SPX Update: Pre-Eating Some Crow in the Analytical Trap

There's a trap that's easy for analysts to fall into. Let's imagine you've been bearish for a while and anticipating a top. Let's also imagine that the market has continued going up anyway, and yet continues to give signs of a top... but it hasn't actually topped (read: a bit of self-flagellation). The longer this goes on, the more you are becoming increasingly trapped by your own prior analysis. The signs are all there for a top, and are actually increasing, but the market's kept rallying anyway. What do you do?
 
Do you shift your stance to bullish? Well, you can't really just jump in and randomly start buying, because the rally is long in the tooth, the indicators are overbought, and every objective piece of evidence says the rally is due for a pause at the minimum. Do you continue looking for a top? That's challenging, because the market is blowing up the bear view and busting through resistance levels like they weren't there -- plus you're starting to feel like the boy who cried wolf.
 
And then the real psychological trap comes: What if you shift to a bullish stance right before the market tops? Oh, the humiliation! If only you'd held onto your views for a couple more days. I think this is a trap that a number of analysts have fallen into, which locks them into being on the perpetual lookout for a top. In particular, I'm referring to a popular Elliott Wave subscription service, whom I won't mention by name (hint: a large international Elliott Wave service whose initials rhyme with "See W. Cry."). They continue to be bearish because it's something of a tradition ("Bearish Since 1988 and Still Going Strong!") -- and they've been bearish for so incredibly long that if they suddenly give it up now, the market is almost certain to drop 4,000 points the very next day, and they will have missed calling it. As a result, they are effectively trapped on the wrong side of the market for as long as the market wants.
 
I believe this problem can present a potentially huge psychological trap for analysts.
 
Well, be that as it may, I'm not going to play the Perpetual Top Hunting Game for the rest of eternity, and I don't want my readers to, either. People who have only recently started following my work may mistakenly think I'm a perma-bear. If you weren't following previously: I nailed the October 2011 bottom to the day (see: SPX Update: Here Comes the Countertrend Rally) and rode that first rally leg up to 1265 before turning bearish again south of the 1292 high. Recently, I switched my stance to short-term bullish yet again after the 1300-1310 zone was successfully back-tested, and stayed bullish up to 1342.
 
I do realize I've been top-hunting for a while and have failed to pin it down here. I've been early at best or completely wrong at worst -- to be determined. But practically speaking, since the October bottom, I've only missed about 50 points of upside (3.7%) on the S&P 500 (SPY) as of Tuesday's close (1265 to 1310 = 45 points; 1342 to 1347 = 5 points), while capturing nearly 200 points of the rally on the long side.
 
Now, all that said, here's the relevant conundrum. On one hand, it is objectively difficult to give up the bear case here. When top indicators are firing off daily and historic highs are being reached in overbought indicators, the odds suggest there's some kind of top nearby. If it looks like a duck and quacks like a duck, then it's probably a top (or possibly a duck, but duck hunting is considerably easier). On the other hand, and I've said this before: The only time I've seen indicators fail this consistently is in a bull market (or a nested third wave: more on this later). This contradiction makes it a tough call.
 
So what's a trader to do? The simple solution is to be aware of the indicators, but give precedence to the trend. The indicators serve as a warning that when the trend finally does break, it might be a meaningful break, so caution is warranted. When the market becomes as complacent as it is now, it's ripe for an "event." To paraphrase the famous proverb: Pride goeth before a great fall. Bulls have been openly gloating for some time, attacking and mocking bears, and talking about how "smart" they (the bulls) are. The market rarely respects a "smart" investor, especially one who's become complacent enough to gloat (more commonly called a "smart-ass" investor).
 
But as I've been suggesting for a couple weeks, until the trend breaks, it must continue to be given precedence. The key now is to avoid the temptation to chase and/or front-run. If one wants to go long, then reasonable entries where one can mitigate risk must be found. The same applies to shorts.
 
Yesterday, the Dow Jones Industrial Average (DIA) knocked out its Minor Wave (2) count by exceeding the 2011 highs. A few people have taken this as if it's some monstrous failing of Elliott Wave Theory, which is just plain silly. If one takes the approach that a system must be 100% perfect for it to be considered valuable, then no trading or investing system on the planet is valuable. In fact, if perfection is the standard, then pretty much nothing on the planet is valuable. Fundamental investing fails at times, value investing fails at times, moving average trading fails at times, classical technical analysis fails at times, candlestick patterns fail at times, et cetera, ad infinitum.
 
At the end of the year, nothing and nobody has a track record of 100% success. Obviously. We'd all be beating down the door to get in if there was.
 
I've said it many times, but the key to trading success is as much about an individual trader's ability to manage his money and his own psychology as it is about the system. To draw an example I've used previously: If one has a system that is merely 50% accurate (random) -- but one only suffers 3% loss on each losing trade and makes 10% on each winning trade, then that system will make money in the long run.
 
Some of the keys are discipline, careful choices of entries/exits, limiting losses, not taking overly-aggressive risks (such as overusing leverage via options, futures, etc.), and protecting profits. Figure that stuff out first and you're on your way to making money. There are entire books dedicated purely to the money management aspects of trading -- it's that important.
 
Striding into the market arrogantly thinking one can "beat the house" is a fool's errand. The edge one has is their money management system and personal discipline combined with their trading system. Believe me; I learned this stuff the hard way, too.
 
Back to the market. Over the short term, there are myriad possibilities. So for the moment, I'm going to limit my focus on the big-picture counts. I'll still present them, but looking beyond the next five minutes, it's going to be difficult to narrow things down until the market provides more info. This is another challenge Elliott Wave sometimes presents for newer traders: There is a temptation to get too focused on anticipation of the next move, which can throw one into bad trade decisions. To turn an old saying on its head: It can be easy to miss the trees for the forest.
 
What we do not want to become is the "See W. Cry" type traders... i.e. - looking for a top the entire way up from the 2010 bottom to the 2011 top. Granted, bears can make money in bull markets, but they have to be quick, disciplined, and not the slightest bit greedy. Slower swing trader bears get slaughtered during bull runs.
 
Once the trend begins to shift, and I see where that happens and how that happens, that information will allow me to narrow down some of the big-picture potentials. Until then, for the big picture we're going to spend some time focused on good old-fashioned support and resistance, overbought/oversold indicators, and pattern recognition. When conditions allow, I will also present Elliott Wave price projections (I have done so today).   Ideally, this picture will clarify soon.
 
I'm going to present my new preferred count, but I continue to believe at this stage it remains more important to watch the trend.
 
Even though the S&P 500 did not invalidate its Minor (2) count yet, I'm going to make the assumption that it will. No guarantees of course, but generally, this assumption has served me well over the years, as the Dow generally leads the SPX.
 
Below is my preferred count, which (still) depicts the SPX in the process of forming the y wave of a double zigzag. This count is interesting because it revises the big-picture count but keeps the double zigzag in the intermediate-term counts. However, without the Minor (2) hard cap, this count could see the market tack on another 100 plus points from here, and puts the target for (c) of y from 1376 to as high as 1500.