A Pullback to Buy?
Wave 5 didn’t go as high as I was expecting on the Dow, but so far this wave count is still my path-of-least resistance plan for the market:
The corresponding wave count on the S&P 500 looks a bit nicer, as yellow wave 5 wasn’t so truncated:
If things play out to form, we should now be in the red wave 4 correction, with a wave 5 push to at least nominal new highs still to come. That’s a decently proportional ABC down on the S&P chart, so it’s not impossible that today’s close will be the extent of the correction, but the chart would look nicer if it went a bit deeper (the best low would be somewhere in the the 1460 to 1480 area, imo). If there is any push under 1450, my expectation is that it will be quickly rejected (if not, then I would have to reassess what is going on).
In short, to me the pattern suggests that this is a pullback to buy. Of course, there’s no metaphysical requirement that the pattern complete properly. Market valuation is reasonably supportive of the S&P in the low 1500s, but I think newsflow is more likely to be a drag than a help (especially the impact of austerity, in particular the payroll tax hike). I don’t really see the argument for new highs right now, but hell, we were there just this morning in the Dow and almost in the S&P.
I upped my long-only 403(b) account to 25% long on the close today. I will up that to 50% if we get a little more weakness (and maybe 75% if we get under 1460).
Wave Count Map
Last week the S&P consolidated just under the 1524 fibonacci extension target from the last pullback. Reaching a target is not the same as hitting resistance, though. Today it broke out of the recent range and started pushing higher. There are just no sellers on this tape, and there are no indications that it’s time to short (momentum has decreased, but that doesn’t mean it can’t keep grinding higher).
The wave patterns are often useful for suggesting target areas where an impulsive move might end. Here’s a wave count on the Dow since the pre-Thanksgiving lows:
I did not expect the yellow wave 4 correction to be as shallow as the yellow wave 2, but as I said there just aren’t any sellers. As long as today’s breakout doesn’t fail, the yellow wave 5 projects to at least Dow 14,199 and probably not more than 14,400. Interestingly, the all time high on the Dow from 2007 is 14,198, so it makes sense for that to be a target (only 165 points away now). A push into this area should complete the yellow wave 5 and red wave 3. The red wave 4 pullback would most likely be of a similar scale to the 482-point wave 2 pullback. Then there would be a wave 5 up to at least minor new highs (possibly a false breakout and failure, but there will be plenty of time to plan for that if things actually follow this map).
I still believe the tax increases and whatever cuts come out of the sequestration will have some bite that the market is not planning for. The scenario above suggests more upside thrusts, but the net movement doesn’t have to be all that many points, as the end of wave 3 shouldn’t be too far away, and wave 5 up doesn’t need to be much larger than wave 4 down.
Until the Dow tests those highs, I will still avoid intermediate market swing trades on either side. It’s too extended to buy, and too strong to short. I’m daytrading the futures and playing some quick swings on individual stocks. My slow long-only 403(b) is unfortunately languishing on the sidelines since the third week of January or so.
Target
We’re up into my 1407-1447 caution zone now. My best guess for finishing this wave 5 higher is that we reach the top end of that zone (1425-1447), with this last leg higher led by banks (continuing relief rally) and small caps (just broke out of consolidation). End-0f-quarter window dressing should help on the long side.
The Near-Term Picture
The nearer-term picture appears clearer than the bigger picture. Here is what has happened since early October, with a guess at a bullish wave count:
This is pretty straightforward action for an impulsive wave upward. If this labeling turns out to be accurate, it suggests we have several more squiggles before we get an intermediate-term top. This has nice waves and nice proportionality so far, so if it continues to play out we should have a solid heads-up that we are entering the danger zone (this should be months away). In the mean time, it appears that we should be pretty close to finishing blue wave 3, then we need blue wave 4 down and 5 up to finish red III. If these are proportional to the blue waves 2 and 1, respectively, then they would be about 70 S&P points down then 110 up. Finally, the bigger red IV and V would come to finish the entire move up. The proportionality for these suggest 130 down and 220 up, with an ultimate top over S&P 1510.
Here is a slightly different alternative which suggests we are a bit further along:
Summary: This wave count suggests that we are fairly close to a short-term top, but not an intermediate-term one.
