Since last update, S&P 500 and Dow made new all-time highs, thereby validating the preferred count and completing the first portion of my intermediate thesis. From last Friday:
Most technicians are either still bearish and expecting an imminent top shy of the all-time high, or they're viewing this rally as wave (3) of (something) and expecting a moon-shot. Is it possible that virtually everyone's wrong?
We can now confirm that those expecting a top shy of the all-time high were wrong, at least. Now we try to figure out if we're actually closing in on a top, or if the moon-shot rally will materialize. Let's see what we can glean from the charts.
First off, Russell 2000 has, thus far, fallen just a hair short of making a new high. In a perfect world, I'd still like to see a new high there -- but while we're on that subject, incidentally, we are now into a zone where a failed fifth wave becomes possible. In my experience, the term "failed fifth" is often misused -- for a true failed fifth, there should actually be five waves present in the structure (but the wave fails to make a new high or low, hence "failed fifth.").
Some folks were talking about a failed fifth in RUT back when RUT was near 1150. As I saw it, at that point, RUT did not actually reconcile as a complete five wave structure, but was instead only 3-waves up (i.e.- it was (1)/(2)/(3), or a possible ABC). That's why I never took the failed fifth idea seriously: Without five waves present in the structure, a "failed fifth" isn't a valid potential in the first place. Now, however, there are five waves up in RUT -- so, while a failed fifth wave is still a long shot, at least now it's technically possible.
Ignoring the failed fifth idea for the moment, it's difficult to triangulate the current wave, since there's no clear fourth wave in the structure. I'm drawing my best guess target of 1214-1220 using proprietary formulas, but without a fourth wave to triangulate the count, I can't currently add or subtract any confidence to/from that target.
SPX followed the blue path outlined in the last update. Since it reached a new all time high, and there are enough waves present, we do have to start considering the potential that (5) is complete or nearly so. If we take our cue from RUT, though, then SPX may still need to unwind another fourth and fifth wave.
The decline into the end of the day yesterday was clearly impulsive, but the move into the all-time high was sloppy enough that I can't be sure the decline wasn't simply wave c of an expanded flat. Nevertheless, I'm very marginally favoring the idea that yesterday's decline is the start of red wave (4), and will thus continue at least a bit deeper, perhaps after a small bounce to start the session.
If the big picture preferred count is correct, then we're likely close to completing black wave 5 on the chart below.
A factor that's a bit harder to quantify at the present juncture is seasonality. Traditionally, seasonality is quite bullish this time of year, and this factor, combined with RUT, are probably the two main things leading me to think we may still see the (4) and (5) unwind as shown on the chart above. Another 4/5 unwind might also be a nice bearish sentiment killer. All that said, if there's to be a surprise reversal in the near future, it may not follow the "usual" expectations.
Finally, let's take a look at the Philadelphia Bank Index BKX. BKX also made a new high and validated its preferred count; and in the process, it followed the labels I placed on the chart (on 12/19) quite well. Of course, it remains to be seen if this marks ALL OF (5), or if BKX needs another (4)/(5) unwind. BKX sometimes leads SPX, so it will be interesting to see how this plays out.
As noted previously, it's not yet possible to rule out the potential for a very bullish third wave rally (the aforementioned "moon-shot" count). For reference sake, I've illustrated that count on the BKX chart below:
In conclusion, if the fifth wave thesis is correct, the wave structure has developed to the point that we can start considering that there may be enough waves in place. Against this type of strong rally, though, it's not a bad idea to watch for the first larger impulsive decline to begin considering a turn. In addition, while SPX, INDU, and BKX have all made new highs, RUT and NASDAQ have, thus far, not. Ideally, we'd still like to see RUT make a new high, so there may be a bit more upside left in the broader market. In the meantime, a near-term correction, in the form of a fourth wave, would fit in with the pattern and be helpful towards triangulating the structure.
With that out of the way, I'd like to wish all my readers a Merry Christmas (or "Happy Holidays" if you don't celebrate Christmas... or "Have a nice day" if you don't celebrate holidays... whatever, this is getting too complicated... what I mean to say is: "Merry Christmas!"). Speaking of, a few readers reminded me about a piece I published last Christmas, which is titled: A Christmas Story -- Reflections on What Matters. If you're looking for something that goes a bit beyond the market, it might be worth a read.
My sincerest best wishes to you and yours for a happy and safe holiday! Trade, and be, safe.