SPX and NDX Update: Bulls Running Out of Options

On Friday, I assigned roughly a 50% chance that Thursday marked the end of the rally, and the top of Minor Wave (2)-up.  Today, I would move that probability up to 80%.  As far as I can see, there is really only one "last hope" for the bulls at this stage.  But before talking about alternate possibilities, it's more important to talk about what's most likely, so I'll discuss that last hope in more detail a bit later.

The market has now given us solid confirmation of the bear case with the break below 1256 SPX.  If we are now in the beginning stages of Minor (3)-down, this wave should ultimately turn into a waterfall decline to substantial new lows.  First target for Minor (3)-down would be in the area of SPX 800 -- but that target could easily move lower as the move progresses.  But, obviously, it's not going to move straight down, there will of course be bounces and rallies along the way -- so first things first.  The charts below reflect the early targets for this smaller wave within the larger Minor (3) wave.  The SPX chart is first, NDX is second:

The structure off the highs is anything but clear-cut, so I am generating these targets using my assumptions of what that structure is.  The first target zone for the SPX is 1194-1220; and for the NDX 2274-2320.  Unless the market is even weaker than I'm anticipating, we should see some type of bounce in these areas.  Tomorrow, we can look at the next target levels.

It's always tempting to get excited when the market follows your predictions, especially when you were a bit off the beaten path making those predictions in the first place.  The problem with excitement is: I think emotion is the killer of most traders, and it's very easy to become too subjective and start trying to fit the market to your expectations, instead of objectively seeing what's really there.  So I continue to challenge my views, even when they seem to be right.

While doing so tonight, I came up with a "last hope" short-term pattern for the bulls.  I don't consider this pattern likely, but it's not impossible.  The bulls last hope here would be an expanding ending diagonal pattern.  Under this pattern, the SPX would put in a bottom somewhere north of 1197.34 and rally back up to a new high.  Expanding diagonals are one of the only patterns where waves 1 and 4 are allowed to cross into the same price territory, which these waves have already done.  That's why I view this pattern as the last hope for the bulls... because there is little else that's possible given the technical damage that's now occurred.

The chart below is annotated with my preferred count in blue and red, and the bullish alternate count in black:

The bulls last slim hope, as I currently see it, vanishes with trade beneath SPX 1197.34.  Please realize that I'm only assigning a 20% chance to this alternate pattern unfolding -- but as I said, it's still not impossible.  However, if there's one entity that can take a low-probability pattern and make it reality, it would be the Fed.  I'm not expecting any game-changing fireworks out of the Fed meeting, and I firmly believe that QE3 won't happen right now... but, ultimately, that's just my very strong opinion.  So, in the event I'm wrong, there's the alternate count.
 
Assuming my big picture view of the situation is correct, and so far it's played out very well, then the market is in the early stages of becoming extremely hostile to long-term buy-and-hold investors.  If the big picture view is correct, the markets could ultimately see levels that most would consider impossible.

As an additional quick update, my call for an imminent bottom in the US Dollar could not have been more timely.  I posted the dollar update on my blog on Saturday, and the dollar went parabolic on Monday.  After reviewing the wave structure in the dollar, I can say with 95% certainty that the bottom is in for the US Dollar, and last week's low should hold for a long time to come. 

Beyond that, it's getting ugly out there... trade safe.

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