Sun 12/11/11. Dollar effect.

(Update Mon 12/12/11 2:30PM EST)
SPX reached the 1220s initial target where the battle between the zigzag and triangle counts will be waged. No System short entry was triggered and the support of the 20/50dSMA with some near-term indicators oversold creates too much risk to go short now. So, the System, which is still in a neutral mode, will likely wait for multiple bottoming indicators to go long. If TRIN forms twin peaks as looks likely if SPX cannot rebound strongly today, that has not boded well in 2011 for the next 1-3 days. However, TRIN>2, NYADV<500, SPX 50dSMA support and a VIX rally near 30 and its 20dSMA would all be bottoming indicators with 1210-1220 being a key battlezone for bulls, so there may be a good reward-risk opportunity to go long this week. It has generally been my policy not to start trades in the day before an FOMC meeting unless the reward-risk is overwhelming or outcome near-certain, and I cannot say those things are true right now, so a sideline stance may be appropriate until at least Tuesday afternoon. The small bounce and consolidation today around 1230 is rather disconcerting for bulls especially with Dow hovering just above its 200dSMA and SPX/Nasdaq hovering just above their 20dSMAs. An equal leg down would target 1200 which is also a Fib 62% retrace of 1159 supporting the triangle count. As you know, I have been leaning towards the triangle count for weeks and so I expect 1220 to give way, but it does not necessarily have to happen today and, in fact, I thought the market would hold up into FOMC day. Still, the market rarely obeys my desires or precise projections and, if TRIN closes high and SPX closes low, I wouldn't doubt a large gap down tomorrow but any gap down to only 1220ish may very well be buyable. Hope my thoughts made sense. Good luck.

(Update Mon 12/12/11 9:35AM EST)
FYI...I made 2 posts this past weekend. Too much time on my hands. SPX gapped down just more than 1% below Friday's top, so the System will not enter short unless there is a 30% retracement (1245 currently) and will not enter short at all if SPX gets much below 1239 first because there is strong support in the 1220s setting up little reward. 1225-1226 is where the 20dSMA and 89hSMA reside. VIX shows little fear this morning compared to the drop and has plenty of room back to its 20dSMA, but I can't be sure if that is misplaced complacency or prescient confidence. If the triangle is in play, SPX will break 1210-1220 but probably not until after the FOMC announcement and VIX would likely stay at 25-35 until the triangle concluded. If 1231 breaks, the zigzag count needs 1220ish to hold. With the 89hEMA at 1239 and more than a 62% retrace of Friday's rally, I suspect breaking below 1239 by a couple points will lead to 1225 or lower. Good luck.
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If I had to pick the #1 reason I believe the US stock market will trade sideways-to-down over the next few years, I'd say cycles. Here's my top 5 in order of importance.
1. Cycles - demographics, energy, debt/credit, technology, 80yr, 10yr, 4yr, 1yr, 35-40day
2. Leading indicators - discretionary spending, oil, Shanghai Composite, my custom bear market indicator
3. Sentiment - VIX, ISEE, CPC, advisors etc
4. Currency/credit markets - TED Spread, US Dollar etc
5. DRSI-based EW count

Before I go any further, I need to correct a statement I made about my discretionary-spending projection. The actual SPX top is projected for this coming week or the following week which carries up to Christmas. It's been on the public weekly chart for months but I remembered it incorrectly last week. Considering the previous 7 cases since 2007 have led to a higher high, that favors the 1290+ zigzag count, but the spending-induced tops have been getting weaker and 2of7 spending-induced bottoms made higher lows (not lower lows), so the triangle count is definitely not out of the question. If the bull market has not ended, there is also the possibility that the longer spending cycle is in effect to late January (see chart), but I have many reasons to believe a bear market has started and a significant top is imminent, so I have not given that much priority. Regardless, my larger analysis doesn't change much except to say the top could extend a few days beyond the max Dec 19th date I gave previously although other indicators favor a quicker top.

