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business newsSPX Update: Proprietary Indicator Suggests Long-Term Caution for Bulls
By
Jason Haver
Feb 09, 2012 9:30 am
The trend is still up... for the time being.
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Sorry! Just a little off-beat humor there, designed to lighten the mood and elicit outrage from entomologists.
To keep it really simple: I haven’t capitulated on the entire bear case. I'm not going to be on CNBC next week talking about how stocks are "undervalued" and how the market always goes up in the long run. Those statements will be reserved for my appearances on talk radio.
Of course I'm kidding again! See how fun this column is? Seriously, here's the simplest way to understand it: I am short-term bullish and intermediate-term neutral.
As I attempted to outline yesterday, the shape of the next decline should help answer many of my questions as to whether that decline will turn out to be a buying opportunity or not -- hence my present neutral stance.
The point I was trying to drive home, and have been trying to drive home for some time, is "the trend is your friend." And until proven otherwise, the trend is still up. This isn't an opinion or a projection: It's simply a fact. Hopefully that clears it up.
The market is still facing a fairly critical test at the 1350-1360 overhead resistance level. So far, it's been unable to break through. If it can't and 1321 is violated first, then all short-term bullish bets are off.
Yesterday I showed a more bullish big-picture count, but at the same time, I tried my best to explain that the market still has myriad options. Once the price action takes some options off the table, the big-picture counts will come into better focus. When we get to that chart, I'll try to better clarify what I believe the two main options currently are. These two options are by no means the only options, though, and more info is simply needed from the market at this stage.
The first chart I'd like to share is missing a lot of data, since I'm only going to share the price portion of the chart. This chart represents a conglomeration of several of my proprietary signal indicators; it took years to develop, and it's simply too darn good to put out on the Internet for free. It's exceptionally reliable at picking bottoms (only two buy signals all decade: March '09 and October '02), and it's reasonably good at picking tops as well, though it tends to be a little early. I could tell you what all the different signal indicators consist of, but then I'd have to kill you. And I simply don't have that kind of time.
Yesterday, these combined indicators fired off the first topping signal in a year.
The chart below shows the S&P 500 (SPX). The vertical red signal lines indicate top signal trigger points; the green lines indicate bottom signals. One can see how exceptionally accurate this indicator has been over the years. While it doesn't necessarily mean the market is going to top tomorrow (though it can), it does indicate that, at best, over the next six months the upside should be limited.
This indicator is a big red flag to those Elliotticians expecting an immediate massive new bull market (of which I have never been one). This top indicator can trigger during bull markets, but even in 2004 and 2010, it indicated a large correction was forthcoming before further advances. In 2007 and 2011, it was early, but did indicate that a major topping process had begun.
In all prior cases, the market made new lows within two to three months of the signal trigger. So theoretically (assuming this indicator is still working, of which there is no guarantee) one could sell short tomorrow and cover in two to three months for a profit. This is a powerful signal, and I believe it suggests extreme caution for folks considering a long-term buy-and-hold approach at this juncture. It would seem that, even in the event that a new bull has started, there may be a better entry point further down the road.
Click to enlarge
The next chart is the intermediate count for the SPX, and I have tried to add more clarity to the chart. Neither I, nor anyone else, can predict for certain whether the next peak will mark all of wave (c) or only wave (iii) of (c). At this moment, I am slightly favoring the view that it will mark (iii) of (c), with a correction to come, and another leg up still to come. This view is largely based on the pending liquidity flood from the European Central Bank, which is due to be unleashed into the world on February 29. If the coming peak marks wave (iii), then that would allow for a correction heading into the ECB date, and then another thrust upward when the liquidity hits.
The old saying regarding central banks is, "don't fight the Fed." This saying was immortalized for bears in the 1959 Crickets song, "I fought the Fed and the... Fed won." The same saying can also apply to the ECB, even though it doesn't have its own song yet. The way things are going over there, it probably won't be in existence long enough to warrant a song.
Anyway, a trip below the red wave (i) peak would rule out further upside for that count. I do expect a significant decline when wave (c) completes.
Click to enlarge
The next chart is the short-term SPX count, which suggests that the rally is still under way, with new highs in store. There are reasonably good odds now that the coming peak will at least lead to a tradable correction, if not the start of something more bearish.
I find the market's behavior around the up-sloping red trend line fascinating. I first called attention to that line over a week ago, and you can see that the market has continued to behave as if it's an important line. Can't tell ya' why, but it is what it is.
Click to enlarge
In conclusion, there are five key points:
1. The market is still below an important resistance level. Going long before it's broken would be front-running, and the equivalent of going short back in December near 1200. If that resistance level is broken, then the 2011 highs mark the next key resistance.
2. The trend is your friend. Once we see an hourly bar print beneath the short-term trend channel, and then some daily closes outside of the larger trend channels, we can have confidence in a meaningful trend change. Until then, the trend is still up.
3. I trust my work. The fact that my proprietary indicator just fired off its first top signal in a year gives me high confidence that there will be no monstrous new bull market starting from these levels. This doesn't rule out further upside over the near term, even into the 1400s, but this indicator hasn't failed yet. Near term, the bulls could still run with the ball, but this indicator very strongly suggests that the bulls will run into trouble reasonably soon. However, see point 2.
4. I expect a significant decline when wave (c) completes. However, see point 2.
5. Cash is a position, too.
Trade safe.
This article was originally published on Pretzel Logic's Market Charts and Analysis.
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