SPX and INDU: Key Levels and Next Targets

By Jason Haver  OCT 19, 2012 9:35 AM

A short-term top is likely nearby, but the intermediate outlook remains "bullish unless proven otherwise."


MINYANVILLE ORIGINAL The intermediate outlook is materially unchanged and continues its bullish bias. The short-term outlook has become slightly ambiguous, but suggests a minor top may be near.  It is currently expected that this will only be a short-term top, and that new swing highs will follow.
I've loaded up the hourly chart of the S&P 500 (INDEXSP:.INX) (shown below) with virtually all the relevant info, so I won't retype every data point here. The bottom line is that a correction lower could be due as soon as today's session, though a bit more upside would be within the margin of error (the second chart may help with this). In either case, if the next decline is indeed the expected small second wave lower (blue (ii)), then ideally it would be a bit scary and cause a fair number of traders to turn bearish. Conversely, if it does not correct as deeply as shown, that would actually stretch the wave (iii) targets even higher.

(If you’re new to Elliott Wave Analysis, or simply want a refresher course, it might be worth checking out my article on the subject: Technical Analysis: Understanding Elliott Wave Theory.)
I'm viewing 1438-1439 as the key bearish pivot, and sustained trade beneath that level would dictate that more bearish intermediate outlooks be considered. Ideally, if this is to remain a correction to an uptrend, this wave should not break the lower black trend line that connects blue (2) and blue (4) -- so that occurrence would act as a second subsequent warning if 1438-1439 were to be broken. Beyond that, trade beneath 1425 would put the bears in control. The chart annotations pretty well detail everything I'm watching, and my expectations, at the moment.

Click to enlarge

The 5-minute SPX chart looks at the short-term trend-channel, which is still intact. The short-term trend remains up as long as it holds, but a breakdown here would be the first warning that a correction was unfolding.  The chart also notes the potential of a small head and shoulders top, along with the classic measured target if prices were to break down through the dashed red neckline.

Click to enlarge

The Dow Jones Industrials (INDEXDJX:.DJI) is in essentially the same position as SPX, and it's also unclear here if there's a bit more upside due before the correction. Note that both hourly RSI (SPX chart above) and 30-minute RSI (INDU below) are showing bearish divergences.

Click to enlarge

In conclusion, unless the bears have a huge surprise up their sleeves, it's expected that the market will continue higher over the intermediate term. The short-term suggests a correction lower is due to begin in the next couple sessions, and a breakdown of the channel on the 5-minute chart would be first warning; while trade beneath SPX 1452 would suggest that correction had begun.  Trade safe.  

No positions in stocks mentioned.

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