Wed 9/7/11. Gap and Crap Today?

(Update Wed 9/7/11 9:30PM EST)
After digging around tonight, I don't have a whole lot to add to my earlier comments. There is a cluster of Fibs on my 60min chart at 1199-1210. That may be the last major resistance before 1231. The US Dollar looks like it wants to go a little higher. The ISEE sentiment index, among other indicators, still suggests that the dumb money is neutral to bullish while the smart money is very bearish. We are down to 2 basic EW counts which are only distinguished by the "when" of the next lower low, and my cycle work suggests its likelier to be in the next couple weeks. I don't know what's going to happen exactly tomorrow, but the System will look for 2-candle hourly support breaks to short until I see more solid bottoming indications or a bullish configuration which is unlikely. Bernanke's speech around 1:30 I think and Obama's speech Thursday night are the next 2 potential market-moving events. If Bernanke doesn't give a wink towards some sort of big monetary stimulus plan tomorrow, watch out. If Obama proposes some huge over-reaching stimulus plan that has little fundamental change and has little chance of passing Congress or retaining our credit ratings, watch out. Good luck.

(Update Wed 9/7/11 3PM EST)
System support has now risen to 1190.61, so the System will enter short on any pullback below that. I noticed that gold stabilized just above its 20dSMA today. If it rallies again towards 1900, it will be at risk of forming an EDT. The US Dollar (at $75.5) seems to be in a wave 4 pullback and has the 200dSMA and previous pivots at $76-77 as resistance. VIX at 33 has serious overhead resistance at 40-48. The German DAX briefly entered its 5% freefall zone before getting saved by rumors of bank rule changes and the court ruling. Still, to me, it seems like various markets look incomplete but near completion if you know what I mean. So, when SPX begins its next downtrend, we'll need to keep our eyes on those things for clues as to where the merry-go-round will stop. Bulls have not yet proven a 5-wave rally today, but they did approach 1200 and, if they can muster a large gap up tomorrow OR make a new high after the next 10+pt pullback without overlapping 1164, then the evidence will likely favor a 1231+ rally. A fairly flat or slightly down day tomorrow (which would not be unusual after a massive rally like today) will probably leave us guessing into the Obama speech. How will the market react to the rumored $300 billion in stimulus that the GOP is already rejecting? I'm enjoying the start of football season...pros, college and high school. Good luck.

(Update Wed 9/7/11 2PM EST)
We got the gap but not the crap. I wouldn't say the 2008 analogy is dead, but its back is against the wall. My System was stopped out at 1192 for a 3% total profit, but it will continue to stay in short mode with next entry currently at 1188 (or 1191 if 3pm closes higher than 2PM). Is it just me or have all the wave 2s been really deep retracements? SPX hit 1356 after 1371, then 1347 after 1356, then 1229 after 1231. Of course, there are no guarantees the current rally is 2 of 5 of 3/C from 1371, but nothing convinces me otherwise quite yet. Having the 20dSMA and 89hEMA/SMA at 1175-1185 below current prices is concerning for the more bearish count. Knowing September 6th could have potentially been a short-term bottom with early October being the next low is a bit concerning. Knowing max option pain is near 1240 is concerning. Knowing an ABC to 1231+ from 1121 is a viable count is concerning. Yet, SPX appears to be at a near-term decision point, I only see a 3-wave overbought bounce thus far, and I still think its best to look for viable short entries...probably into late September or early October. Good luck.

(Update Wed 9/7/11 10AM EST)
SPX reached the 1185-1190 resistance area described below. The first hourly bar is in the books. I'm going to give the System stop 0.5% of room from the 1186 pivot, so I'll use 1192 as a stop unless I see a huge SPY volume/TRIN surge there indicating exhaustion. The System is back to a 100% short position at 1183 after previous profit-taking at 1174 and 1154 and an entry at 1216. I don't expect SPX to rally much further if the bearish count is in play, and we have a clearly visible ABC/123 from 1140. Bears need overlap of 1164. Bulls needs 5 waves to 1200ish. I suppose the market could consolidate into Obama's Thursday night stimulus speech, but, based on recent volatility, I expect an answer before that. Good luck.

BTW, there is now a H&S pattern with neckline at 1136-->1140, head at 1231 and shoulders near 1190. The textbook projection would be 1050ish. If this turns out to be a wave 2, FIBBEWIE would target 1025-1060. The 1020 +/- target area is gaining in odds if SPX makes a new low, although 1070-1120 is still possible. The more bullish WXY/ABC count from 1121 would see Y=W at 1250. That latter projection is why one must honor stops within your risk tolerance just above current levels and wait for good re-entries, even though I don't think that's the likeliest path.
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Is today Nov 10, 2008? On that day, SPX gapped up 2% and then fell 15% over the next 4 days making a new low by nearly 3% before briefly bouncing again. VIX was >60 back then, so that is probably the equivalent of a 1-1.5% gap and 8-9% crap in today's terms. That wouldn't mean much unless I told you that the previous 25 trading days were eerily similar now vs then. The analogy has differences and doesn't track hour-by-hour in most cases, but it's close enough in price, time and relativity to give attention. In fact, when I look at the daily indicators, there are other striking similarities. VIX jumped above its 20dSMA just before Nov 10, 2008, fell back and then grinded higher to its upper BB20. TRIN spiked to about 4 just before Nov 10, 2008 and MACD was nearly crossing bearish. Perhaps most importantly, SPX gapped above its 20dSMA and pierced its 89hEMA on Nov 10, 2008 and that's nearly the same exact setup we have today. If the analogy continues to the exact day, SPX would bottom on September 20th in front of the FOMC meeting, but I'd give it +/- 2 days. Today's rally could extend into Thursday, but it should not turn the 89hEMA into support.

Looking beyond the 2008 analogy, the System is 50% short from 1216 and will use the 1186 pivot as resistance. The 89hEMA is currently at 1184 and falling. A 50-62% retrace of 1231 would be 1185-1191. The last OEW pivot in the local cluster is at 1187. There are a lot of reasons to believe SPX should meet strong resistance at 1185-1190 assuming it makes it there. Futures currently suggest SPX will reach the upper 1170s. Assuming the gap up sticks into the open, DRSI will almost certainly confirm that 1231-->1140 completed a structure. That means we are likely in wave 2 of 5 of 3/C from 1371, but the alternate is that SPX is in a C wave of a rally from 1121. The latter does not seem to fit the System cycle, 2008 analogy or spending cycle very well, and it is not confirmed by DRSI, so I am heavily leaning towards the former count. In the bearish case, wave 3 down should exceed wave 1 which was 91pts. So, if SPX rallies to 1180-1190, wave 3 should make a new low at 1070-1100 or even lower. Then, wave 5 of 5 of 3/C from 1371 could either double bottom or carry down to 1020 +/-. We may get our answer today or tomorrow. Good luck.