Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

SPX, INDU, and BKX: Can We Draw a Conclusion From These Fractured Markets?

By

Three important markets have fractured.

PrintPRINT
Long-time readers will recall that I've written about fourth waves as my arch-nemesis, and the current market hasn't disappointed me in that sense. The market has been whipsaw city for the past few sessions, and this is typical behavior for a fourth wave, which is one of the reasons I despise them, and generally simply avoid trading them except for very low-risk entries that I'm often quick to exit.

While it's tempting to look at yesterday's rally as the "all clear" for the bulls to proceed into a fifth wave rally, I would simply caution that price is still within the fourth wave trading range, and fourth waves are almost never as straightforward as they appear at first (or second... or third...) glance. Further, we are presently seeing some fracturing across markets.

Yesterday, I called attention to the Philadelphia Bank Index (INDEXDJX:BKX), which appears to have formed an impulsive five-wave decline. This is a tricky one, though, because the preceding move was a mess, and so the impulsive decline could conceivably be the c-wave of an expanded flat correction ("alt: (4)" label). However, I presently do not believe that's the case; I'm more inclined to view that decline as a first wave down ("(1)/A" label), and am not yet convinced the correction there is over.

That leads me to a more complex count in the S&P 500 (INDEXSP:.INX), which I'll share momentarily. Further, note how much BKX is lagging SPX in price, and that's often not a good sign for SPX. As long as this fracture between markets continues, it's more likely that BKX will ultimately win that battle and drag SPX lower, as opposed to vice versa.

The bottom line here is that I'm inclined to believe that BKX will see lower prices before it sees new highs, and that suggests SPX will be struggling uphill for the time being. We'll watch this carefully going forward for signals that either validate the rally in BKX as corrective, or that suggest that rally is becoming impulsive in nature.


Click to enlarge

The impulsive decline in BKX leads me to believe that one of two outcomes awaits SPX. The first option is that the current correction will become more complex in nature (blue 4 below). The second option is that SPX will make a new high for wave 5, but that it won't be significant (red "alt: 5"). I would like to caveat that I'm front-running the market with this conjecture, and the intermediate trend is still clearly up -- so play along at your own risk.


Click to enlarge



Another market that has now gone its own way is the Dow Jones Industrial Average (INDEXDJX:.DJI). INDU made a new high yesterday, and SPX often follows suit. So we have BKX, SPX, and INDU each doing their own thing. SPX presently seems to fall right in the middle of the two, so hence my conjecture that a retest or marginal new high followed by a decent reversal is in the cards. This proposal actually matches the INDU count quite well, as the present rally leg does appear to be the final fifth wave in INDU's series.

INDU's rally is presently corrective (an ABC), and has not yet formed five waves at micro degree.


Click to enlarge

The long-term INDU chart notes the approach of the previous all-time-high. If INDU clears 14,200, then there is simply nothing left as far as horizontal resistance, so we have to watch theoretical overhead resistance levels in the form of trend lines/channels, etc..


Click to enlarge

Another ratio I track is SPX:TLT, and this ratio gave a warning signal a few weeks back. I didn't publish it at the time because my other indicators weren't yet validating it. I think it's time to pay a little more attention to this now, though please be aware this doesn't necessarily argue for an "end of the world" type decline -- but it does suggest that what we've seen in SPX so far may be only part of the corrective picture.


Click to enlarge

In conclusion, I may be a little early warning about these signals since it's entirely possible that a fifth wave rally is underway in SPX and that will take us up to new highs rather directly. However, I wanted to emphasize that things are not as clear-cut as they may appear. Ideally, one or more of these signals will clarify in the next few sessions. Trade safe.

Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE