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SPX Captures November's Targets; What Next?


Last month provided a very tradeable market, but has now entered another inflection zone.

What sets successful traders apart? Most people think that winning in the markets has something to do with finding the secret formula. The truth is that any common denominator among the traders I interviewed has more to do with attitude than approach.
-- Jack Schwager

On Friday, the S&P 500 (INDEXSP:.INX) captured the next target zone, and promptly turned where it "should" for the preferred Elliott Wave count. We're now entering waters that, while not exactly dangerous yet, certainly call for added caution. Part of Elliott Wave Theory revolves around counting the number of waves in the correct way, and then anticipating (based on that count) where market will head next. For the past few weeks, the market has been unraveling fourth and fifth waves (the final waves in a series), and we've now reached a point where it becomes a game of inches.

The best way I can explain this is as follows: When you count the early portion of a wave (the first and second waves), there's always at least one or two that are a bit vague. Let's draw an example, and say that you work your count and determine that there are probably seven first and second waves, which means at the end, you'll anticipate seven fourth and fifth waves. But one of those waves is vague -- so you're not 100% certain there are 7. You can see the potential that perhaps there are only six -- this means that you can have pretty high confidence in six fourth and fifth waves coming at the end of the series...but that final wave to make it seven becomes a lower probability trade.

This is basically where we are now. I had high confidence in the last two fifth wave rallies; however, my confidence is not as high for another one. Given the charts as of this moment, I'm still leaning toward it, but be aware that it's a higher-risk proposition and act accordingly. Also be aware that the wave count suggests we may be nearing a higher-degree fourth wave correction -- this means that the coming correction is likely to be deeper and longer-lasting than the previous two.

Let's start with the 30-minute SPX chart. Note that the location of gray (4) is not intended as a target on this chart -- it's far too early to calculate a high percentage target for that wave, or even to confirm that gray (4) has begun (since the market has yet to form a five-wave impulsive decline for confirmation and target purposes).

Click to enlarge

The SPX SPDR ETF (NYSEARCA:SPY) also has enough waves to count as complete, and suggests odds are increasing that a correction is looming. I'll track and update the odds and signals for the noted potential fifth wave extension as it unfolds.

Click to enlarge

The Dow Jones Transportation Average (INDEXDJX:DJT) is now bumping into the upper boundary of its long-term trend channel. In itself, this doesn't guarantee a correction -- but it certainly calls for a healthy dose of caution.

Click to enlarge

In conclusion, Friday's target capture and reversal came right where the waves suggested it would, but as of yet, we do not have a five-wave decline to confirm a trend change. Based on the rest of the wave count, though, in a perfect world, I'd like to see a deeper correction unfold in the near future. If the higher-degree wave count is also correct, ultimately there will be another buying opportunity down the road, for a trip into the next target zone. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic.

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No positions in stocks mentioned.
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