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SPX Update: Will the Market Break This Pattern?


This pattern has repeated since the October 2011 low. Will it continue?

Some nights I study so many charts that I have no idea how I get the update finished at all -- and this is one of those nights. (I know for most people, the sun is up already -- but for me, since I live in Hawai'i, the market opens at 4:30 a.m.) I've been studying chart after chart, because there's something bothering me about this market, but I can't quite put my finger on it. Sometimes when I look at enough charts, I can figure out what my gut is trying to tell me -- and sometimes it's nothing. Maybe my feeling of nagging discomfort is just normal bull market "wall of worry" stuff. I ran out of time tonight, and couldn't quite pin it down, but may have come close with a ratio I watch.

Since this is a currency-driven rally in the form of the QE printing press, I often try to view things through a dollar-lens, so to speak. The chart below is a ratio of the S&P 500 (INDEXSP:.INX) to the US dollar. This is a bit inconclusive at present, but the chart explains the reason for caution: What's bothering me right now is that every rally prior to this (in the QE era, anyway) has begun a deep correction right where we'd normally expect a fourth wave decline and a fifth wave rally. Maybe this rally will break that pattern -- but given the precedent, it seems unwise to simply assume it will.

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The Philadelphia Bank Index (INDEXDJX:BKX) is also warning that a larger turn may be in the works.

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The NYSE Composite (INDEXNYSEGIS:NYA) shows that bulls probably need to hold the black dashed trend line, or risk bigger problems.

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The preferred count for the SPX still has the active downside target of 1470-1473. I went over the one-minute SPX chart in detail tonight, and it is possible that the market has completed an ABC fourth wave correction in its entirety (hence the alt: 4), but I presently view that as the underdog. And, as I just noted, I'm having trouble simply assuming we'll even have a fifth wave up. The annotation from yesterday still sums up my approach right now.

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Finally, a short-term chart of the Dow Jones Industrial Average (INDEXDJX:.DJI), which staged a pretty solid snap-back yesterday. The chart is simply for aid in identifying potential support and resistance areas throughout today's trading session.

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In conclusion, if it weren't for the market's behavior over the past few years, I would normally be reasonably confident in the idea of a fourth wave decline now underway, and a fifth wave rally still to come. But given the three-wave nature of most rallies since 2009, I am continuing in my cautious stance until I see more signs of an "all clear" from the market. Trade safe.

Editor's Note: Today at 4:30 p.m. ET, Minyanville is hosting a free webinar with Buzz & Banter contributor Peter Prudden, who will give attendees an in-depth look at his macroeconomic outlook and trading style. To sign up for this free event, click here and hit the register button on the upper-left side of the screen.

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.
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