Thu 5/5/11. Cycle bottom imminent.

(Update Fri 5/6/11 3:05PM EST)
SPX broke hourly resistance and has since retraced well over 30% of the low. Those were my guidelines for a long entry. I merely waited for a 5min 2-candle resistance break which did not occur until a few minutes ago just above 1339. I entered a long position at 1339 with a stop a few points below 1329. Risk is 1%. Reward is to 1370-1404 in May for potential 2.5-5% gains. Good luck.
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On Wednesday of last week, I called for a likely short-term top to occur on Thursday. SPX reached 1362 that day and popped 0.7% higher to 1371 over the weekend on Bin Laden's death marking the top. Since then, SPX has fallen over 3% in 3 days to my target area of 1320-1335. Now, SPX is only 1 trading day from my May 9th +/- cycle bottom target date, so we are well within the time and price window to look for bottom signals.

Here is the status of some of the bottom indicators I watch at 3:36PM Thursday:
TRIN=1.68=the highest value in 2+ weeks which qualifies but >2 is preferred
NYAD=small change at a bearish extreme for the 3rd day in a row=imminent s/t bounce at least
VIX=18.86>upperBB20@18.42=potential setup for a bottom if VIX closes back below the uBB20
RSI5=30,RSI14=50=common bounce levels
%B10=0.13=bearish extreme although sub-0.10 is preferred
Stoch=67.33=still high and not below 30 which means a second low is not as likely after this bottom finishes



I am calling for an imminent SPX multi-week bounce. The bottom could already be in place, but a lower low on Fri/Mon is certainly not out of the question especially with a jobs report on Friday morning. I would not have the confidence to call an imminent bottom here if it weren't for my cycle work. Last month, the bottom occurred 5 days early, but within the time window, at 1249 and I was too gun shy to go long despite the bottom indications being more extreme. This time, I WILL go long when the extreme high of the lowest hourly close and its preceding candle is exceeded (although I will wait to enter after any 30% retrace if that occurs greater than 1% off the low). Currently, 2-candle hourly resistance is at 1345.91 which is more than 1% off the low. A better risk/reward setup would occur if the jobs report leads to 1 or 2 or more hourly closes below today's final closing value.


I am sticking with my thesis that THE bull market SPX top will occur in late May or June, so this next bounce is likely to be the last new high for a long time. Based on my analysis of spending pivots since 2007, consumer discretionary spending projects a large May +/- top (usually 8%+) and a smaller top around May 1st +/-. If you visit http://www.consumerindexes.com, you will see May spending has fallen back near 92 which is an 8% rate of decline matching the dismal numbers in March and the horrendous lows of 2008. Oil above $80 led to recession within 6 months the last 2 times it occurred and we're in that timeframe for the 3rd case. QE2 is coming to an end in June with some front-running likely, and we all know what happened at the end of QE1 and since QE2 started. Seasonality studies suggest sell in May and go away. Terry Laundry's T-Theory, Parker's Money Flow theory, Peter Eliades' cycles and even Martin Armstrong's 8.6yr cycle theory are all pointing to a HUGE turning point in May or June. The S&P credit rating warning, the debt limit debate, the budget debate, the falling dominos in Europe, the energy & food inflation-induced world turmoil, the China bubble, the typical 2-year bull market length and the lack of any meaningful momentum in housing and jobs is all bringing things to a head.


However, I think there is likely one more multi-week bounce coming. SPX has not convincingly closed below both its 20&50dSMA at 1320-1335. I have been projecting an ultimate top above 1400 to possibly 1425-1450ish. I still think that is possible, but the final top may very well fall short. Let me paint 1 scenario for now:
1. EDT from 1249: Throw out the hogwash EW arguments. I don't care whether you call it a wave 5 from 1011 or an EDT wave C of Y from 1011. An ending wedge is definitely possible if the low 1320s holds on this bottom. If the top of the wedge were to be challenged, SPX could test 1400 or so in the last couple days of May. Wave 1 of the EDT was 1249-->1339=90 while wave 3 was 1295-->1371=76, so wave 5 must be 75pts or less. From today's low, that gives us a maximum of 1329+75=1404...very close to the wedge top at end of May. Time-wise, wave 1 lasted just over 3 weeks while wave 3 lasted 2 weeks. The drops in between should be about 1 week each. One could certainly argue that wave 5 should end in about 1 week, but I'd just give it a conservative range of 1-3 weeks. So, for this scenario, we should get a top before the end of May at 1371-1404. Nice and tidy analysis.


Such an EDT would violently correct to 1250+/- which would make for a perfect wave 1 length down from 1400ish breaking the 10% barrier that would get people really worried just in time for a large bounce shortly after that maybe back to the current 1340 congestion area. Based on previous downtrends, that 10%+ drop would occur in 4-6 weeks. Based on typical EDT breakdowns, I'd favor 3-4 weeks. So, a top around late May would likely lead to a bottom in late June possibly forming a deadcat bounce into bad earnings and economic surprises in July.
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Of course, I will follow my daily and hourly System trends so I suspect I'll catch the majority of whatever the market decides to do. The System hourly trend broke down at 1361.44 so that was a great short entry point with only a few days left to the projected cycle bottom. The System has not fully exited its short trade although it recommends profit-taking at key MAs like the 20dSMA and it will exit if hourly resistance is broken as described above. I may add more analysis this weekend but that's a bit to chew on. Good luck.