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SPX Update: Next Move Out of the Trading Range Should Be Lower

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Range-bound markets are tough to predict, but the expectation is for a break lower.

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While virtually every technical analyst on the planet is watching the bullish triangle "continuation pattern" that's been forming in the indices all month, I have stated on several occasions that I don't think it's real. After studying the price action of the last couple days, I find the triangle has not displayed the proper form, and the volume has not performed according to the pattern. Volume should be diminishing as the pattern forms, but has been rising instead. Doesn't mean it can't be a statistical outlier, but I am cutting my odds on the triangle from 20% to 15%.

This is, of course, the "all clear" for the triangle to break out tomorrow and humiliate me (cue music from Jaws... visual: triangle rising from the dark waters and ripping analyst to shreds). On the flip side, if I'm right, I should get a cookie for digging into the charts and breaking from the "easy answer" analysis. Keep in mind that if this move down is somehow Wave e of that triangle, there may be a strong whipsaw below the lower triangle boundary and back up into it. While I think it's low probability, be aware of it and respond accordingly if necessary. Below 1,215 would completely eliminate it from consideration. For the triangle chart, please refer to yesterday's article (see SPX Update: The Picture Is Again Becoming Clearer).

Yesterday, the market performed exactly as the charts predicted. So did the news, as I also opined that the Fed's sudden talk of stimulus was an attempt to front-run a bad news event. There's an age-old debate between fundamental analysts and technical analysts over which is more valuable, news or charts. As a technical analyst, while I do believe that fundamentals are important and a driving factor behind the charts; I also believe that the charts are forward-looking, so with rare exceptions, news is noise. If you look at the charts I posted in yesterday's article, every one of them predicted yesterday's sell-off perfectly -- and I drew those charts long before the news (which allegedly sparked the sell-off) was released. Funny how the charts knew ahead of time what was coming.

This is one of the reasons I often laugh when I see the headlines on CNBC, trying to explain why the market did what it did each day. You see things like:

"Market Sells Off on Renewed Fears Over Europe"; which is followed the next day by:
"Market Rises on Renewed Hope for Europe"; which is then followed by:
"Market Crashes as Investors Are Overcome by the Nagging Sensation That They Left The Stove On."

It's all nonsense. The market does what it does because humans follow patterns in their psychology and decisions, so the exact same news can be perceived as negative one day and positive the next.

I continue to believe that October 27 was an important top. I have one count I've been favoring for some time now, but this count does allow two possible resolutions over the short term. Those possibilities haven't changed since last Thursday, but I have consolidated both possibilities to one chart. The burden remains on the blue count to prove itself. It needs to begin making some marked progress in the downward direction.

The blue count shows the market forming a subdividing series of first and second waves (or nested waves, as I prefer to call them), which would lead to new lows fairly directly. The black count shows Wave (ii) still in process. Trade above 1,260 would be the first clue that the black count might be unfolding.


Click to enlarge

The Philadelphia Bank Index (^BKX) is another that's performed perfectly in line with expectations, so far anyway. I posted a chart two days ago showing my projected path for the BKX (see SPX and BKX Update: Market on Hold, Call Again Later), and would now like to update that chart with the recent action. None of the projections have changed yet:


Click to enlarge

The fly in the ointment for the bear count is the specter of Fed intervention. The credit markets are beginning to show extreme stress, and the Fed has talked up stimulus recently. Fed intervention could blow this count up. While news is noise, the Fed is liquidity -- and liquidity drives the markets.

Another potential issue for this bearish count is that the sideways market has been burning off bullish sentiment. This is not something bears want to see. The latest AAII sentiment survey came in at 41.9% bullish and 31% bearish. That's a 6.5% jump in bears from the prior week -- which actually represents a 26% increase to the total number (from 24.5% to 31%).

Long term, I remain very bearish. I believe that, one way or another, Minor Wave (3) will carry stocks to new lows. The biggest challenge in deciphering the short-term turns of late is that the market has been forming multiple zigzag patterns within a trading range. Double and triple zigzags are among the hardest patterns to predict and project, since they have very few rules, and trading ranges give you nothing in the way of meaningful price points. I assume these patterns are a reflection of the extreme uncertainty present in market participants.

We would be fools to ignore market signals and new price data when trying to determine the market's short-term path. Despite whatever I "think" should happen at a given moment, I try to respond as objectively as I can to the charts as new information becomes available.

I am severely handicapping the triangle as a true possibility, but that doesn't eliminate it. The triangle is still within the realm of possibility, and might be the "Fed intervention" pattern.

My strong belief that we're headed lower in the near future hasn't changed. The key levels to watch are still SPX 1,215 and 1,190. Barring some type of central bank intervention, or the significant threat of such, a break of those levels should lead the SPX down into the low 1,000s. 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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