SPX and BKX Updates: 10-5-11

The market gave us a follow-through day yesterday, which is appropriate if Minor (1) down has indeed bottomed. I am still assigning a 95% probability to the view that Minor (1) down has completed; however, we are unable to confirm this with 100% conviction until we have a complete 1st wave up on the smaller time frames, and then see the form taken by the first move down.  The move up so far appears impulsive, which would then indicate the next larger trend is up.  [Apologies for the typo on the 5-min SPX chart; the annotation should read "1074 print low," not 1174] 

Assuming Minor (1) has indeed bottomed, that places us in wave 1-up of A-up of Minor (2) up.  One-minute charts seem to indicate that wave 1-up of A may have a little more room to run.  In a perfect world, we would see it at least tag the 1150's before completion, although it looks like it might even want to reach all the way up to tag the top line of the ending diagonal (in blue, low 1160's).  The normal retracement for wave 2-down would be 40-62%, which, if wave 1-up topped right here, would place the retracement target range in the 1102-1119 zone.  Obviously if 1-up still has more legs, then that range will accordingly be pulled higher.

I have also drawn up a 1-minute chart of the Philadelphia Bank Index (BKX).  The BKX was a fantastic leading indicator during the 2007-2009 bear market, so it may be helpful to track it now.  It's hard to label the structure in the BKX as anything other than impulsive (an impulse wave moves in the same direction as the next larger trend, so this structure seems to confirm our view that Minor wave (2) up has started).  So the BKX sports a pretty well-defined five-wave move up, which still looks like it needs a couple more up-down sequences, followed by a lunge higher, to complete (see chart).  If this count is accurate, the SPX should follow a similar track.  A break of the lower red trend-channel line (shown on both the SPX and BKX charts) will likely be our first clue that wave 2-down of A-up is starting. 

I do want to stress that these counts are all preliminary: the first portion of major swings in trend is always the toughest, since there are no larger waves yet formed in the new trend to use for comparison.  Also, it appears that we are still forming the third wave of wave 1-up... so combining that fact with the lack of larger waves makes it difficult to assign targets with a high level of confidence.  The best analysis I'm able to apply to the charts (given the limited wave form) says wave 1-up of A has a little more to run before completion -- but my gut says that there may be enough fuel in the form of short-covering to drive it even higher.  Whipsaws like the one we had on Monday can sometimes surprise to the upside.  Once the move gets a little more mature, the targets will become more accurate.  Trade safe!

The original article, and many more, can be found at http://PretzelCharts.blogspot.com