Ouch. It was not a good week for the bearish case. The S&P gained 3.55% for the week. It appears that the operative wave (iii) of 3 down count that was widely held by fellow wavers is now dead as price rose above critical resistance (1096). With that said, many readers would like to know where are we in terms of the near term count. So let's dive in and see if the Bulls are really down for the count.
First let's look at some market internals that still favor the Bearish case. NYSE volume has declined throughout the current rally that began on 7/1/2010. Downside volume (albeit light) has been greater throughout. That does not bode well for the Bulls. Upside volume has been muted. ADV_DEC remains in a decline from the high established on 5/10/2010. It would be fair to say that the Bullish case is less than impressive. Could that change?
Two Counts Left For The Bears!
Trade is nearing a point where I believe the third wave labeling must be forfeited. Any break above 1127.5 busts that count and forces alternative labeling. For the sake of argument, the operative count remains that we are in wave ii (circle) of 3 down. However, price has carried to the .786 retracement and I don't place much faith in the level holding. My expectation is for 1127.5 to be tested near term. So let's explore two other "alternative" bearish counts.
A Zig-Zag Correction
The chart depicts a zig-zag correction that is unfolding from 1006. Upside potential as measured by Fibonacci expansions are:
Wave C= 1.618 Wave A @1198.5
Wave C= .618 Wave A past Wave A @ 1151.62
Wave C= Wave A @ 1043
Wave C=.618 Wave A@1108.5
There are also two other key resistance areas that come into play near term: The 200 sma crosses 1110.75; a 50 % retracement is 1112.25 and the market reaches overbought territory at 1112 on Monday. The Fibonacci data clusters lie within the previous 4th wave of a lesser degree, which often coincide with termination points. So near term, I'll be closely watching the 1108 - 1112 area for sell signals and the possible termination of wave 2. Five waves down from there and in an impulsive manner would bolster the case that wave 2 had indeed ended and we are beginning wave 3 down.
Oh No! Price Trades Above 1127.5. Now What?
Should 1127.5 be breached, we must consider another alternative scenario. One which removes any possibility that wave 3 of 3 had even begun. In this case, a serious blow would be dealt to the bears much like going "all in" on a poker hand with no pairs, then failing to convert.
Under this scenario, you should note the different labeling for the termination of wave 1 down. I have purposely left the operative count on the chart but for a reference point I have presented the "Alternate Count". Under this labeling, an expanded flat would be unfolding with the following termination points:Wave C=1.618 Wave A @ 1202.5
Wave C= .618 wave A past Wave A @ 1202.59
Wave C=1.386 Reverse extension @ 1174
(Story to be continued).
Best of Trading?
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