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Is the Rally Nearing a Peak?

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While a trip to new highs would be the "perfect world" path, a larger correction could begin at any time.

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Yesterday's preferred wave count outlined a small fourth wave correction as the most likely outcome for the session, and the market performed very much in line with that expectation. Odds are reasonably good that there's still a small degree fifth wave-up left to come, ideally peaking into my 1520-1530 target zone -- however, we're now within the margin of error for that wave count.

On the chart below, note that the market may have completed all of red wave (iv), but fourth waves are notoriously ugly and unpredictable, and quite frankly, I hate trading them. In a perfect world, red wave (iv) is roughly complete as a simple ABC and would move more or less directly into wave (v) to complete blue 3, but there are no guarantees of this and there's no rule that says this fourth wave can't chop around for another session or five.

Blue wave 3 is expected to be followed by blue wave 4 (I know: duh) -- in other words, a high degree fourth wave, which could chop around in a sideways/down manner for several weeks.


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The 3-minute S&P 500 (INDEXSP:.INX) chart contains additional detail:


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I'd also like to dust off the trusty Philadelphia Bank Index (INDEXDJX:BKX) chart once again. On January 15, I noted that BKX still needed a fourth wave decline and fifth wave rally, and it has since fulfilled the minimum expectations of that. This opens the possibility that the entire wave at higher degree is now complete, which would suggest a deeper correction is in the wings.

While both SPX and BKX suggest another small wave up is reasonably likely, at higher degree, SPX suggests a fourth wave correction (blue 4 on the hourly), while BKX suggests a second wave correction (red wave ii on the chart below). Second waves are typically deeper, sharper, and more frightening than fourth waves. Second waves are likely to turn everyone bearish again, while fourth waves are likely to be more "ho-hum, just a consolidation." Presently, I am uncertain how to reconcile the wave counts of SPX and BKX with one another.


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Additional detail on the 30-minute BKX chart:


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Finally, I'd like to revisit the long-term NYSE Composite (INDEXDJX:NYA) chart, which is one of the charts that's kept me largely in favor of the bull case ever since the key breakout of September 2012. Note that weekly RSI is again overbought, and again has confirmed the rally to this point. This behavior typically implies a correction, followed by new highs.


Click to enlarge

In conclusion, as noted yesterday, the market is quite likely to be on the cusp of entering a larger corrective chop zone. In a perfect world, we'd get a final thrust up toward the target zone, and then begin a larger and more lasting correction -- however, we are within the margin of error for the wave count, and thus a deeper correction could begin at any time. Through all of January, I've reiterated my opinion that this was not a market in which to do any bearish front-running, and I continue to feel that way -- however, the easy money portion of the rally may finally be drawing to a close, so please protect profits accordingly. Trade safe.

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No positions in stocks mentioned.
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