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SPX and XLE Update: Light Volume Breakout Is Highly Suspect


The market seems intent on drifting higher on light volume, but does it mean anything?

There's been no material change in the counts since yesterday. The expectation remains that a top will form sometime over the next week or two. Bear market bottoms tend to be V-shaped, but bear market tops are affairs that generally last several sessions as a balance is reached between buyers and sellers. They sometimes take the form of a drop followed by a retest of the high, but very rarely form as immediate reversals.

The volume on Tuesday was even lower than Friday, which creates a bit of a problem for bulls. The S&P 500 (SPY) has made a technical breakout above a significant trendline and its 200 day moving average, but true technical breakouts are supposed to occur on increasing volume, not diminishing volume. This bearish volume divergence adds corroborating evidence to my preferred Elliott Wave count which suggests the breakout is merely a head-fake.

On Tuesday, the market reached the target zone for the current count. Despite this, while an immediate reversal is always possible, probabilities argue for fresh highs for the move -- and the corresponding, more typical, price action which usually forms a top. The implication of the short-term counts is that the market is due a bit of sideways/down action before moving back up to make another new high.

Along those lines, the first chart I'd like to share is the one-minute SPX chart (below). This chart shows a potential trend channel projected from two different lows, and the knockout level for the bulls.

Click to enlarge

The next chart is a daily chart of the SPX, and shows several resistance and support lines which are in the vicinity of current prices. It also notes the low volume of the breakout.

Click to enlarge

On the chart above, I have also shown my expectations for the market when Minor Wave (2) finally completes. Apparently some readers were confused on this point: I'm not expecting a huge drop immediately. I have on occasion referred to the next wave (Minor Wave (3)) as "the crash wave," which is probably what created the confusion -- but I have never expected an immediate crash off the Minor (2) top. I would expect the next move to start as a persistent march lower, possibly in the form of a waterfall (my first target is SPX 1000-1050), then a decent bounce, then the crash. This entire process would unfold over the span of several months. All of this, of course, is predicated on the idea that the market is indeed forming the Minor (2) top.

The next chart is presented in support of that theory. Some bears are beginning to undergo an identity crisis, given the persistent hovering of the market, and the recent technical breakout. The chart I'd like to highlight is the SPDR Energy Sector ETF (XLE), which consists of holdings such as Exxon (XOM), Chevron (CVX), ConocoPhillips (COP), and similar companies. One reason I like to track this index is that it's often used as an inflation hedge and thus could give leading indications if the market had impending inflation expectations. Since money printing is one of the fears bears are expressing, this seems an ideal time to share this chart.

On the chart below, what strikes me as important is the fact that the October rally is virtually impossible to count as an impulse wave. Due to the numerous cases of overlap, it can only be counted as a corrective structure... and this implies that the October lows will be revisited and eventually broken. This chart is a particularly good example of a triple-zigzag, because it conveys not one, but three meaningful Fibonacci relationships in each wave a and c pair of the triple-zigzag off the October lows. These are highlighted in the callout boxes.

It also bears mention that this ETF is currently lagging the Dow and SPX in performance, as it has not yet bested its December highs. This isn't what I'd expect to see if there was a lot of money flowing through the inflation pipes.

Although the recent structure is a bit less clear-cut than October, the expectation is that the XLE either topped in early December, or is very close to doing so.

Click to enlarge

In conclusion, I'm still a bear. I'm not a permabear, though, and if the market gives me some reason to change my stance, you'll be the first to know about it. But so far, it's given me no reason to do so. The bullishness which is now in the air is to be expected if the market is topping -- in fact, it's a prerequisite that traders are bullish near tops. Usually, the market gets the majority to flip at just the wrong time. Trade safe.

This article was originally published on Pretzel Logic's Market Charts and Analysis.

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