Wednesday's update noted that the market was approaching an inflection point, and to watch the SPX 1440-1455 zone for signs of a reversal. Later in that same session, the S&P 500 (SPX) reached an intra-day high of 1438.59 and reversed strongly. This is again a very interesting position for the market, because the decline has unfolded in an apparently impulsive fashion, and can now be counted as five complete waves down. Normally that would suggest at least one more leg lower, of at least equal length -- but I have my doubts for a number of reasons, and suspect the market may find a bottom fairly directly.
I am currently viewing the decline as a complete, or nearly complete, c-wave lower to wrap up yet another second wave. This suggests a strong rally is waiting in the wings. I'll cover a couple reasons for this view, beginning with the SPX chart below. I'll caveat with the note that this is a very vague wave structure on SPX, though, so the possibility does exist that a larger decline is beginning. Once the market sees its first decent bounce and retraces somewhere in the 50% zone, we'll be able to consider the prior swing low as important to the near-term bull case.
The chart below is the interpretation I'm presently leaning toward, and suggests a bottom fairly directly, followed by a strong rally to new highs.
Examining the hourly chart yields a slightly different perspective on the alternate potential. The odds favor that bulls will find a bottom directly, but if they can't, then the shape of the previous rally would force us to consider the possibility that the present decline is part of the larger wave (2) which could retrace 50-62% of the total rally.
While I'm favoring an intermediate bullish resolution, the bears do still have hope. I've noted 1434 as the key bullish pivot for some time, and the market was unable to sustain trade above that zone, which keeps bears in the running for the time being. Accordingly, I'll update their chart with the bear potential. While I still consider bears the underdog here, the market always reserves the right to change my mind. (continued, next page)
A chart that appears to be a problem for bears is the Nasdaq 100 (NDX). The NDX has formed a fairly clean five wave rally off the November print low, and that does suggest trouble for bears. It's also now in a zone where a meaningful bottom could form. If the count shown below is correct, this represents a low-risk buying opportunity with the potential for a great deal of upside (well, low-risk as long as the position is managed properly. Of course, consult your broker and/or the I Ching before doing anything.).
Conversely, a sustained breakdown of the blue base channel would at least open up questions and cast doubt on the bulls. It wouldn't necessarily be the end of the world for bulls over the long-term, but it would complete a pattern known as a double-top for the short-term, and that's not the type of pattern one usually wants to get in front of on the long side. A double-top breakdown (sustained trade beneath the lower blue line) would suggest about 70 points of decline from here.
In conclusion, the market moved from the inflection point noted on Wednesday straight into a second inflection point on Friday. This is an important test for the market. So far, the decline has simply reached normal corrective territory, and the pattern looks roughly complete -- so I think odds are good that the bulls will grab the ball and run from here. A sustained breakdown would change my mind. Trade safe.
Reprinted by permission; copyright 2012 Minyanville Media, Inc.
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