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SPX Update: Bears Fire a Shot Across the Bow

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Still no confirmed trend change, but bears seem to be gaining strength.

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The bears finally showed a little bit of strength yesterday, although the decline was almost entirely retraced by day's end. Before I get to the short-term bear counts, I'm going to present the slightly more bullish alternate, then wrap up the discussion with the bear view.

The recent decline is currently a three-wave form, and played out almost perfectly for the alternate count -- this is causing me to again present the alternate count's chart (not published yesterday; chart last published in Friday's article: SPX Update: Using Elliott Wave Theory to Find Entries and Stop Losses).

It was brought to my attention that the very short-term count I showed yesterday with the black "Alt.: A" and "Alt: B" labels wasn't understood by many readers. Those labels represented the blue a and b labels on the chart below.


Click to enlarge

There's an interesting potential at play across markets right now. Last Thursday, the Dow Jones Industrial Average (INDU) came within 35 points of invalidating its entire Minor Wave (2) count. The current structure on the INDU appears slightly different than the SPX. While the SPX looks like a three-wave decline, the INDU may have formed a five-wave decline. The INDU also pierced intermediate support, though rallied back above it. Is it possible that the INDU has topped, while the SPX could still make another run, slightly above the 1,333 high? Today's action should help answer this question.

Below is the INDU chart, which mainly focuses on the support and resistance lines. For the first time since the rally began, INDU pierced the rising blue trendline connecting the November and December bottoms. It still maintained the red channel, but each decline has been getting progressively stronger, as each time the channel line is forced lower. I expect the next decline will finally break the rally's back for good. In the meantime, until there is a solid close beneath the blue trendline, there is still no confirmation of trend change.


Click to enlarge

The next chart is the short-term bearish count for the S&P 500 (SPY). Trade above 1,320.06 would rule out the 1-2 portion of the count shown below, and cast suspicion on the blue 5 label, since that would force the entire decline to be viewed as a single first wave, which is difficult. Trade above the recent 1,333 highs would rule out this count entirely and shift preference to the alternate SPX chart.


Click to enlarge

The final chart is simply a big picture view of support and resistance lines for the SPX. The bears still have their work cut out for them, though they do seem to be getting progressively stronger. Breaking the black channel in the short-term chart (shown above) is the first step, breaking the 1,300-1,310 zone is the second, breaking the rising black trendline in the long-term chart (shown below) is the third, and breaking the rising blue trendline below would be final confirmation.

It is noteworthy that the daily moving average convergence-divergence has finally crossed over. It has also formed a negative divergence with price, and barring a big renewal in the rally's strength, this is often indicative of a pending decline.


Click to enlarge

In conclusion, whether I nailed the top yesterday remains to be seen. I'm not backing off that call yet, but there was nothing yesterday to add any confidence to it. However, even if the market moves slightly above the 1,333 price point, the rally is now showing signs of weakness. Each decline has gotten stronger, and each time it's knocked out the next lower channel support. MACD has finally crossed, and I suspect that any upside potential is now quite limited. Trade safe.


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

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No positions in stocks mentioned.
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