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SPX Update: Fed Cash Trumps Prior Sell Signals


The market gapped through 1600. Will the breakout fail or keep running?

On Friday, the intermediate thesis I've been building for a couple weeks (of a larger fourth wave correction) was at best forestalled, or at worst completely blown up. The signals I noted in April constituted the first serious batch of sell signals I've seen since the Fed started feeding QE-Infinity money into the Primary Dealer accounts back in 2012, and I apparently made a mistake in thinking those signals might work anyway. Lesson learned.

There's an outside possibility Friday may have been the exhaustion gap of an unpredictable extended fifth wave -- however, there's danger at times like this for an analyst and a trader because there's always a temptation to latch on to whatever might "prove you right in the end." So I'm going to override my own slight hesitation and stick to the discipline of the equation: This breakout must be respected as bullish as long as it sticks. Accordingly, I'm going to publish the "most obvious" bullish wave count until proven otherwise -- but to be fair, we won't really know one way or the other for a session or two. In this update, I'll outline a few of the signals and key levels to watch.

Even though I've written extensively about the potential for upside surprises during third wave rallies, and about the bullishness of the unprecedented liquidity the Fed is pouring into the market, I myself sometimes forget to "expect the unexpected." The mini-crash in precious metals during the second week of April got my attention and suggested there might be some underlying cracks in the foundation, but apparently if there were (or are), the Fed has so far been able to print over them.

One of the challenges in Elliott Wave is the fractal nature of sub-dividing waves. Though I wasn't favoring this view, I mentioned last week that the market had formed five waves up, but it was possible those five waves only marked wave i of a larger five wave structure. That now appears to be the case, but the even bigger surprise for bears was the extremely shallow nature of the second wave. Normally second waves will retrace 50% or more of the previous wave -- this one barely corrected at all.

There were numerous indicators suggesting a correction was due, but as I've discussed many times previously, we must at least consider the possibility that this market may simply not behave in line with historical sell indicators until QE-Infinity begins tapering off, or until there is a larger crisis of confidence. Speaking of, now that May is upon us, there's the historical seasonality factor for bears to ponder (the old "sell in May and go away"). Whether that type of seasonality will work in a Fed-driven market where bulls are endlessly backstopped, and "risk" is a four-letter word, is another question entirely, though.

Things always become a bit tricky this far into a strongly-trending wave, because the smaller waves we'd normally use to triangulate the pattern are compressed and harder to locate. This is my least favorite potion of any pattern for a number of reasons. In any case, I made it no secret that I expected more from the recent fourth wave correction, and I won't pretend I wasn't surprised by Friday's action. But in the bigger picture, the long-term preferred wave count is materially unchanged since January/February (back when everyone thought I was a complete loon for favoring it). This will remain preferred unless the price action gives us some reason to stop favoring it, or until the Fed files for bankruptcy.

Click to enlarge

The near-term count I published on Thursday was invalidated before the session closed, which was the only warning cash traders had before the S&P 500 (INDEXSP:.INX) gapped open on Friday's job number. As promised, I'm now showing the most bullish wave count as the preferred interpretation until proven otherwise. Keep an eye on that blue trend line; it's one of those "stealth" trend lines that the market's reacted to every time it's touched it.

Note the extreme momentum in RSI on the chart below. Normally, that type of reading suggests that the next dip will be bought.

Click to enlarge

No additional comments for the hourly chart:

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Finally, the Philadelphia Bank Index (INDEXDJX:BKX) is lagging a bit here:

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In conclusion, unless bears are able to stop the advance more or less immediately, we probably need to favor the most bullish wave count until proven otherwise. Trade safe.

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