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Jason Haver: Upcoming Week Has Intermediate Implications for US Equities

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Bulls and bears are battling over a key intermediate inflection zone.

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For the past couple updates, I've been warning that I felt the market was in a potential topping zone, but was uncertain if the S&P 500 (INDEXSP:.INX) had another small wave up still left. As the pattern developed across markets, in Friday's update I noted that the Dow Jones Industrial Average (INDEXDJX:DJI) looked destined for new lows. With this mention, I published an if/then target: If 16,378 failed, then it suggested a strong decline to 16,200-16,240. On Monday, the Dow broke the key level, then dropped rapidly to 16,240.60 before staging a small recovery.

For at least a year, this has been a very hard market in which to project downside moves against the (obviously) prevailing bullish trend -- and the market's current position is often where things get even trickier for bears. No matter how hard we try, as humans, we can't help but want to envision a market that moves in a linear fashion. We have to fight the urge to project the market's future by using the same equations that work in the macro world: "If a train leaves New York and travels at 100 miles per hour, how long until it reaches Cleveland, 400 miles away?" We figure four hours, right?

The problem is, when it comes to the market, that train may decide to travel to Cleveland by way of Miami. Or, despite the fact that it's headed towards Cleveland, it may decide not to go to Cleveland at all, just like the rest of us (sorry Clevelanders!).

The point is, on several occasions last week, I mentioned that selling retests of the S&P 500 1849 high appeared to be a solid trade to me -- but now that we've seen a decline and selling actually looks like a "good" trade to our linear-thinking minds, it's much more dangerous. Don't get me wrong, I think the odds are good for at least some continuation to the downside -- but every projection doesn't make for a good trade, because entries, risk/reward, stops, etc. must all be considered.

So if you're bearish but missed the boat last week, be very careful about where you try to hop on going forward. The reality is, the market hasn't yet done anything but form a three-wave corrective decline. No key intermediate levels have been broken, and the pattern has not yet formed an impulsive five-wave decline to suggest a larger trend change. While there have been intermediate warning signals, price and pattern trump everything -- and practically speaking, the pattern at the intermediate degree has not yet ruled out the potential for another wave up. Speculate accordingly.

Let's start off with the Dow Jones, since the pattern here still appears a bit cleaner to me than the S&P 500. I've noted some key upside levels on the chart.


Click to enlarge

The S&P 500 doesn't have the clear nested first and second waves that the Dow has, but bears would like to see 1823-27 act as resistance to any rallies. Bulls would like to see 1810 +/- act as support. The action over the next few sessions will have intermediate implications, though it must be noted that a failure at 1810 simply rules out a micro fourth wave and limits bull options. In itself, it is not the end-all to the bull case -- more on that in the next few updates.


Click to enlarge

One chart (not shown) which was quite bearish yesterday is the Dow Jones Transportation Average (INDEXDJX:DJT). The Dow Transportation Average lunged to new highs at the open, then closed below Friday's low, thereby forming a bearish engulfing candle.

I'd also like to show the SPDR S&P 500 (NYSEARCA:SPY) chart again, to emphasize the intermediate importance of the current inflection zone. Bulls can still stick-save the market in the near future and keep the uptrend alive -- but if they don't, we're likely in for a solid correction, in the neighborhood of 8-10% or more.


Click to enlarge

In conclusion, the ingredients are in place for an intermediate decline, but we don't yet have confirmation from either the price or the patterns. This has all the makings of an important week for the markets. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic.

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No positions in stocks mentioned.
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