall, the last Fed day didn't turn out to be so bullish, but then the market rallied the rest of the week, so that could be in the cards once again if this is just another corrective wave structure and we further subdivide.

The dollar continued its bullish posture and the equity markets once again did not respond. Something smells of manipulation going into opex this Friday. It would be interesting to catch the bulls going the other way for once though ;-).

Nearing a 5 wave completion pattern

While the market opened up at 1110 it quickly hit 1113 only to selloff in an attempt to close the gap. That attempt failed, however, at 1109 and then after a quick push to a higher high, we spent the better part of the day in about a 3 pt range. Financials continue to show relative weakness, while the other sectors were strong today. So where does that leave us?

Well, looking at the 5 min chart (not shown) the best count shows a wave 3 ending at today's initial push. The caveat here is that our wave 4, which has either already finished or will finish early tomorrow is so far very shallow in comparison to our wave 2, which means that our wave 3 might possibly be still in play. Any wave 4 retracement should not touch 1109, so if we get that far, then we have already started our next wave structure. Of course, our wave 3 wasn't very strong, so a deeper retracement for our wave 4 would have gotten very close to overlapping our wave 1, so there it is. A 5th wave requirement is only a marginal new high. Looking at relationships with the wave 1, it does give us upside targets in the 1118/1123 range. But there appears to be lots of sellers lurking above 1115, so we'll see what happens.

I changed some of the degrees of trend and opted for an extended wave 5 as part of a complete 'C' wave in stead of a smaller A-B-C, which is how I started to count it. The reason is because our A wave is being counted as 5 waves, so we should be counting another 5 waves as standard wave counting. All in all with each new high the liklihood of THE top being in places increases as the wave counts have to keep subdividing to keep the bullish picture alive. Constant subdivision is not what fuels a rally and is subject to announced reversals. Instead, the back and forth of the market is the fuel that drives a market, and we have not seen a decent pullback since the summer.

I continue to be amazed at the disconnect between the USD, the bond, and equity markets. Based on recent correlation, the equity market should be cratering, so I don't know if it is just keeping the party going until the end of the year or just through option expiration Friday.

Key support levels to watch:

- 1108/1109
- 1100
- 1086

Best of luck!

The market sided with the bulls...

on Friday as we got our 5th wave up ending right in the zone (previously defined as 1107-1112) with the high coming in at 1108.5 during market hours but closer to 1110 during the premarket. The market then reversed and got to as low as 1101 before it trended up the rest of the day. This price action limits the bearish counts without a new high and clearly defines the key levels for both bulls and bears.


Bull Count:
Monday brings us a 3rd or C wave, and that usually means a gap up at or above key resistance at 1112 to start the day off. Now, what will be important to watch from there is how the market re-acts. If the market is able to hold the gap, then look for new market highs with a target of 1131.


Bear Count:
Should we gap up on Monday and immediately sell off and close the gap, then that would be our signal that wave 3 has begun. Confirmation comes as the market is able to break key support levels with the most important one being in the 1100/1103 zone. Of course, should we break 1100/1103 before we test 1112 that would also be bearish.

Best to your trading.

Back and forth...

What a day. We got the bulls to close the gap and then some with a very tight range once the market opened. The bulls were unable to close it above 1103. 1110 is the next key resistance area (left shoulder pivot). From the look in the action we have one of the following patterns in order of preference:


- Wave 4 flat with a 5th wave tomorrow ending somewhere between 1107-1112 to finish off a running flat and the bear market resumes (the bear part of the chart is not shown).
- Wave 4 flat with a 5th wave tomorrow ending somewhere between 1107-1112 to finish wave A with a wave B testing 1100 before going to new market highs.


- Wave 4 triangle and a failed 5th wave. Price action will break 1100 in the first 30 mins and closes the gap and then some.

So basically, I'm saying there is a very low risk short entry coming up tomorrow that will likely get us 10 points and maybe a whole lot more. At the same type a sell stop below 1100 tomorrow is also a good entry.

Price action is getting messy

We touched the bottom of my wave 2 target during the overnight session and pushed to new marginal lows this morning before reversing once again. So far we have not yet had any follow through either way and if the bulls can recapture 1100, then we will have likely put in our 'B' wave and will be pushing to test the highs yet again.

All in all very disappointing.

