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SPX Update: Giving the Bulls Some Airtime

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While the market is still on a long-term sell signal, it could potentially flip to a long-term buy if the rally continues much farther.

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"Everybody knows that the dice are loaded, everybody rolls with their fingers crossed.
Everybody knows the war is over, everybody knows the good guys lost.
Everybody knows the fight was fixed, the poor stay poor and the rich get rich.
That's how it goes... and everybody knows.
Everybody knows that the boat is leaking; everybody knows that the captain lied,
Everybody got this broken feeling, like their father or their dog just died..."
-- Leonard Cohen, Everybody Knows

Bears need a game changer. On Tuesday, the market tested, and held, the critical 1300-1310 zone. If the bears can't get something going pretty soon here, it's going to turn my system long-term bullish. The next week or two have could become critical.

As I've said before, I'm not a perma-bear. My system turned long-term bearish some time ago, and it currently remains bearish -- but it's now very, very close to flipping to long-term bullish. This is as opposed to October 4, 2011 when it turned intermediate-term bullish, but remained long-term bearish.

Lest people read this wrong, we're not there yet. But it seems appropriate to give some thought to the possibility.

While "everybody knows" that the world is in long-term trouble with its mountains of debt and contracting economies, these lousy fundamentals do not preclude a bull market. The market is driven solely by liquidity -- and if the central banks of the world keep flooding the market with liquidity, then stocks can continue to rally. This doesn't necessarily mean stocks will be increasing in value in real dollar terms, but it doesn't really matter from a chartist's perspective. A rally is a rally.

With Europe now doing its own form of QE, the interesting dynamic at play is that the U.S. equities markets could rally in lockstep with the dollar as Europe floods the system and devalues their currency. So for a time, stocks could actually increase in terms of real U.S. dollars as well.

It seems to me that this gigantic central bank shell game must end eventually; and when it does, it will end very badly. The governments of the world have been eating all the economic bubbles they themselves created... and as a result, the governments have now become the final massive bubble in this grand economic experiment. You are what you eat. They're a bit like the Blob in that old Steve McQueen movie, consuming everything in their path and growing ever more massive -- except the Blob was somewhat more discerning about what it consumed.

When this massive government bubble does finally burst, as it inevitably must, then there will be nothing and no one left to backstop it. And that, my friends, will be a very dark time -- and one that none of us should look forward to.

Personally, I don't look forward to it; however, I do believe it to be necessary for things to become healthy. Things can't last when built on a faulty foundation. The writing on this wall has been pretty obvious since the late '90s, but each time the markets have tried to move back in line with reality, the government steps in and creates more pretend money. That's how the Internet bubble came about; how the housing bubble came about; how the mortgage-backed security mess came about; and why the national debt now borders on being completely unmanageable.

So here we sit, unable to create anything of real value, and unable to produce anything other than greater and greater quantities of pretend money.

But in the meantime, the question on my mind is whether the can has been successfully kicked yet again. The answer to that question should be revealed by the signals the market sends over the next couple weeks.

The bullish interpretation of the charts reeks of massive inflation. I view that as perhaps a scarier resolution to the current ongoing and unresolved crises, because it will ultimately be that much farther to fall. In any case, I'm watching these things carefully, and if my system flips to long term bullish, then that's how I'll play it going forward.

Let's see if the FOMC meeting can have any impact on the market. As I've stated, I don't believe there's even a remote chance that QE3 is coming out of this meeting, so it will be interesting to see how the market reacts to that (assuming I'm right, of course).

I'm only going to present one chart today, because there's simply not much to add over the last couple weeks-worth of data. There are two ways to look at the recent decline from the 1322 high. The bullish view counts the decline as an a-b-c down to a fourth wave bottom, although fourth waves can be quite complex, and as such it could bounce around in a sideways fashion a few more times before rallying again. If that interpretation is playing out, then the S&P 500 (SPY) is ultimately on its way to 1330 as its next test.

The bearish count would view the decline as two sets of first and second waves. If that's correct, then the move lower should accelerate if the recent lows are broken. If the recent lows are broken, but the move fails to accelerate, then suspect that a more complex correction is playing out, which should ultimately resolve with higher prices.

On the chart below, I have highlighted some key levels for the bull and bear counts, and also drawn an upside target box in the event the bull count is in play. I'm hesitant to suggest a target for the bearish possibility at this juncture. If there's downside follow-through, then I'll add some downside targets in the future.


Click to enlarge

In conclusion, the market appears to be at an important pivot point for the big picture. My system remains on a long-term bearish signal, but it's on the cusp of turning bullish. The next week or two are potentially critical to the bear case. 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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