SPX Update: Why this Rally is One for the History Books

This is a historic rally, and it's accomplished something the market hasn't accomplished very often -- but I'll return to that later.  Monday the market performed as anticipated by the preferred count shown on Thursday and Friday -- strongly reversing back to the upside out of the wave 4 target zone.

There are now three distinct possibilities over the short term.  Each leg of this rally has subdivided into smaller and smaller waves, which has continually caused it to overshoot target zones.  The market reserves the right for the current wave up to either mark 5 small waves to complete ALL OF blue wave 5 -- or 5 small waves to mark only wave i of 5, which would then lead to a small correction before reaching higher, into the original target zone.  

Trade beneath 1337.35 would rule out the wave i of 5 possibility. Since there are five waves in place (see 5 minute chart), it could be a complete wave (possibly still unfolding).  However, it's not until 1321 is violated that we can rule out the potential that this is merely all part of blue wave 4.  The Dow chart should be helpful in this regard. 

Sometimes, this is just how it works.  The market gives us new price data, and we do our best to interpret it accordingly.  It's not a fixed mechanism, and targets can rise or fall as the market shifts its position.  It's a real-time mechanism -- and some days are harder than others. 

There is simply no way to know for sure at this stage which of the three is playing out.  But we do have some hints and key levels to watch. 

On the upside, the classical technical analysis pattern now on the S&P 500 (SPX) implies a move to 1370-1371 if the 1354 highs are broken.  1354 would therefore be an area to watch for whipsaw action.  A head-fake above and back below would suggest that the higher targets will fail.  Conversely, a break above followed by a successful back-test of the breakout point would imply that the original 1376-1378 zone mentioned last week could actually be reached.

1321.41 is the big key pivot to the downside, and that would indicate that blue wave 5 is over.

The first chart I'm going to share is the Dow Jones Industrials, because its levels are clearer, and, more importantly, closer than SPX.  I've highlighted some trade trigger levels and the projected targets if those levels are broken.  I suggest watching the Dow during the day to act as a canary in the coal mine for SPX.  The levels and targets are mentioned in the call-out boxes.

The next chart is the 10-minute SPX and shows that the rally has completed enough squiggles to potentially mark a complete wave at higher degree, and highlights some of the support zones.

The next chart is the very short-term SPX chart, which shows that the rally has potentially completed 5 small waves at micro degree.  As I mentioned earlier, there are enough squiggles now in place to count five waves complete at the large and small degrees of trend.  The big question now is whether that wave is only a smaller portion of wave 5, or the whole thing. 

The final chart is my big picture preferred count, to help center everything.  This shows the rally as the (y) wave of a larger double zigzag to wave B.  Though it seem likely that wave B still has a few months left in it, the implications of this count are that the 2008 lows will be revisited after wave B completes.  That probably sounds impossible to everyone right now, but keep in mind that this current rally sounded impossible to a lot of people back in October.

As I mentioned previously, I'm leaning toward the view that the next peak will mark wave (iii) of (c).  If that's correct, it will be followed by a nice trade-able correction in wave (iv), and then another wave up to complete wave (c).  It's also possible that the next turn will mark ALL OF wave (c).  The next decline will help determine which view is correct.

At the beginning of the article, I promised some historic data.  So far in 2012, the market has stayed above its January opening price.  Going back to 1928, the market has stayed above its January opening level for this long in only 13 prior years.  The other years were 1931, 1942, 1943, 1951, 1958, 1964, 1967, 1975, 1976, 1979, 1987, 2006, and 2011.  In 8 of those years, the market stayed above its opening yearly price for the remainder of the entire year.  The remaining 5 years, the market lasted an average of 92 trading days above its opening price.  In 1987 and 1931, of course, the market crashed later on during the year.

In conclusion, for at least a month I've been warning bears to wait until the trend channels break before getting too excited about the potential of a decline, and that continues to hold true.  Not exactly esoteric stuff -- trend lines are Basic Charting 101 -- but I mention this to illustrate to less experienced traders why front-running a trend change can be dangerous if one isn't careful.  The market has reached another potential reversal zone -- but whether it will actually reverse or not is yet to be determined.  Trends can run a lot longer than seems reasonable, and that has certainly been the case for this rally.  Watch the trendlines and the key levels for clues.  Trade safe.

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