Bulls Need to Hold it Here

An interesting situation has developed during the holiday weekend.  In the last update, I discussed that my preferred count for the S&P 500 (SPX) was an expanded flat, which would decline to 1627-1630, then rally to 1649-1652.  On Friday the market declined directly into that three-point zone -- then on Monday, while the cash market was closed, the E-mini S&P futures (symbol: ES) rallied straight up into the (cash-equivalent) target zone, and promptly reversed.  The chart below shows the futures action:

This means the futures may have done the "work" and completed the pattern while the cash market took a holiday.  This has left me a bit uncertain about whether to expect the cash market to also complete the pattern or not.  On the chart below, the more bearish option is shown in blue.

It should be noted that the potential does exist for this to be a more meaningful bottom.  The charts suggest a market that's teetering on the edge, and sustained trade below 1627 is likely to precipitate a strong sell off -- however, as I noted on Friday, as long as bulls hold that zone, they could conceivably begin the larger wave B/ii rally from here.

A couple markets will start to look very bad on breakdowns.  One of them is the Nasdaq 100 (NDX), which has left open the potential for an ABC decline -- however, it looks much more like a bearish nest of first and second waves.

NYA will look horrible on a breakdown:

And same goes for RUT:

 
On the monthly chart, the Dow Jones Industrial Average (INDU) completed the bearish engulfing pattern mentioned on 8/22.  This is traditionally a reversal signal.

In conclusion, it looks to me like bulls need to hold it here -- which they might do -- or risk an accelerating decline.  We should get some degree of Friday's anticipated bounce -- what happens from there will tell the story as to whether we should be on the lookout for the larger rally.  Trade safe. 

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