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SPX, INDU, RUT, NYA: Market Wants a Debate


The bears are demanding equal airtime...

MINYANVILLE ORIGINAL In keeping with the spirit of election season, the bears have decided it's time to open a debate.

On Tuesday, bears broke the market down through some key trendlines in several markets. The analytical challenge I'm running into remains the same as mentioned last update: there are a lot of mixed messages being conveyed by different markets, and it's difficult to find a pattern that holds across all of them.

The one market that has largely convinced me that higher prices are still ultimately coming is the Dow Jones Industrial Average (INDEXDJX:.DJI). I can't get past the three-wave rally into the new high, which suggests the final high isn't in yet -- and this is a pattern I've learned to never ignore. It doesn't work 100% of the time -- nothing does -- but it does work the vast majority of the time. The main question has become how deep the correction will run, and as I suggested on Monday, wise bulls probably wanted to get out of the way once that lower red trendline broke.

I can now count five clean waves down into the recent low. Where I'm most unsure is whether those five waves form wave 3 of c, or ALL OF wave c. On the chart below, I've drawn-in the potential for wave 3 of c, with a fourth and fifth wave still to come -- but there really isn't a clear answer.

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An interesting fractal study I want to share is General Electric's (NYSE:GE) pattern of March-June 2012 in comparison to the current S&P 500 (INDEXSP:.INX).

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SPX below. The beginning of the structure looks remarkably similar to GE, but they diverged recently, as SPX has materially exceeded the lower support line -- and has done so on a confirming MACD reading. This is the signature of a third wave decline (c-waves are third waves), the question for SPX is the same as INDU -- whether this is ALL OF (c) or whether there is a correction to come, followed by new lows.

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The simple SPX chart below still outlines the key intermediate pivots.

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In a further attempt to fit everything together, we have the Russell 2000 (INDEXRUSSELL:RUT), which also has enough waves to form a complete correction. RUT really makes me wonder about SPX and INDU, because if the recent low breaks in a material fashion, it will be hard to see that as a short-lived event, given the present pattern.

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The market has so far been unable to hold support -- and the fact that 1474 has held keeps the mega-bear count alive. If it weren't for INDU's final high on a three-wave rally, I would be favoring the count shown below... especially since it's the only wave count that seems to connect the whole structure from March 2009 into a cohesive form. This count suggests that the market has seen a major trend change, so we'll keep watching it for confirming signals -- but until there is some confirmation, we'll assume the long-term trend is still up.

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I also want to point out the stark contrast between a couple markets, to illustrate how it's difficult to find an over-arching theme. First is the NYSE Composite (INDEXNYSEGIS:NYA), which (so far anyway) looks like nothing more than your average healthy correction.

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For contrast, we have the Nasdaq 100 (INDEXNASDAQ:NDX), which has now retraced 50% of the rally off the June lows.

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In conclusion, the short-term trend is currently down across markets; the intermediate trend has shifted to down in several, but not all, markets; and the long-term trend remains up. INDU, RUT, and SPX could be counted as complete waves down, but it is unclear whether we should anticipate a fourth wave higher followed by a fifth wave down, or whether the pattern is roughly complete.

I remain of the opinion that the final high isn't in yet (for INDU and SPX), but bears certainly aren't going quietly into the night. A small bounce here which was followed by lower lows that held key support would be acceptable for the intermediate bull case, but a large bounce that fails to reclaim 1464, and which then subsequently broke the recent lows, would suggest a very bearish longer-term outcome. Trade safe.

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No positions in stocks mentioned.
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