Is the Rally Over or Just Due for a Breather?

On Monday, I laid out the intermediate bear case and noted that the wave structure suggested there was likely to be one final wave up over the short-term.  Then, based on Monday's price movement, I adjusted the target for that final wave in the S&P 500 (SPX) to 1425-1430 (contingent on trade above 1419.59); and also published a target of 3100 for the Nasdaq Composite.

In Tuesday's session, the SPX hit 1426.68 and reversed; and the Nasdaq hit 3100.54 and reversed -- and in a market like this, that's not a bad day.

Now the question becomes if the entire intermediate rally is, in fact, complete.  I favor the view that it is, for a number of reasons, but in this article I'll discuss some of the pros and cons for that view.

A series of historical data points which suggest an intermediate turn is underway were laid out in Monday's article, and it's worth visiting if you missed it, since I won't rehash that data here.  These data points are definitely a "pro" to the overall bear case, but are not exact short-term timing measures.  As such, they tell us that a turn is very likely to be in play over the intermediate term, but they don't really help us figure out the short-term: i.e.- if that turn happened yesterday, or if it will happen a couple weeks from now.

The chart below is a point in favor of the intermediate turn having peaked.  The wave structure that shows in the Dow Jones Industrials (INDU) counts very well as a complete wave.

The Nasdaq Composite (COMPQ) is slightly more ambiguous, particularly on the daily level (not shown), and the daily chart of the Nasdaq 100 (NDX) in particular would probably be considered a "con" to the intermediate turn having already occurred (chart follows).

Below is the Nasdaq 100 (NDX) daily.  This chart looks like a con to the idea that the final top is in, though it's also possible that NDX will go on to make a new high, and indices such as INDU will not.

The SPX chart outlines both possibilities, and some key levels to watch.  The weakness of the alternate count's third wave has to be considered a "pro" to the idea that the top is in. 

Another "pro" not shown was discussed yesterday: the NYSE Composite (NYA) reaching, and so far failing to overcome, intermediate resistance.  On Tuesday, NYA was rejected directly at the intermediate trendline discussed yesterday.

In conclusion, the rally turned perfectly from within Tuesday's final adjusted target zone, and I feel reasonably confident that an intermediate trend change is now underway.  Obviously, trade back above the 1426 pivot high would suggest the alternate count is in play -- however, even if that were to be the case, at the bare minimum, I expect this high will hold for several sessions and lead to a decent correction.  As the assumed decline unfolds, I'll watch the structure and the key levels, and that will help me either add confidence to, or subtract confidence from, my view that Tuesday's swing high was all she wrote for this rally.  Trade safe.   

Reprinted by permission; copyright 2012 Minyanville Media, Inc.