E-Wave for the S&P 500 Index

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For those who follow Elliott Wave analysis:

* Monday, January 27, 2014

Market sets up for further lows

Last week, I continued to forewarn that the market was at a serious inflection point, in fact, it was the headline of my column. Although I noted the potential for an uber-bullish alternative count was potentially developing, I said that it was clearly not my preferred count and, until it could prove itself, I was looking down for the next bigger move, and not up. For now, it seems the market is paying attention.

For weeks I have been suggesting caution to market participants, in that we are most likely completing a larger topping pattern, even though we have extended beyond the 1825 target on the E-Mini S&P 500 Futures I had in this region. In fact, the market extended beyond my ideal topping target in May as well, right before we saw our expected "June Swoon."

When we see larger extensions beyond our standard extension targets in the market, many of you may have noticed that I become more cautious rather than more bullish. Unfortunately, some have either ignored my cautiousness, or have even taken me to task, of late, in not being bullish enough.

But my perspective in trading markets is not to be able to trade every penny in every direction the market has to offer. Rather, I always look for safe, low-risk entries, and will exit when we attain a target region so I can bank profits safely. So, there will be times I will miss a larger extension in a market, and may not attain the great majority of a move. But I will rarely be caught holding a position in the face of a reversal.

As for our targets, we use our standard extensions to gauge where we are in the market, and it, more often than not, provides us with accurate exit points. Yet, there are times we see extensions well beyond the standards, but that should not make us more bullish or bearish (depending upon the prevailing trend), but rather more cautious of an impending reversal. And often the more extended the market becomes, the sharper the reversal, since we all know what happens when we stretch that rubber band beyond its standard usable limits.

Last weekend, I stated that "my preferred count is that we are just about done with a smaller-degree 4th wave consolidation within wave (5), as long as we maintain support over the 1826/28ES region. That would mean that we should see a rally begin early next week, which should target the 1847ES region at a minimum, for a triple top..." As we now know, the market bottomed at the 1828ES level, and then rallied up to the 1844ES region, admittedly three points shy of the 1847ES target and perfect triple top. However, note that wave (5)'s topping at 1844ES provided us with an almost exact 1:1 Fibonacci ratio between waves (1) and (5).

I also clearly noted that "if the market were to break down below 1817ES, I believe it will likely fail to find support at its next support level of 1809ES, thereby invalidating the immediate uber-bullish count, and potentially take us much lower." The break down this past week below the 1826ES level, with follow through below the 1817ES level, opened the door to the 1700s. But even if we do find a bottom to this decline in the upcoming week, I am still not convinced that we will be seeing new highs any time soon.

As I have also been warning in the recent past, if the rally over the last two years is really an ending diagonal, then the market will reverse quite sharply and swiftly when the diagonal completes. Well, after experiencing the largest two-day decline we have seen in years, where the S&P500 dropped over 3% in just two days, it sure looks like the typical reaction we see after an ending diagonal completes.

Another important chart which points to a potentially significant top is that of the Select Sector SPDR-Financial ETF . Back in 2012, when the near-term bearish perspective invalidated, I began to target new all-time highs in the equity markets. At this time, while the XLF was still within the 16 region, I noted that the next higher target region for the XLF was the 22 region, almost 40% higher than the level from which we began. And, yes, I still remember how many of you scoffed at that target suggestion.

As we recently came into the 22 region, we were pointing to the 22.00-22.20 region, which represented a larger point of confluence of an a=c target rise, as well as the .500 retracement of the 2008 market decline. In fact, as we came into the 22 region, I become quite bearish on the XLF, since we had attained the target we set well over a year ago. This confluence region represented strong resistance, in my humble opinion, which I expressed quite often as I continually posted this chart in our trading room, with my bearish annotations, again, at which some scoffed. Since hitting its recent top of 22.17, the XLF has dropped over 4% and seems to be leading the market down.

So, does this mean that seeing the 1900 region in the spring is out of the question? My answer at this time is no. It is still possible (but not highly likely, in my humble opinion) we can make one more run toward the 1900 region before forming a much more lasting top. In fact, this would simply align with the series of 4's and 5's which may be left in this market since November of 2013. It has been these 4's and 5's that have been providing us with the serious whipsaws we have been seeing since that time, which is why I suggested to move out of the indices and into specific stock picking in November, when we completed the 3rd wave of this 5th wave.

But as I have noted before, a move in the near term to the 1900 region is not my primary expectation. The only way I will consider going long for any possible 1900 target is if the market maintains support over the 1740/60 region, and provides us with a clear 5 wave structure off that support region, followed by a corrective 3 wave pullback. Until such time, my focus will continually be down . Sure, I will expect a consolidation/corrective rally of some sort beginning over the next week. In fact, a b-wave bounce, as represented on the 60-minute chart linked below, would provide us with a really nice head-and-shoulders pattern. So, I am not as confident as many others that "buying the dip" is still the order of the day (for other than for a trade lasting a few days), at least not until the market provides me with a clear reason to go long.

For now, I will remind you of the caution I noted last week, which is still quite applicable today:

So, for those looking to get long in the index for a bigger swing trade of 100-plus points, I must caution you that we are at a major inflection point at this time. Until the market can prove its bigger bullish intent with a very strong move over 1866ES, we will likely see the 1700s, which may present you with an opportunity to get long again. However, as I have been saying, if the market cannot maintain support in the 1740 region, then we are looking at much lower levels to be seen, as it opens the door to the 1500-1600 region.









http://www.marketwatch.com/story/market-sets-up-for-further-lows-2014-01-27

George.

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