The bears need to close the market at its lows for the day and below 1085 to get any kind of momentum going. No use on wasting brain power on a count now until we break out of this consolidation range.

The market relieved some pressure, but...

...there is still more to go. The bulls stepped in as usual and were buying in the key area that I had already outlined: 1090/1092. While the bears did push the index as low 1088 it wasn't there long.

My RSI(5) indicator never exceeded my 3rd wave extreme on my hourly chart (10.07 vs today's 13.75) making this morning's move a 5th wave washout. There are lots of momentum divergences on the hourly chart at this point, which leads to the bulls making an attempt to test the breakdown pivot (1098) and possibly close the gap (1103) tomorrow. There is a ton of overhead resistance between 1100 and 1103 btw, so that is the target short entry. If they don't, then look for a massive sell-off tomorrow as the market ignores the divergences and pushes this a lot lower.


The channel that has been created with the move down thus far should be broken after we test the breakdown (assuming of course that the test fails) as we have some real wave 3 acceleration.


Should this be our dreaded larger degree 'B' wave, then look for a test of today's low to hold after a failed test (once again assuming that it fails) of the breakdown somewhere in the 1085 area. Should the market successfully get above 1103 and stay there, then I would reverse my stance and look for another rally high.

The spring continues to compress...

...with today's action. No solid gap up or down today as the market tested the 1110 (I sited earlier as the level the market should gap at or above to claim a wave 3) and failed...twice. The market decided not to play catch up with the USD while the USD consolidated its gains today. A resumption of the USD uptrend to test the 77 area should get this market to break key levels (mainly 1090). However, the move down tested the rising support line (seen in the bullish count chart), only to get pushed back by the bulls back into range keeping today's range to a mere 10 points. Unless we are in some type of complex b wave triangle, we should see a solid wave 3 push to the upside or downside tomorrow.


Bearish Count
While the market action on a higher time frame looks overwhelmingly toppish, this count doesn't imbue confidence in the bearish picture. I hate complicated subdivided counts like the one that shows up on this chart. Now, it is possible that have just completed an 'A' wave and we'll see another test of 1090 fail tomorrow, so that has to be in the back of your mind as price approaches that level. A gap below 1098 tomorrow should easily push to 1090/1092 before reversing should this just be another correction. But I definitely like a gap open at or below the 1100 area for a 3rd wave start.


Bullish Count
While the bearish count is messy, the bullish count isn't much better. Especially because prior 3rd wave gaps have been in the direction of the end of day momentum. As you can see from this 30 min chart, the EOD momentum sided with the bears. The key level 1110 remains as the level to beat for a gap open wave 3 acceleration to the upside.

Weekend Analysis

Friday's reaction to the job report immediately reversed the losses in the futures and popped the SPX to a new high only to see sellers come in for what the 3rd time in 3 days to push price back into the consolidation range that we've been in for the last 19 trading days. Yes, that is how long it has been.

My primary wave b scenario from last night played out as the overnight futures pushed the SPX to ~1096 (my target was 1092-1095) before the job report came out. It was interesting to watch the USD strengthen while the SPX was pushing new highs. This eventually lead to yet another reversal and the SPX nearly touched 1096 again before moving up into the close.




The USD, however, did not reverse and stayed strong all day long nearly pushing as high as 75.94 before settling into 75.79 at the close. This looks like a clean break of the daily 34 SMA, and at worse should see a couple of days consolidation and best case should see instant follow through all week long to the upside taking out overhead resistance at 77.00. Should the SPX recorrelate with the USD, then we should see a massive move down starting on Monday, which is consistent with my primary count.


Another thing to look at is the market's previous 21 week cycle pivot chart. While the market appears to have broken the cycle this last timing window, but if we move to the downside, then that would be another confirmation as we are on 21 weeks now from the previous pivot low.


This chart is my primary scenario with ideal price action seeing an acceleration gap down on Monday and never looking back. My larger wave B scenario is still on the table (bulls holding 1050) zone, but I still like a primary wave 2 top here should the markets follow through on Monday to the downside. Closing the gap at 1058 should be sufficient to have a confirmed failed breakout and reverse the trend from up to down as many indices are already there if not on the edge.


Should the bulls actually gearing up for a true breakout, then we should see an acceleration gap to the upside at or above 1110 on Monday. Any gap up that reverses SHOULD see follow through to the downside.

Pullback or impulse...

