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SPX Update: The Picture Is Again Becoming Clearer


While a bearish resolution seems probable, there are two short-term paths the market may seek to get there.

For once, what I found most interesting about yesterday wasn't the charts. It was the push that suddenly materialized from the Fed to assure the market that the stimulus guns were ready and loaded for bear. I found that quite unusual, because the Fed meeting was barely two weeks ago, and they decided "no stimulus." Are we to believe that the Fed governors suddenly woke up yesterday and randomly said to themselves, "Sheesh, well, that was a bad decision." Hardly.

This concerted "feel good" effort seems to hint that the Fed is aware of some pretty bad news lurking on the immediate horizon; and it's trying to reassure the market before this news event hits. I can't see any other logical explanation for the sudden about-face and ensuing media blitz, in light of current events. It's not like the market is cliff-diving at the moment; and it's not as if the economy got significantly worse in the lengthy span of two whole weeks.

No, I'm pretty sure they must be front-running some piece of bad news that has yet to reach the public; or perhaps it's something that's already there (such as the stress being shown by the credit markets), but hasn't sunk in for the public yet. Either way, it's an unusual and telling move that indicates underlying issues may be worse than they seem.

In other news, I've just been handed a short note from the Horn Tooting Department, which mentions that yesterday's KBW Bank Index (^BKX) count and chart has so far played out to a tee -- although I missed the exact bottom by $0.17. Hopefully, some readers were able to take advantage of that setup. (See SPX and BKX Update: Market on Hold, Call Again Later.)

The charts are finally starting to narrow down some of the possibilities. The "simple" explanation that most chartists are looking at is the potential triangle continuation pattern that's forming. This would be bullish for equities and implies a move higher. That's certainly possible, but based on the best analysis I've been able to muster by examining numerous markets over the past few weeks, I find it less likely. That could always change as the market gives new information in the future.

I still favor the bears here, as I have since October 27. If the bears can get through the bulls' first two lines of defense, SPX 1,215 and 1,190, they should be able to take the whole cake and run this market quickly down to new lows.

Unfortunately, I can't tell you exactly what the market will do next. I can, however, present a few things to watch for. Since I continue to favor a bearish resolution, and continue to believe that October 27 was a meaningful top, there are two potential bearish resolutions I'd like to share here. Both are counts we've been watching for a few days, but I want to share with you how they could diverge in the next few days. The first chart shows the move as a series of subdividing waves, each forming a smaller first and second wave. This count is just about out of time here, and needs to accelerate lower almost immediately, or it will lose plausibility. The chart says "today," but today/tomorrow would still be passably acceptable. This chart has the alternate count shown in black, but that count is detailed in the second chart.

Click to enlarge

The second chart shows the alternate way for the bearish count to resolve. The potential currently exists that the market is forming a double-zigzag formation, and I have drawn in a likely way for that to play out. I am starting to grow fond of this count, as it would cause the greatest confusion to all players with a head-fake triangle breakout. This count also foresees downward movement from the market today, but instead of accelerating, it would then stage a rally near the lower triangle boundary.

Click to enlarge

I believe the market will seek one of those two resolutions in the coming days. Both are quite bearish, and would both call for significantly lower prices once this correction is over. I continue to favor a bearish resolution by an 80% margin.

However, in the event I'm wrong, readers should be aware of the bullish possibility, should it start to unfold. The bullish resolution is what many players here are expecting, as triangles are continuation patterns in the vast majority of cases. I am handicapping this scenario at 20% odds; in other words, I think the triangle is a "fake."

Of minor note, this triangle is consummate with the expanding ending diagonal alternate count we've been watching for weeks; it's simply a different way to chart it. Since the triangle has become so prominent in the charts, I feel it's more prudent to address the market in these terms going forward.

Click to enlarge

As I have stated repeatedly, I continue to be bearish at this juncture, whether that comes by way of the first chart or the second. If the first count is to play out, it's do-or-die time, so today should answer the question of whether this ends immediately, or drags out for a few more days. The bullish count is presented, not because I think it's likely, but because sometimes I'm wrong. Trade safe.

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

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