Much as I’d like to give the bears something to be really excited about, yesterday’s action wasn’t terribly encouraging, and has left some questions about the decline from 1333-1300. Yesterday’s morning spike exceeded the 1320.06 high, and this price action effectively “locked in” the three-wave structure on the S&P 500’s (SPX) decline which only leaves two options:
1) The decline from 1333 is all, or part of, a corrective wave, which means the 1333 high will eventually be exceeded.
2) The decline from 1333 to 1300 is the first wave of a leading diagonal.
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In either case, I am expecting further upside for today and/or tomorrow, with a price target between 1321-1330. The rally off 1300 was a pretty clear five-wave move, and that suggests at least one more five-wave rally is due. My ideal target would be 1328, where wave c reaches equality with wave a (see short term chart below):
The chart above is labeled with the bear count in blue and the alternate more bullish count in black. Due to the long-term structures and the dozen top indicators we’ve looked at recently, I remain in preference of the bear count, shown at length on the 10 minute chart below. The structure of the decline really leaves the bears only one option over the short term, though, which is the leading diagonal discussed above. If this decline is part of a leading diagonal (hypothetically sketched in below), then the market is going to be very choppy, but with a downward bias, over the next week or so.
Any print above the recent 1333.47 highs would immediately shift preference to the alternate count shown below. If the bullish short term count is playing out, the market should form a five wave rally to a new high. Wave iii of this count would reach 1.618 times the length of wave i at 1340. The ultimate target for the entire wave would probably be near 1350, but that would need to be calculated after wave iii and iv complete.
In conclusion, as mentioned in yesterday’s update, the rally is showing signs of weakening. However, until we see some hourly closes outside the boundaries of the lower black trendline — and then some daily closes outside the boundaries of the trendline connecting the November and December lows — there is as yet no objective confirmation of a trend change. I remain in preference of the bearish counts over the intermediate and long term, but over the very short term, I’m expecting a rally.
I was positioned long briefly last night, but dumped the position early for a few points of profit. Assuming we get a rally, and it reaches the vicinity of the 1328 area, I plan on shorting ES (E-mini S&P futures) with a stop above the recent 1333 highs. This is, of course, not trading advice. Trade safe.