Position: Short from SPX 1331 on 2/22/11
Daily Trend: DOWN with trend resistance at 1339-1344 and the 20dSMA at 1320.
Daily Indicators: Leaning bearish for a few days. VIX still has plenty of room to run to its upper BB20 and recent pivot high. MACD has room to fall to its support at 0. Breadth is not oversold. RSI is confirming on the daily and weekly level, not diverging except on dRSI5.
Weekly Trend: UP with trend support at 1271 and the 20wSMA at 1263-1268.
Monthly Trend: UP with trend support at 1173-1187 and the 10mSMA at 1186 and the 50mSMA at 1195.
Next Projected Cycle Low: March 23rd +/- 2 weeks.
SPX 1294 was pierced but the OEW 1291 pivot held. S2EW's Dynamic RSI confirms that 1326-->1292 was a 5-wave structure. Since I count 1344-->1294=A/1 and 1294-->1326=B/2 triangle, it is technically possible that an ABC completed from 1344. However, I favor 1326-->1292 as wave 1 of C/3. Here's why.
1. The C-wave would be short and not near a Fib ratio. 1326-->1292=34pts versus 1344-->1294=50pts.
2. Although the 1292 low was within the early part of the time cycle window for a bottom on March 23rd +/- 2 weeks, about 90% of cycles make it to at least a couple days before the projected low date. Occasionally, in double bottoms, the first bottom will occur 5-10 days before a cycle low while the second bottom occurs days after the cycle low. I suppose that is possible here if 1344-->1292=ABC=W and now we get an X for a week or so followed by an ABC Y-wave lower for a couple more weeks to complete a double ZZ. But, I doubt it for all the reasons stated here.
3. Dynamic RSI confirmed that the rally from 1040 to 1344 is complete (no confirmation yet that 1011-->1344 is complete) and a 52pt correction on a 304pt rally is only a 17% retrace which is unlikely enough, although I won't say it's impossible.
4. My daily indicators are not oversold nor are they signaling a reversal upward. For the vast majority of cycle lows, there will be a multi-week TRIN spike high and often there will be a breakdown of the VIX 20dSMA/uBB20 and/or an obvious bullish NYAD pattern such as a zigzag, scissor bottom or small change near bearish extreme and/or an MACD 0/support test and/or a test of the SPX 20dSMA none of which have occurred now.
5. During the 2008 oil parabolic rise and fall, there were 4 major pivots at $110-111 (WTIC), so I think the odds highly favor an oil bounce from 100ish to 110ish. That should put more pressure on SPX and it makes sense that the Middle East turmoil and Japanese earthquake effects will provide good excuses for fear for weeks longer. The next oil pivot of significance is $120-122 which would be the next target if SPX has another downleg in April after its March bottom occurs.
None of that prevents SPX from rallying Monday. However, that analysis does suggest 1326 is critical for bulls to surpass. The 20dSMA will reside at 1318ish on Monday. A typical 50-62% wave 2 retrace of 1326-->1292 would be 1308.87-1312.85. There is an OEW pivot at 1313. The high on Friday was 1308.35. SPX (and Dow) came within a whisker of retracing 50% and both rose to approximately the previous degree wave 4 high which is common. And, Friday's rally looks like a clear ABC thus far. Obviously, it could morph into an impulse or double zigzag up to 1313-1320, but conditions certainly support an immediate leg down.
If we assume Friday's 1308 high ended wave 2 of C/3 from 1344, then wave 3 of C/3 is likely to exceed 1326-1292=34pts and possibly extend to w3=w1*1.5 or more. So, we would expect to see 1308-34=1274 at a minimum and possibly sub-1257. You know I've been expecting the previous cycle low of 1271-1276 to be pierced and, every day, there seems to be a new reason for that target area. Likewise, below that, it seems like 1255-1265 keeps coming up as a support area with a vacuum from there down to 1227. Since wave 1 of C/3 took 2-3 days depending on if you look at SPX or Dow, I'd expect wave 3 of C/3 to do the same. So, from late Friday 3/11 at SPX 1308, the time and price projection for wave 3 of C/3 is 1257-1274 ending late Tuesday to early Thursday. Obviously, if SPX decides to challenge 1313-1320 on Monday, the price target will bump up and the time target will extend as far as OPEX Friday. In any event, you can see SPX should ultimately trade down into March 23rd +/- a couple trading days. I kinda thought the larger cycles would press a cycle low on the early side of March 23rd, but my bread-and-butter is the 1.5-2 month cycle and the daily indicators are not suggesting a low just yet.
Assuming SPX 1326 is not broken to the upside next week, I offer the following multi-week chart projections based on the above analysis. The dashed red line is most bearish followed by the dashed orange line, the dashed dark blue line and the dashed light blue line. I don't know which one will happen if SPX closes down next week, but I currently favor the red and orange scenarios. One thing you do not see on the chart is the uptrend line from 667 which crosses 1040 and currently resides at 1165ish rising about 20pts per month. So, in addition to the various MAs, Fibs and price-volume congestion around 1177-1200, there is also a critical cyclical bull market uptrend line in that area in late March to mid-April. Most recent sizable bearish corrections tend to last either 3-4 weeks (Nov 2010, Aug 2010, Jan 2010, Jun 2009, Nov 2008, Jul 2007) or 6-9 weeks (Apr 2010 which started as a 4-wk correction, Jan 2009 which ended with a 4-wk correction, Aug 2008 which was comprised of two 3-wk drops and a 2-wk drop, May 2008, Feb 2008, Dec 2007, Oct 2007). The 3 large down legs that kicked off the 2007-2009 bear market in Oct07, Nov07 and Feb08 were all of the 6-7 week variety. That's what my red bearish scenario depicts presuming 1344 was THE top. The orange scenario is a large ABC scenario spilt into two 3-4wk drops. The blue scenarios assume the current drop just a correction in the bull market and thus shouldn't go much if any beyond next week. Good luck.
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