The Trend is Down

Today's price action on the $SPX hourly chart confirmed that:

(1) wave-2 of "c" did in fact completed yesterday as suggested, and 

(2) an impulsive wave-3 of "c" is in progress. To this end, the recent $SPX floor of 1,635-1,640 was broken during the last hour of trading today.

The target of this wave-3 of "c" is 1,600 on the $SPX, which served as resistance during April. 

The trend is down

$SPX chose option "(1)" from yesterday, to move higher today, reaching 1,662 or 65% retracement, as part of wave-2 of "c".

Price action during the last hour of trading and into the close suggests that wave-2 of "c" is now complete and wave-3 of "c" appears to have begun, but without confirmation yet.

If our prediction is correct, we should see impulsive moves down going forward, with the previous resistance level possible target of this leg down.

As the trend unfolds, we will be able to define the target with more accuracy.

The trend is down

What we experienced in the last few trading days is a wave "a" down, a wave "b" up that retraced 75% of wave "a", and today the completion of wave-1 of "c" down during the morning floor trading hours.

We also experienced wave-2 of "c" (upwards direction), which is not clear if it has completed.

Therefore tomorrow Thursday, we may (1) see the market higher than today's high (suggesting that wave-2 up is still unfolding), or (2) we may move impulsively down (suggesting that wave-2 finished today and wave-3 started already and was unfolding into the close).

Retracement of a down-trend versus new up-trend

As we mentioned in the previous blog, we expected $SPX to "go higher".

What we just had today was a 75% retracement of the 1,687 - 1,653 leg down from last week.

The question is whether today's move (up) is the beginning of a new leg up (that could go for another 60 points), or was this the "b" (retracement) of an a-b-c down? In this case, "a' would be an irregular-flat.

To answer our question, we looked at the $SPX daily and hourly charts:

- Daily: Indicators (MACD+stochastics) on this chart suggest that we are in a down-trend and hence today's "bounce up"is part of a larger wave down (a-b-c).

-Hourly: We do not have yet confirmation for exhaustion of this leg up that started last Thursday at 1,535, not the beginning of a new leg down ("c" wave).

Overall, we favor reading direction on daily charts and confirming signals on the hourly

Trend is down

What we experienced in just 2 days is a leg down of 52 points on the $SPX (1,687 - 1,635). This leg subdivides in 5 smaller waves in the hourly.

At 10:00 am today, $SPX hit oversold on the hourly and the shorts covered - this down leg was over!

The market spent the rest of the day recovering from the drop, as expected. The retracement today was 38% (20 points), which means that the market may retrace even higher tomorrow. 

When the market turns downwards again (second leg down not confirmed at this point), it will hit as low as ~1,600's, finding support at a level that previously acted as resistance (April high). 

On our way to support

We expect that $SPX will reach as deep as the previous April high, where it should find temporary support.

Extension under way

First of all, I apologize for being unable to keep up daily with the blog.

We are in an extension wave that started on April 19, 2013.

Extensions usually subdivide into 5 waves.

This is what has occurred so far:

1st leg up : April 19 - April 25 (1,536 - 1,592)

small pullback: April 26 (1,592 - 1,577)

2nd leg up : started April 26 and has been on going.

Quantitative analysis suggests that this 2nd leg up will end around current $SPX levels and another pullback will occur, perhaps as deep as 1,617 (backtesting the recent breakout area of May 3).

After this pullback, the market will attempt to resume the uptrend. This 3rd leg up may fail at any time and has the potential of reaching 1,725!

We believe that the upcoming FED meeting and the chatter about tapering the bond buying program is what will trigger market behavior in the coming weeks. Also fear of an upcoming tapering of bond buying may cause participants to sell (causing the anticipated pullback mentioned above).

We are in the final stages of an extension

With the FED pumping a ton of money into the markets every day, it should be recognized understandable that there is an upwards bias in the stock market as well.

Two events of the last week may signal that things are about to change: 

(1) CNBC on Thursday, through Pisani, generated new information about a rumor that the FED was going to taper down their liquidity pumping. 

(2) After the close on Friday and a new historic close (high), the Wall Street Journal's Jon Hilsenrath with an article in the on-line publication (after hours) reported on exactly that, a plan by the FED to reduce their purchases due to an improving economy (http://www.marketwatch.com/story/fed-maps-exit-from-stimulus-2013-05-10-191031815?link=MW_home_latest_news).

Interestingly, a week ago Friday (May 2), the bonds did a 180 degree turn, and changed their direction: The price of bonds has been falling since then ($TNX increasing) in a rapid manner. This is significant because bonds were just last week at historic highs, resulting from FED buying action. Bond holders started selling in anticipation of a FED exit, perhaps. 

