SPX and RUT Update: Market Has Reached the Topping Target Zone

I was watching CNBC last night, and it seemed like every other guest was predicting Dow 36,000 for 2012.  Correct me if I'm wrong here, but don't bull markets start when everyone is bearish?  In March of '09, AAII sentiment was over 70% bears.  The new AAII numbers come out tomorrow, and I'm reasonably certain the bullish percentage is going to be well above the historic average; the numbers were slightly above average last week, and the rally since is sure to get more on board the bull bus. 

Anyway, I changed channels a couple times to see if I could find any bears out there, and finally I did.  I came to a channel where a fellow was talking about how he expected the Dow to hit 10,000 soon.  He was even wearing a Dow 10,000 hat; and I thought, "Now here's a guy who might have a clue!"  Then I realized the show was a re-run from March of '99. 

Part of the job of the second wave retrace during the early legs of a bear market is to fool the majority into thinking that the first wave down was just a correction in an ongoing bull.  Bear markets need buyers early on -- that way there's somebody selling later to keep prices heading lower.  That current sentiment fits that pattern.

The other factor which fits the pattern is the extreme difficulty in nailing the exact top.  This top needs to leave confusion in its wake, and that can only happen when the majority are still looking for higher prices.  There should be buyers all the way down for the first half of wave Minor (3); so those buyers can turn into sellers all the way down for the second half of Minor (3). 

Now, all that said, if prices break above the 2011 highs at any point, it's back to the drawing board on the whole kit and kaboodle.  I'm not a perma-bear with some type of agenda -- so if the market proves me wrong, then so be it.  However, my expectation that the market is in the process of forming a significant top has thus far been unchanged by the price action -- and this top seems to be confirmed by sentiment.

The market action yesterday was in line with larger expectations.  I'm going to present the long-term chart first.  It shows some resistance lines from the old head and shoulders pattern of 2011; yesterday the market broke above, but closed beneath, that resistance area.  The blue target zone has now been solidly reached, but still remains active for the moment. 

  

The next chart is the Russell 2000 (RUT), and I'm sharing this one because it shows an ugly, but clear, 5-wave structure off the December lows.  The count shown on this chart would seem to indicate that time's about up for the rally -- but prices are still living within the nicely-defined red trendchannel, and until that breaks, there's no solid signal of a trendchange.

The last chart I want to share is a speculative possible ending for this move.  I've been kicking this around for awhile, and the market has performed close enough to my expectations under this potential that I feel it's worth sharing.  This count would create even greater confusion over the short-term, and I think that's what I find most appealing about the possibility.

This labeling takes a little creative license with the waves, but I don't feel it's forcing the count excessively.  Keep in mind that the lower red line is just for illustration, as opposed to being an actual support zone.  Also keep in mind that this is pure speculation; there's nothing yet to indicate this will unfold.

The short-term waves yesterday left me with the expectation that prices during Wednesday's session will reach beneath Tuesday's low, but whether that was "the" top remains to be seen.  This is going to be a hard top to nail to the penny, so the larger waves in the first chart will have to be our guide.  The target zone's been hit, so my stance now is that the rally could end at any time.

Worth mentioning, the Euro is sporting a complete wave structure which allows for the possibility that it may have already completed all of its 4th wave rally, as anticipated and mentioned yesterday.  The rally fell slightly short of the target zone, so if that was the whole of wave 4, it indicates extreme weakness in that currency.  This would bode ill for equities as well. Trade safe.

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