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SPX and INDU Updates: Rally Due for a Breather?


Monday's potential turn level stopped the rally -- in this update, we'll look at price levels that should help signal if the correction will continue deeper.

MINYANVILLE ORIGINAL Monday's update expected the S&P 500 (INDEXSP:.INX) to head toward the 1426 +/- level, and noted that price zone should be watched for a possible turn. SPX reached nearly 1424, and then reversed into a 20-point decline. That decline does appear to have been impulsive, but there are presently two equally viable ways to fit that impulse into the surrounding structure, as shown on the chart below. The chart also notes a pending bearish sell trigger if the market sustains trade below 1403.

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This has been a pretty sloppy market for the last couple sessions, and try as I might, I cannot yet reconcile the rally from 1385 as an impulse wave (a five wave move). This means it's either incomplete and will head to new highs (black, below), or it's the b-wave of a larger expanded flat (shown below in blue), which will culminate in a decline toward 1384 or lower. Sustained trade below 1400 would more strongly favor the expanded flat.

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The next chart shows why I slightly favor the idea of a larger correction here. SPX, Russell 2000 (INDEXRUSSELL:RUT), Nasdaq (INDEXNASDAQ:.IXIC) and NYSE Composite Index (INDEXDJX:NYA) have all back-kissed the underside of major trend lines, and it would be unusual for them to simply power through without more of a pause.

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Not shown in this update: The SPX bear count is still alive and well -- however the chart is essentially unchanged since our last look, and a bit redundant to publish with this update. Please refer to Monday's update if you'd like another look at that chart.

I would like to take a closer look at the Dow Jones Industrials (INDEXDJX:.DJI), largely because I spent more than a few hours trying to break down the 2-minute chart (second chart).

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Below is the two-minute chart, which may take a few minutes to wrap your head around. This count is incredibly complex, and that raises the probability that it could be simply "unknowable" -- so take this chart with a grain of salt and for educational purposes.

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In conclusion, the odds appear reasonable for a larger correction in the near future, though the shape of the correction could still take a few different forms. The simple view is that 1400-1403 is important support to stave off a deeper decline... however, the INDU chart above raises the specter of a confusing, whippy, and ugly trading range -- fortunately, this can largely be ruled out if INDU sustains trade below yesterday's low in the immediate future. I remain marginally bullish on the intermediate term. Trade safe.

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No positions in stocks mentioned.
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