In conclusion, we may have upon us a significant event, the end of aggressive monetary policy which started at the dark days of the 2008-2009 recession and financial crisis.

For the stock market, our quantitative analysis has been indicating a multi-year top around the current levels. However, with the current extension (it is visible on the MACD of daily charts), the actual top may be difficult to accurately pin point. 

In terms of self analysis, please refer to last Sunday's graph which was pointing to a high in the 1,636 area and then a retracement to 1,485 - 1,500's (which is also the anticipated 10% correction that everyone is talking about). 

The $SPX made an all time high close yesterday. Look here for an explanation of how this was accomplished by the robotic computers that run our markets: http://www.zerohedge.com/news/2013-05-10/how-manufacture-record-high-stock-market-close-friday-afternoon

As I mentioned a week ago, we may be "too late to go long and too early to go short".

DISCLAIMER 

This blog shall not be perceived as investment advice. This is a personal diary of our thoughts on the markets. Consult a professional broker or adviser before investing.  Any opinions, news, research, analyses, prices, or other information contained on this blog are shared as personal thoughts and provided as general commentary only.

. 

Short term trend is down

Both $SPX and $DOW signal short term down trends today on the daily charts as well as on the hourly.

What we experienced today was a retracement of yesterday's leg down.

New all time high

$SPX and $DOW continue to clock all time highs.

We are only a few points before the upper end of our projected target (~1,536) qualifying from both last November's low as well as from the March 2009 low.

RSI(14) is also approaching overbought on the daily and is in overbought territory on the hourly for $SPX. Also the bonds picked up a bit today, indicate buying others than the FED.

Our short term trading indicator, SPY:VXX on the hourly has also signaled that the current leg up (since May 2) has probably ended. Although this is a good indicator, it is not enough, however, without a confirmation on the daily charts.

Time will tell in a few days, perhaps as soon as tomorrow morning with new unemployment claims.

The macro is expected to deteriorate because of the Federal government sequestration. Claims are real time data on a weekly basis, unlike employment numbers given out once a month. Weekly claims correlate highly with $SPX direction in an inverse manner.  

Till tomorrow

Reached the middle of target range

We have calculated a target range of 1,618 - 1,634, with 1,626.37 the mid-point.

Today $SPX clocked 1,626.03 and then stopped.

Everything seems and feels bullish and euphoric, so from a contrarian point of view, we are worried of a sudden change in direction.

The market can always extend higher beyond the target range into a 5 wave extension, as it has in previous times.

The best comment I heard about this market on TV was ...  "too late to go long, to early to go short".

DISCLAIMER This blog shall not be perceived as investment advice. This is a personal diary of our thoughts on the markets. Consult a professional broker or adviser before investing.  Any opinions, news, research, analyses, prices, or other information contained on this blog are shared as personal thoughts and provided as general commentary only.

6 month evaluation

Without minimizing our erroneous revision (red) on April 26 of our original prediction (dotted black), the market did reach our target of 1,620 on the $SPX as predicted from last November's low as well as the March 2009 low and advocated on this blog for several months now. The actual target range reaches as high as 1,626.

If our original prediction is in fact correct, then we should see the anticipated 5% + pull-back. If not, we are in an extension.

Let's see what happens.

This blog shall not be perceived as investment advice. This is a personal diary of our thoughts on the markets. Consult a professional broker or adviser before investing.  Any opinions, news, research, analyses, prices, or other information contained on this blog are shared as personal thoughts and provided as general commentary only.

Full analysis Sunday evening

I am on the road traveling, so this is short and before the close.

In brief, I was mistaken by the April 2 - ADP employment report and the accompanying $SPX response. Although $SPX dipped below 1,537, it did not have a daily close below - more importantly, $DOW more accurately displayed was really occurred. This is a rookie error.

Point is, if you look at the projections of our model as presented here before April 2, you will see that the projections called for 1,610-1,620 end target, with today's top at 1,618.46. This is also the end of 5 waves up from the recent low of 1,581 on May 1.

More self evaluation on Sunday.

Non-farm payroll numbers tomorrow

The economic news will apparently tells us tomorrow what will happen to the market.

Today's reversal upwards stopped right at the 1,537 resistance level from April 11, 2013.

Till tomorrow ...

Bull trap !

We have been pretty persistent with our call for a correction, all along this last leg up, no matter how difficult it was to be positioned against main stream media and commentary.

Today we have confirmation for a new leg down both on the daily as well as on the hourly $SPX charts. 

Although exuberant, such upward retracements during corrections are not new, as they can be identified in several occasions in the past  ( as recent as April - May 2012: last year! ).