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Jason Haver: Blue Chips and Bonds -- Equities May Try to Confuse Traders


Equities may have a trick up their sleeves. Here's what to watch.

The market has been treating the preferred wave counts well over the past few weeks, and on Tuesday, the S&P 500 (INDEXSP:.INX) dropped down into the 1863-70 zone, while the Dow Jones Industrial Average (INDEXDJX:.DJI) made new lows. 
The market has now reached a minor inflection zone, and I'm inclined to think we may see the double retrace rally I spoke about on Friday and Monday. 
While I think the intermediate term suggests this is a seller's market, the near-term is on the cusp, and there are two potential challenges for bears over the near-term:
1.  Yesterday's decline was only 3-wave in the S&P, leaving open potential that the decline was corrective.
2.  The initial decline off the all-time high featured an extended fifth wave. And extended fifths are usually followed by complex "double retrace" corrections -- thus, given the 3-wave decline yesterday, the double-retrace is still a very distinct possibility for the moment.
While we've stayed a step ahead of the action lately, this market has been hard on a lot of other traders -- by the time everyone thinks it should be bought, it should be sold; and by the time everyone thinks it should be sold, it should be bought.  While I suggested the market was a "solid sell" near 1882-88, I doubt the masses agreed.  But I'd be willing to bet they agree now -- and that might make this an ideal spot for a second rally leg toward 1888-92 (where everyone will think it's time to buy again... rinse and repeat).
I illustrated this double-retrace on Monday's chart, and so far the market has followed the projected path almost perfectly (all I had to do to update the chart was delete the line that price traded over).  It's a tough call right here, but I'm marginally inclined to give the bulls the near-term edge for that second rally leg.  The preferred near-term count would be challenged below 1868 -- if that happens we're likely to see new lows (and probably a whole lot more) more immediately.  Ultimately, new lows are expected either way.

Click to enlarge
I've also illustrated the near-term wave count in more detail on the Dow chart, and noted a key upside resistance zone  Additionally, I've illustrated the alternate intermediate-term count -- more on that after the chart.  (Incidentally red is the new black -- or vice versa: On the chart, I mention the near-term alternate count in red, but the alternate counts are both in black, as I forgot to change the colors!)

Click to enlarge
Finally, a quick update to the 30-year Treasury Bond (USB), which is now awfully close to February's target zone.  This is one of the reasons I'm giving consideration to the alternate bullish intermediate wave count in equities:  USB has rallied as expected, but blue chips haven't made much downward progress during this rally.

Click to enlarge
In conclusion, the near-term is an extremely tight call here, but I'm inclined to give the edge to bulls for a second rally leg to complete a textbook double-retrace rally in the wake of the extended fifth wave decline.  But after that, I expect new lows will follow -- so the intermediate outlook is bearish.  In the event equities are unable to reclaim noted resistance, or in the event S&P sustains trade south of 1868, then the near-term outlook would also turn more immediately bearish.  Trade safe.
Follow me on Twitter while I try to figure out exactly how to make practical use of it: @PretzelLogic.

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