SPX, NYA, INDU, TRAN: 2070 Target Captured as Bears Make Their Presence Felt

Friday's decline caught a lot of traders wrong-footed, and the "bearish potential energy" I spoke about last update became reality during the session.

I do hope the updates of the past few weeks have been helpful to readers.  Back on February 27, when SPX was at 2110, I wrote the following paragraph -- and this is about as excitable as I ever get.  Long-time readers know that I'm a pretty laid-back guy, and writing a paragraph like the one below is (for me) the rough equivalent of Jim Cramer repeatedly slamming his fist into one of his sound effect buttons while screaming into the camera:

In conclusion, this appears to be the best opportunity bears have had since 2072 SPX.  If this is a bull wave, then it's likely that this will prove to simply be a fourth wave correction.  If the bears have control, then it will turn into something more significant, and 2058 comes into view as a potential target.  Either way, near-term, prices appear likely to be headed lower, so if you're a bear who's been waiting patiently for another decent opportunity, then this is the best one that the market has presented in a while.

Interestingly enough, SPX closed Friday's session just below 2072, so bears who allowed themselves a few small losses on the way up from 2072 were likely able to recoup all of those losses (with interest) in one fell swoop on Friday.  Especially if they were able to protect profits along the ride from February 27.  So 2058 +/- has now not only come into view, but wasn't too far from Friday's low.

So, with almost 40 points behind us since February 27, shorts can finally breathe a little easier, and have either already captured profits (since Friday's 2070 target was hit), or should look for ways to protect profits. The second target is officially 2048-60, with 2058 being the perfect world number.

To the upside, bears will want to be cautious if SPX can sustain trade north of 2087, though 2095 is the current (most conservative) key bullish overlap.

There are still bull patterns possible, such as the black ending diagonal (bull: i/ii/iii) shown below... but let's face it, that would be too easy for bulls.  There were a lot of traders still looking for higher prices when we were within the SPX 2090-2120 zone, so there is most likely significant overhead resistance in that zone.  As I wrote in our forum last Wednesday:

The wave structure has gone a bit into the realm of unusual, but unless we want to call today's drop an extended fifth of wave C,  bulls are running into the difficulty of "too many waves down." Right now, this looks more like a bear nest.

This pattern continues to maintain decent symmetry, and what we're seeing is potential layered overhead resistance being created as each sudden new drop ratchets the market below the prior support zone. Theoretically, bulls are getting trapped by this pattern.

A fourth wave is still possible and not off the table, but given only the raw appearance of the price action, this doesn't look like a "normal" fourth wave does. Sure, technically, it could still be a fourth. But it looks more like a top.

Resistance, of course, comes from all the (currently) trapped longs who bought each of those dips during that complex wave at the top -- many of whom will probably now be more than happy to sell at break-even if SPX revisits that zone any time soon.  Therefore, the pattern below suggests lower prices are probably needed before bulls have any real chance at a full bailout to new highs.

(NOTE:  Typo!  "1970" should be "2070"!)

A lot of traders were looking for a fourth wave here, to be followed by a fifth wave to new highs.  Now, I can't say new highs are off the table (especially for indices like COMPQ), because they're not -- in fact, I suspect we'll eventually see new highs one way or another somewhere down the line -- but I can say that this most recent decline is most likely (almost certainly) NOT a fourth wave:

The big picture count remains somewhat ambiguous, but my present instinct is that odds are fairly decent that we'll retest the February lows.  Stay aware of the key bullish overlaps, listed earlier, for warnings that new highs may be coming sooner, though.  Be aware that those overlaps will change as each wave completes, but should still mark resistance areas.

INDU's chart below:

Finally, nothing new to add regarding TRAN, except to note that the rally here has continued to look like an ABC for several weeks -- and looks even moreso now.

In conclusion, Friday's first downside target of 2070 was already captured, for an "easy" 40 points of profit.  To reiterate from earlier in the update:  The second downside target looks reasonably likely, and is "officially" 2048-60, with 2058 being the perfect world number.  To the upside, bears will want to be cautious if SPX can sustain trade north of 2087, though 2095 is the current (most conservative) key bullish overlap.  Trade safe.