Nothing Major Yet
Today was the type of day that can mark a near-term top: breakout, failure, bounce, failure again. However, in the big picture nothing major happened. The SPY just traveled down to the bottom of its recent rising wedge:
… and the IWM went to the bottom of its recent trading box:
I did short the IWM (using TZA) pushing against the top of the box, but I’m already out and flat except for some small momentum longs with pretty tight stops.
Regarding the big picture, I don’t have any conviction either way right now. 1371 got poked through, so my favorite doomsday pattern is broken on the Dow and S&P 500. It is still in play on the broadest measure of the market, the Wilshire 5000, but I’m not putting any money to work on that. The wave patterns almost always work out to some logical pattern in the end, but right now that picture is not clear to me since the market declined to decline where I hoped it would. If we get any significant pullback (4-5% or more), I will likely increase my long-term allocation back to “lightly invested” unless there are signs of worldwide economic slowdown or increasing stress in Europe. I do expect the austerity to start biting harder soon in Europe and perhaps filter out to the rest of the world, and there are still giant sovereign solvency problems in Europe, Japan, and the U.S. that really have not been addressed. This move since November has been a giant sigh-of-relief rally as worldwide economic data has been solid and the LTRO has averted the brewing bank liquidity crisis in Europe (and allowed the banks to support sovereign bond prices as well). The bull thesis is that valuations are still decent, so there is more potential upside IF the economy holds up and the financial sector stays calm. Really, it seems to be all about growth right now: the financial problems can be held at bay as long as Europe, Japan, and the U.S. are growing. If we turn down into another recession, however, then tax receipts drop, social welfare expenditures rise, and the solvency issues really start to bite again.
50% Retracement Game
The advance since December 20th has been characterized by 50% retracements and -30% or so extensions on the globex ES. We’ll see if that game continues tonight. 50% is 1275.88, and there’s a trendline a bit above that as well. If it holds, the long target would be ES 1300.
OK Shorties, Let’s See What You’ve Got
This was the push higher I thought we might get to very nicely complete the correction pattern. The S&P hit its target 1293 (high today was 1296), and the Dow is still holding under its 2 important trendlines. I entered the last 1/3rd of my swing short position. There is room for a wee bit more upside if it wants, but we should be really ripe for a top now. There is nice proportionality on the big red ABC, the little purple abc, and there’s now five little waves in that last purple c. She’s a beauty if she turns down now.
Something’s Gotta Give Soon
It tested the bottom trendlines in the morning and the topside resistance in the afternoon. No breakdown, no breakout. It has been going sideways for quite awhile now, so either it is waiting for earnings, or just consolidating for another push higher. Most likely, I think, is a breakout higher, hopefully followed by a quick rejection from S&P 1293-1306.
Watching for Monday
The S&P had a very nice pre-market poke to a new high and rejection, but I would have liked to see downside followthrough during the regular session. It wasn’t bad for my bearish thesis, though, as the decent jobs news was digested without the market going higher. I’ll be watching this bottom trendline on the Dow on Monday, to see if it remains support or is gapped under:
The Nasdaq was strongest this week (the Dow and S&P went nowhere after 10:00 on Tuesday), so I’m also curious how this 24-hour Nasdaq chart plays out (the futures open Sunday at 6PM):
One more push please
I’m hoping for one more push higher, where I will enter the rest of my swing short.
Trust the Dow or S&P?
I stopped out the QQQ short pre-market, now I’m watching again. The Dow is coming into that very nice shorting area that I’ve been waiting for, with a couple important trendlines just above and nice wave proportionality if it tops out fairly soon. Unfortunately, there isn’t the same pretty convergence on the S&P, which looks best for shorting a little higher. I tend to trust the Dow more than the S&P in these matters, but we’ll see. Other reasons for caution are the potential bullish breakout patterns, as well as decent economic news (quite a few countries posted slightly-better-than-expected manufacturing numbers). Unless some surprising weakness shows up, I expect to give this more time for the bullishness to peter out. A conservative entry trigger I might use is to wait for the indexes to take out a prior day’s low, which isn’t likely to happen for at least a couple more days.
Loroz Trading 