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SPX, US Dollar, Dow Jones Industrials: Markets Approaching a Key Inflection Point

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The outlook has been anticipating higher prices since November 29, but now things get interesting again.

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MINYANVILLE ORIGINAL Last update (Friday, Dec. 7) noted that trade above 1416 would suggest a first target of 1422 and a second target of 1433. Both targets have since been reached, amounting to 17 points of profit. Of note, the S&P 500 (INDEXSP:.INX) exactly tagged (to the penny), and reversed from, my "critical bear level" of 1434.27. It remains to be seen if bulls can sustain trade above that zone.

I am continuing to give the edge to the bulls for the intermediate term, but the SPX has reached/is reaching another interesting potential inflection point. Since November 29, my standing target for SPX has been 1445-1455, and we've come within 11 points so far. This is a zone bears may attempt to defend, so longs should stay nimble going forward.

Beneath us, I would watch the 1420 area as the first important support zone, and sustained trade beneath that zone would serve as a warning to bulls, at least over the short-term -- with the possibility of a more bearish intermediate outcome. Until then, as long as bulls maintain that support zone, the market is cleared to keep moving higher.

The next two charts help outline the importance of this inflection point, and the outcome here will help define the bigger picture. According to Elliott Wave Theory, the market moves in three-waves when it's moving opposite to the direction of the next larger trend (correcting), and in five-waves when it's moving with the larger trend. I'm continuing to favor the bulls for the intermediate-term, because the decline from 1474 counts better as a three-wave move, which suggests it was a countertrend correction to the long-term uptrend -- but it's still not a clear-cut picture, and thus both possibilities remain valid.

The first chart is the bullish count, though it's important to keep in mind that there are different paths the market can take to reach these targets -- and very few markets move in a straight line. I try to adjust the projected paths when possible and as needed.


Click to enlarge

The next chart shows the hourly count when viewed through a bearish lens. The bears want this to be a three-wave rally (an ABC), which would make it a correction to the prior decline. Bears will need to make a stand soon to maintain their hopes, and the market has almost reached the zone where a corrective rally could expect to be rejected.

The chart below depicts an ending diagonal (c) wave. A related option, not shown on the bull chart above, is that of a leading diagonal first wave, which would play similarly over the short-term. A leading diagonal or ending diagonal would make one more quick thrust up before a strong reversal toward 1385-1400. The difference between the two is that the leading diagonal would still be intermediate bullish, and march higher after that decline. Thus, we should watch the 1440-1455 zone carefully for a any signs of reversal -- the chart below notes some signals to keep an eye on.


Click to enlarge

Those are the caveats for bulls regarding the current price zone. The caveats for bears are different. One problem for bears, as I see it, is that once the market sustains trade above 1434, we're back into a thinly-traded range (between 1434 and 1464), and there may not be much in the way of resistance until the upper edge of that range. This would jive with the bullish interpretation of a third wave higher (blue (3)) underway. Third waves are pure trending waves, and are unforgiving of traders who cling stubbornly to wrong-sided positions.
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No positions in stocks mentioned.
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