When I read the commentary published in the market this past week, I found it quite amusing. People who have been bearish and missed a significant amount of this bullish run for the last two to three years were figuratively "high fiving" themselves in print, and popping the champagne corks.
It seems that some have forgotten that our goal as analysts is not to say the same thing over and over until the market finally moves in the direction of our "analysis." Rather, we are supposed to identify where we are in the overall market trend and place ourselves on the correct side of that trend for the greater majority of the time. And with that in mind, in light of the volatility of the past week or so, we need to address the question of what we believe the next trend will be.
While I have been giving the market the bullish benefit of the doubt since June, I noted that I was unsure if the market top was in place. I questioned whether the market was going to attempt one more higher high before it corrected down to the 1800s, but noted that once 2040SPX broke, the trap door would open for that bigger correction. For weeks, I have been going on and on that once we have confirmation that a top was in place, our target was in the 1800s with an ideal target in the 1835SPX region.
When I got back from vacation Monday morning, I was welcomed back by the market spiking down to the 1867SPX level, and even lower in the futures. So, within the first 10 minutes after the market open, I sent out a Wave Alert, followed by a Market Update to our members stating that "we are now hitting the region of the .236 retrace of the larger degree wave 3. This should and often does mark a bottoming region. . . "
From that point in time, the market began to climb almost 90 points in the SPX and over 100 points in the futures. As we headed higher, I put out another alert with a target in the 1953SPX region, which was where I felt the market would turn down, yet again. True to form, the market then dropped over 70 points from 1953SPX. However, the manner in which it dropped did not make me believe we were going to lower lows. Rather, I continually reiterated that if the 1874ES level (1880SPX) held as the support, we could turn up strongly. Yet again, the market turned up another 45 points exactly at our noted support.
So, Monday turned into one of the best trading days we have experienced in four years, wherein, in real time, we identified turns representing over 200 points in a single day. The rest of the week provided several other opportunities that added another 100 points of movement as well. Now many are wondering if this type of trading environment and volatility is here to stay, or will we go back to the old grind heading to higher highs.
I think the jury is still out on that question. Thus far, we have basically struck the minimum level one would expect to see for a larger-degree 4th wave. Since that time, we have enough waves in place to consider it being 5 waves off the low in the SPX, but with the futures presenting an incomplete upside pattern due to the lower lows seen in the futures.
In the SPX, the pattern would be classified as either the top of a bullish wave I, or the top of a c-wave in an (a) wave, as represented on our 60-minute SPX chart linked below. If we see downside follow through early next week, then we will be expecting a corrective pullback before the market continues to rally in either a wave iii or a (c) wave of a larger degree b-wave.
Alternatively, if the market gaps up on today (Monday), then I will be tracking the bullish pattern on the attached 60-minute futures chart, which would take us into the middle of September until this i-ii structure completes, at which time one should go long for a rally pointing us to the 2400 region. But, even in the gap-up Monday scenario, the market cannot break down back through the 1971ES level (wave 4 support) until it completes all 5 waves up, or else it puts the larger degree impulsive structure represented on the 60 minute ES chart in jeopardy.
There is one more factor that we need to consider and that is the Barclays Bank PLC iPath S&P 500 VIX Short-Term Futures ETN VXX, +3.62% As you can see on the linked-to chart, the VXX is in what we would normally consider a "bullish flag," or, in Elliott Wave parlance, it seems to be developing as a triangle. This is a low-volume consolidation which remains over the 22.90 support level. And, as long as it remains over that level, the expectation is that it will continue in its upward trajectory. This is often a signal to expect more market volatility, and potentially more downside in the market as long as it holds over support. Alternatively, a strong break down below 22.90 may be a bullish indication for the equity market, with a follow through below 21.50 a much stronger bullish indication.
Also, at any point in time where we see a break down below 1835SPX, with follow through below 1810SPX, it opens the door to the 1770SPX support level, with greater likelihood we head all the way down to the 1705-1740SPX region.
Monday should let us know if we are to follow the pattern represented in the futures, or if the pattern represented by the SPX is the operative perspective. Due to the inconsistencies between the two markets and charts, I am unable to ascertain which one is more likely at this point in time, and will need the market to let us know early in the upcoming week.
At that point in time, we can place more focus upon the appropriate chart we need to trade and will be able to make much more definitive decisions relating to the expected market action over the next few weeks to next few months. In the meantime, we cannot ignore the message of the VXX charts which suggest more market volatility may still be ahead of us.
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