Recently it seems that virtually everytime there’s a choice between a bearish count and a bullish count, the bullish count wins. This was once again the case yesterday, as the bulls did what they needed to in order to knockout the bear count (in the Dow, at least).
There now appears to be a complete five-wave form on multiple time frames, so it’s likely that a correction is due at the minimum.
The bears will hold out hope that the recent highs will mark ALL OF wave (v) up, but given the track record of bearish vs. bullish counts, I’m going with the more bullish count as the preferred view, which would see the recent highs as marking wave (1) of (v), with more upside to come. We’ll have to watch the decline carefully, and if it seems to be turning into an impulsive form and starts breaking some key trendlines, then we’ll consider the more bearish option in greater detail.
The bullish Dow triangle count, shown on Sunday, appears to have played out to perfection. Below is the original chart, followed by the updated chart.
Again, since the rally has now completed five smaller waves up, there is always the possibility of a larger top in this position. Current expectation is that these five waves are only completing wave (1) up, but any trade beneath the E wave low would be a big red flag to bulls. Barring that, we should probably continue to give the benefit of the doubt to higher prices.
Below is the short-term SPX chart.
And the bigger picture SPX chart, with an initial target possibility. We’ll narrow down targets after the assumed wave (2) bottoms.
On a bright note, yesterday’s Euro/US dollar call was a big winner, as eur/usd dropped substantially. This is the one thing which is causing me to give some serious consideration to the more bearish alternate count — the dollar appears to have put in a base and could be due for a lengthy rally. Now, dollar/equities correlations come and go — however, a bullish dollar indicates that traders view QE3 as significantly lower probability. And no QE3 hope is bearish for equities.
In conclusion, we’ll have to watch this next decline carefully for signs of an impulsive move. If that happens, the possibility of a fifth wave failure will loom large. But if we get a garden-variety scary (to bulls) a-b-c down, which is currently the expectation of the preferred count, then it becomes quite likely that the SPX is on its way into the mid to high 1400’s. Trade safe.