SPX Update: Will the Waterfall Crash Continue?

So far, the market has lived up to my prediction of a waterfall decline, and now everyone wants to know if it's going to continue.  Today we're going to take a look at a few things and try to answer that.

First of all, it helps to know what a waterfall looks like.  (By the way, I consider the terms "waterfall" and "crash" to be essentially synonymous, and use them interchangeably.)  The chart below compares the current waterfall with the prior waterfall decline, earlier this year:

We can see there were very similar top formations in both instances, and we can see that last time, there were bounces the whole way down.  And yes, I continue to favor a waterfall decline (or "crash" if you prefer) going forward. 

Note that the target for the top formation the market just completed, using classical technical analysis, is around 1150.  It would not be unreasonable to expect some sort of bounce from that level.

One of the things I like about the waterfall decline scenario is that the market action of "ratcheting" lower discourages shorts, and encourages longs.  The momentum never gets going down fast enough for the momentum traders to pile in, and it pauses just long enough to convince people the decline is ending.  This causes a max pain effect, which is what the market seems to enjoy doing to everyone.  Shorts either cover or don't enter, and longs keep buying and then getting creamed.

But make no mistake, under my preferred scenario, there will be lots of little bounces along the way.  The market never moves straight up or straight down.

Now that the market has provided another piece of the puzzle, I have been able to clean up the charts a bit.   Although my preferred count is bearish no matter how you slice it, of the various ways to count the current decline, I continue to favor the nested 1-2 count by a slim margin.  Call it 57.756% probability (I considered adding like 90 more digits to that -- be thankful I'm really tired!).  This count can be eliminated from contention if the SPX trades above the blue wave 2 high at 1223.51.

If this count is playing out, we could still see some rally today, but when it turns, the next leg down should show increasing momentum over yesterday's move; and the overnight futures sessions will likely create cash market gaps such as yesterday's.

The more conservative way to count the decline using Elliott Wave is presented below.  What I do like about this count is that it allows for the "seasonality" factor.  The Wednesday before Thanksgiving has been a positive market day in 8 of the 9 prior years.  Of course, none of those prior years featured the Congressional Stupor Committee, who, after months of heated negotiations, was finally able to tentatively agree on catering.  However, this is still subject to future review. 

Who knows what impact that may have on things; maybe that's why the nested 1-2 count has always looked more probable to me in the charts.  Anyway, the chart below is the "conservative" bearish count.  Under this count, it still looks like the market needs a lower low before we have a day or two of "happy rally time" before heading lower again.  The alternate black count considers the possibility that Happy Rally Time is already here.  Trade above 1211.36 rules out the preferred count; trade below yesterday's low rules out the alternate.

And of course, no discussion would be complete without mention of the short-term bullish alternate count.  If that count is playing out, change the blue and/or black "1" in the above chart to "C," and up we go, right on into the 1300's.  I continue to discount the probabilities of that count to about 15%.

In conclusion, my medium term target for the SPX is still 1000-1050; I'm just trying to pick nits over the short term.  Today looks like it could potentially see some continued rally early on (although that could be viewed as complete or nearly so), but I expect any rally will ultimately lead to lower prices.  Trade safe.

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