SPX Update: 1344 Reversal Target Hit, Time for the Expected Relief Rally

There's not much to add from the past few days.  Yesterday played to perfection, and I simply can't predict the market any better than that.  I won't always hit things that perfectly, so please forgive me when I whiff on one!

Anyway, after yesterday's 1339-1344 target zone was tagged, the market spiked immediately. 

Of course, the media attributed this to positive rumors and news out of Europe.  Isn't it funny how "someone" knew to start these rumors just as my target reversal zone was reached?  Obviously, they didn't.  Technical analysis, and specifically Elliott Wave Theory, is all about sentiment.  The chart pattern revealed (at least, under my interpretation) that sentiment would be bottoming yesterday, and voila, it magically did.

If Wednesday's action doesn't clearly illustrate why I believe that the charts are the leading indicator, while the news is a trailing indicator, then I don't know what will.

Accordingly, there's no material change from Wednesday's update, and the expectation is that this bounce will be sharp, but relatively short-lived.  Sentiment should experience a brief spike as well, but expect some bad news to follow near the wave ii top. 

The potential now exists for a dramatic sell-off if and when the SPX breaks 1340.  Think in terms of potential energy:  the market has coiled itself up like a spring, and if the 1340 zone breaks, it will release a huge amount of pent-up energy very rapidly.  

Of course, there are other interpretations of the charts, and the possibility always exists for this to have marked a more meaningful bottom than I'm currently anticipating.  If 1340 doesn't break in the future, then that potential energy never gets released.  I don't view that as likely at present, but I will certainly monitor the market's signals and update you if my view changes.

Below is the expectation for the current rally.  As I talked about yesterday, I expected the market to decline into the target box and then generate a solid bounce.  It appears that's now unfolding.  The chart below indicates the upside targets.

Below is the bigger picture view of the SPX.  No change here either.

In conclusion, if my preferred interpretation is correct, then this bounce should be a fantastic selling opportunity.  I'll keep watching the short-term structure and attempt to narrow down the targets over the next couple days, and -- of course -- alert you if there are any changes to my big picture view.  Trade safe.

Reprinted by permission; Copyright 2012 Minyanville Media, Inc.