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SPX and INDU Updates: Europe Adds a Wave to the Outlook

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It appears the current wave is becoming more complex, which extends the bounce.

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MINYANVILLE ORIGINAL Yesterday's outlook expected lower prices, which happened. The market then launched a strong bounce from the lower end of the trading range -- and then, after the cash market closed, Europe announced that it had solved the majority of the world's problems. When it was further revealed that, during the course of the summit, German Chancellor Angela Merkel had developed a cure for cancer and a viable Unified Field Theory, futures shot higher.

If you're feeling frustrated with this market at all, you're probably not alone -- and that's a pretty normal function of a trading range. It now appears likely that Minute wave ii is becoming more complex than initially suspected. Unfortunately, this type of development often can't be predicted in advance. Sometimes a corrective wave will form a complete ABC fractal, then decide to add a couple more ABC fractals (or similar). This appears to be happening now.

The S&P 500 (SPX) did not make a new low yesterday, but the Dow Industrials (INDU) did, and that opens up the potential of an expanded flat developing in INDU. The typical target for such a wave is 12720-12775.


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Moving on to SPX: After studying the overall structure, and a number of other indices, I've decided it is probably appropriate to label the decline from 1320 to 1310 as a failed fifth wave. A fifth wave is considered a "failure" when it fails to make a new price low beneath the bottom of the third wave, and when it's unable to hold down a steady job. (Sorry, just a bit of bad Elliott Wave humor there!)

Anyway, the targets here are 1337 or 1352, give or take a couple points. The black alternate count targets are listed, but the basic structure of that count is detailed on the next chart.


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Now, because 1306 has not been traded under, the alternate count is still alive. I continue to give this count lower odds because the retracement level of 1363 was 61.8% of the prior decline, and that's wholly appropriate for a Minor wave (ii) -- but the market is always the final authority. We'll see how excited investors are about Europe because this alternate count is still technically possible. I think if the trendline connecting 1422 and 1363 is materially broken, then at that point, we should probably give strong consideration to this potential.


Click to enlarge

The chart below shows the preferred count, big picture targets, and some things to watch. Keep in mind that red Minor wave (iii) should take several weeks to months to unfold -- targets won't be reached tomorrow and there will be rallies along the way.


Click to enlarge

In conclusion, the short term expects higher prices, and a reversal to follow -- but the more bullish alternate count cannot be ruled out yet, and traders should stay alert to it if the upper trendline is broken. Trade safe.

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No positions in stocks mentioned.
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