Sun 2/20/11. Beware.

Based on S2EW, I have had 2 basic counts from March 2009 for the last couple months. Both counts start like this.
667-->1220=W (abc pattern, not 5 waves like most people have)
1220-->1011=X

Then, the 2 counts diverge.
1. 1011-->current=AofY which I had been favoring most recently
2. 1011-->current=Y

Those 2 counts have equal probability now in my opinion. After the shallow drop from 1227 to 1173 and subsequent breakout above 1200, #1 became favored but there are now countless reasons to favor #2. Most recently, SPX made a new high on daily Dynamic RSI but not weekly Dynamic RSI. That suggests a potential wave C or 3, not a 5. Dow made a new price low on Nov 29 but SPX/Nasdaq did not, so we have different ways to start the count from November. The rally from 1011 to 1129 in August formed a wedge which can be counted as an impulse or corrective wave depending on the index you choose, so that gives us other count variations. The rally from SPX 1040 to 1227 counts best as 3 waves not 5. The most recent drops to SPX 1271 and 1277 can be counted as an ABC wave 4 or wave B depending on which timeframe you use for Dynamic RSI. The 20% retrace like we had from 1296 to 1271 is not at all uncommon for B waves. So, all in all, it is possible that SPX is at the WXY top from March 2009 (or within 1-2% of it) OR merely completing A of Y.

At a minimum, the B of Y scenario should see a 20% retrace of 1011-->1344 (currently) to 1277. A new bear market wave 1 is likelier to reach 100-200pts.

As far as timing, we are now almost halfway into the current 1.5-2 month daily cycle band. I have mentioned many times that I show multiple cycle time periods up to 4.5 years ending between February and April with mid-March appearing to be the central magnet point that does not violate any of my cycle rules. That also fits the window of opportunity for the Hindeberg Omen from December. I reviewed all the large (3%+ 3+ day) cycle drops back to 2006. 14 of 21 such cycle drops lasted 2-4 weeks. 6 of 21 lasted 5-6 weeks and 1 of 21 lasted 8 weeks in the heart of the bear market. So, the odds favor a 3-week +/- drop with the reasonable possibility for a longer drop. Given that there are 4 weeks left in the cycle and cycles can extend 1-2 weeks, we have a 5-6 week window for a low, so SPX could rise 2-3 weeks and then fall 2-3 weeks or just fall straight from here. Given that there are only 3-4 weeks to mid-March which is when the cycles converge, SPX is more likely to start falling within the next week or so probably from 1344-1370. I'm not sure which it is going to be but there is not much upside left in either case.

Take a look at http://www.consumerindexes.com/. On the weighted composite index, the level of discretionary spending is very near an all-time low for the data back to early 2007 and has dropped precipitously in the past week. This fits with recent inflation trends. If spending cannot bounce back strongly in the next week to the channel it has been in since September, we will see a minor monthly pivot breakdown and a confirmation that November 2010 was a major pivot top. Based on my previous analysis of the SPX/spending lag time, that means 2 things: (1) we should see a minor SPX pivot low around late March and (2) we should see a major pivot SPX high in May/June. Already, the major spending pivot low back in August projected an SPX pivot low at end of February +/- a couple weeks. Everything seems to converge around an SPX low in mid-March +/- with a large rally into May/June and then further trouble.

None of that clarifies my 2 counts, but March does seem to be a significant cycle/spending low, so we'll be looking for signs of exhaustion on the downside around mid-March. At that point, the depth and impulsiveness of the drop should give us a much better idea as to the favored count and how large the bounce is likely to be. SPX 1160-1180 is still a target area in count #2 above, but count #1 could drop much more shallow. I decided to stay short on Thu/Fri because, despite the EDT count being eliminated, I usually give my stops/levels a .25% leeway and Friday closed for the 3rd day at or above the 90% level within its 10dSMA bollinger bands which almost always leads to a 1-2% pullback with limited upside but all bets are off after you see a 10-20pt correction. There are Fib/pivot levels at 1350-1365 that might be attacked at some point in the next few days but I don't expect much higher than that. I expect a multi-week USD rise imminently too which should place pressure on SPX and gold. Good luck.