(Update Mon 1/31/11 11PM EST)
SPX is likely to rally to the 50-60% retrace area of 1288-1292 piercing the 10dSMA and possibly testing the recent 1290-1296 pivot band. I am not projecting the large 7-10% down move into March to start just yet based on my weekend analysis...until I see Dynamic RSI break down which likely requires a close below 1275 and possibly 1271 at this point. So, I suspect the current bounce from 1275 is either wave 1 of 5 or B of 4 from SPX 1173, and I will likely place my money on the latter count tomorrow if my favorite technical indicators hit key overnought levels. If I'm right, we should see an impulsive move down to 1271-1275 starting Tues/Wed and possibly even a spike down near 1262 with a snap back closing above 1275. If 1271 holds on an intraday basis or 1271-1275 holds on a closing basis on the next drop, the wave 5 scenario to 1313 becomes more likely especially if Dynamic RSI holds and near-term indicators get oversold. Good luck.
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If SPX closes much lower on Monday, Dynamic RSI will likely confirm the uptrend from SPX 1174 is complete, but, after Friday's drop, Dynamic RSI sits just above the Wave 2 RSI meaning a Monday reversal upward could indicate a new Wave 5 high near 1313. SPX 1303 and 1313 were the tops before SPX crashed in fall 2008. The former level was rejected Friday. The latter may still need to be rejected, but Mon/Tues should give us the answer. If SPX does continue higher near 1313, I suspect there will be growing technical divergences intra-market and inter-market.
S2EW still leads me to believe 667-->1220 was an ABC (wave W), 1220-->1011 was an ABC (wave X) and 1011-->???? will be wave Y. If SPX does make one more high to 1313ish, that will make the rise from 1011 look more like 5 waves to me making it A of Y. If SPX 1303 turns out to be the top for a few weeks, a corrective count from 1011 is very possible making 1303 the potential completion of WXY from 667. As much as I am bearish into 2012+ on the economy and stock market, I technically favor the A of Y scenario and would favor it even more so if 1313ish is reached. That tells us a couple things. (1) The next large drop will be B of Y which makes a 20-50% retrace likeliest with 30-40% being the most common target. A 30-40% retrace of 1011-->1303/1313 would be 1180-1220. (2) That low will be followed by a new high in 5 waves with targets unknown until the low is established.
I don't discuss patterns very often, but in my cycle studies now back to 2004, I stumbled across a benefit to some basic bottoming patterns. I found that the rally out of cycle lows always hits a critical decision point (which I've quantified in terms of candles, 20dSMA and retrace percentages) and that rally sometimes breaks out and other times falls to new lows or just retraces the bottom. When trying to gain in edge in determining what would happen at each decision point, I noticed a fairly repetitive pattern in addition to some technical indicators that provided highs odds. When bottoms are spread out across several weeks or months, the double bottom patterns tended to breakout more often on the subsequent rallies often with a smaller cup-with-handle type pullback and/or with a breakout retest along the way, while the zigzag bottom patterns usually morphed into inverse head-and-shoulders patterns albeit often slanted with larger retracements of the bottom forming the right shoulder. It's just a rule of thumb of course, since there are counter-examples. If you step back and look at the rally from SPX 1011, the inverse head-and-shoulders pattern stands out in neon lights. Then, as SPX approached its H&S target it ran into pivot resistance at 1220ish which led to a smaller pullback much like a cup-with-handle to 1173. Since that time, SPX has rallied hard to 1303 but it has never really backtested that 1220-1230 breakout. Now, my sample size is small, but I noticed most cup-with-handle and double bottom breakouts are backtested. The subsequent rally after that backtest does sometimes fail leading to a new downtrend while another high gives confidence to the original W/cup breakout target. It just so happens this lines up very well with my S2EW analysis above. SPX is likely to backtest/pierce 1220-1230 making 1200ish a real possibility. 1180-1220 is the S2EW target. There was also a ton of congestion at 1170-1200 which may serve as support at least the first time. So, 1200ish makes real sense as a target for the next imminent downturn. Even if a new cyclical bear market is starting, a wave 2 retrace from a 1200ish bottom could certainly reach 1250-1300. The cup-with-handle target for SPX would be 1440ish if a new high is reached. And, that would correspond with C of Y in the primary S2EW scenario.
What about timing? My cycle analysis suggests a new cycle likely began at SPX 1271. If 1271 is closed below this week, then a new very bearishly left-translated cycle has begun OR SPX could form a rolling/wedging top for a few more weeks. If SPX reverses higher Mon/Tues, cycles by themselves do not project a price or time target. Of the 5 cycle lengths I studied out to a 4-5 year length, 4 of them are lined up for a cycle low in March. Also, remember the Hindeberg Omen formed around SPX 1240 in December and my Shanghai Midnight indicator (borderline signal thus far so watch for Shanghai weakness) suggest a large move down within weeks. And, my discretionary spending analysis suggests a significant low in Feb/Mar to be followed by a very large market rally (often 10%+) which favors the 1303/1313=AofY scenario.
Putting that all together, I expect SPX to reach 1200ish in March. To confirm 1303 is the top for a while, SPX should close below 1271, then pierce the 20dSMA on overbought signals and then fall hard again. In my ideal scenario, SPX would pop one more time to 1313 for 1-3 weeks, then drop hard to 1200ish for 4-5 weeks into March. That low should be buyable with caution needed as the retracement reaches 50% and key moving averages and pivots. All in all, I guess I won't be convinced the next bear market has started until 1170 becomes resistance, and I see the possibility that SPX could reach 1350-1450 in the summer. Good luck.
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