...that is certainly the question we bears ask ourselves every time one of these tops are put in with a decent reversal. Well, this first chart has a few different targets on it depending on the size of this pullback (if it turns out to not be impulsive).

Our first target is a wave b pullback from the recent high. Price should close the previous wave 3 gap and not much more. I put this as a med probability because if we go much lower than this I think the market will just fall apart based on a number of divergences that are showing up in the market (i.e. adv/dec, index non confirmations, new highs, etc.). The target for this pullback is in the 1092/1095 area. Likely price action would see an exhaustion gap down tomorrow in this area that immediately fills.

Our second target would make this a larger degree wave b, and while I strongly believe that if we make this far the market will be falling apart, it does have "A" probability of occuring without the benefit of future price action to see how price is unfolding. This would be yet another break the trendline psyche-out by the market as we gain support somewhere in the 1050 area.

Our third target, which I give the highest probability is a wave 1 target in the 995/1000 area. I can tell you that if we have indeed topped out, then we could be hitting this target by option expiration (just 11 trading days from now). I absolutely believe it will happen VERY fast if we are going to go. Likely price action tomorrow would see an acceleration wave 3 gap down that does not close and a close near the lows of the day.


Looking at the big picture we are seeing the winding of the spring. Volatility has been contracting and we are getting ready for a very big move and that has a very high probability of occuring to the downside since it has yet to occur to the upside.

Wave 4 is likely over

We never did reach my targets yesterday, so that means that we either got a running flat (today's high was a wave b) and we finished our c of 4 off with today's low, OR wave 3 extended with today's high and we'll get one more lower low tomorrow to finish off wave 4 somewhere in the neighborhood of 1102/1103. As it sits right now our waves 4/2 have a .786:1 ratio, so we already have a valid completion target. The way the futures are moving up tonight certainly makes it look like we'll get a wave 5 tomorrow.

Lots of overhead resistance in the 1113 area. If the bulls get it past there, then look for 1120 as the first wave 5 target and 1124 as 1:1 parity with wave 1 target. A daily close below 1103 could put the uptrend in jeoprady, but a close below 1080 would seal the deal.


Here's a look of a chart with more bearish potential (with either a lower low tomorrow for wave 4 or a move below 1100 that would likely be part of a wave 3).

Wave 3 up it was...

The market played the wave 3 card just as required: a gap above 1100 with strong follow through. My biggest disappointment, however, is the lack of strength into the close. From all accounts our wave 3 finished weakly and we have now entered the 4th wave.

I come up with my 4th wave targets by looking at the following:

- key support lines
- 38.2% and 23.6% retracements of the 3rd wave
- 61.8%, 78.6%, 100%, and 138.2% relationships with the 2nd wave

I look to see where most of the lines come together. Now look at my chart. Here is what I have:

- key support at 1102/1103
- 23.6% 3rd wave retracement at 1106
- 38.2% 3rd wave retracement at 1102
- 61.8% wave parity with wave 2 at 1105.5
- 78.6% wave parity with wave 2 at 1103.5
- 100% wave parity with wave 2 at 1101

My best guess is a wave 4 termination in the 1101-1104 area. Wave 2 was a flat, so wave 4 should be a simple zigzag.

The biggest question will be what do we have when our 5th wave is in. Our options are:

- Primary wave 2 top (very bearish)
- Wave A of the final wave C (mildly bearish)
- Wave 1 of the final wave C (pretty bullish)

I have to put my analysis in that order based on price action in the other indices and a possible bottom in the USD. We'll see how it works.

A move below 1098 should move us into sell mode.

More consolidation....

While we did test Friday's high and fail, we ended up testing Friday's higher low pivot, which the bulls were able to hold. We then rallied into the close. Stepping back and looking at the big picture tells us one very important thing: we have been consolidating below key support for the last two days after a swing high failure on the daily chart. Time is ticking for the bulls.

As for the near term picture, things don't change much from yesterday's post except that we now have a very definitive expectation for tomorrow.


Bullish picture:
We gap close to or above 1100 at the open and rally the rest of the day to close near the highs. As you can see in the last wave 3s, this same pattern has worked over and over with a break away gap above resistance.


Bearish picture:
We have one more failure somewhere between where we closed and 1105. Any gap up that closes tomorrow would be a bad sign for the bulls and should immediately push the indices down the rest of the day.