Back to my top 5 indicators.
1. Cycles
Based on my extensive studies largely on the backs of other researchers, the demographic spending cycle has peaked and will provide downside pressure for years to come. Energy extraction efficiency has peaked due to the increasing difficulty and cost of finding viable sources and all the low hanging fruit has been exhausted in terms of oil/gas usage efficiency too. The debt momentum peak has likely been reached after the explosion in 2007-2010 even though it continues to grow, and it is quite evidently reaching the point of no return where the debt burden is too much to bear and trust and where the benefit of each debt dollar approaches zero (some research says it is actually negative). The technology cycle likely peaked around the 1920s largely due to the widespread acceptance and benefits of automobiles, telephones, typewriters and light bulbs and likely peaked around the 2000s with the widespread acceptance and benefits of computers, cell phones and the internet. The price cycles point to various significant lows until 2016+. The 1yr, 2yr, 4yr, presidential and possibly 10yr cycle lows should occur in 2012 with the longer term lows possibly coinciding with the next set of 1/2/4yr/prez lows in 2014-2016.
2. Leading indicators
Discretionary spending indicates a likely significant 8-10%+ drop beginning in mid-December (see public weekly chart #1). It has not failed in 14 projections since 2007. Oil has never stayed this high for this long without causing a recession and severe economic damage. In fact, the October SPX rally was allowed in part because oil retreated to $76 but it's now back at $100 for a month. Shanghai Composite warned of pending trouble in May and July just before the SPX collapse, and it is now on the edge of a 2-yr breakdown that could lead to a retest of its October 2008 low with a troublesome economy of its own. Since 2008, Shanghai has largely been ahead of our market, so I suspect the recent 5 weeks and 4 months of weakness will be reflected in SPX soon despite our 2-3 month rally. My custom bear market indicator suggests that SPX will retest 1075 before it breaks 1371 and the bear market will continue stair-stepping down if 956.23 is broken before 1371.
3. Sentiment
The short-term composite sentiment indicator at SentimenTrader is neutral, and the intermediate-term composite sentiment is at the first overly-bullish extreme but not at an ultimate extreme. Advisors have gotten more bullish in the last couple months but not extremely so. Guy Lerner's sentiment studies suggest the slight bullish optimism without extremes is actually a negative thing in today's scenario. VIX is back down near its 200dSMA triangulating. There is a large consensus expecting a Christmas rally, and a growing consensus that 2012 will not be a good year. There's not a big edge as to which way sentiment is going to turn.
4. Currency/credit markets.
The TED spread is nowhere near its highs in the 2008 crisis, but it just exceeded mid-2010 levels and mid-2007 levels, so there is some concern. There are further threats of bank and sovereign downgrades overhanging the market. The rates in Greece, Italy, Spain etc have fallen from their peaks but are still at fairly alarming levels, and I think almost everybody would agree that the EU has not solved its underlying debt problem nor convinced anybody that its backstop plans are sufficient, passable or sustainable while austerity is approaching a brick wall with populist risings. The Euro and US Dollar have been violently chopping around for the last 3 months, but the 7-month US Dollar uptrend and Euro downtrend are fairly obvious.
5. DRSI-based EW count.
I posted my count from the 1770s recently. If you study history, it's not hard to pinpoint euphoric decades like we had in the Roaring 20s, the Nifty 50s and the 90s (name TBD by history). Using RSI as an objective technical momentum indicator, the year 2000 was THE peak since the USA was born. You can probably come to the same conclusion in terms of world economic, miltaristic and technological domination. In S2EW and most other Elliott wave derivations, it is commonly agreed that wave 3s usually exhibit a momentum peak. Since (a) year 2000 surpassed year 1929 RSI, (b) 1929-1932-1937-1942 formed more of a sharp zigzag pattern than the 1970s sideways pattern, (c) the 1970s and 1870s RSI lows approached but did not break the 1930s RSI low and (d) economic empires typically last 200-400 years, I am convinced that year 1929 completed wave 1 from year 1776 and I am convinced that year 2000 completed wave 3 of 3 from year 1776. That makes 2002-2007 the likely completion of wave 3 from 1776. Wave 4 should be more of a sideways affair corresponding with other wave 4s like the 1970s and in alternation with the matching wave 2 in the 1930s. And, wave 4 is likely to last as long or longer than wave 2 which could be argued as 1929-1932 or even 1929-1942. 3-10+ years is a wide net but since SPX is now at a larger degree than the 1970s or 2000-2003, I think the odds favor 5-10+ years of sideways action even if there is no lower low, and that projects to 2012-2016+. On a shorter-term basis, DRSI does not support 667-->1371 as impulsive, and the odds favor more than a 38% retracement of 667 in a triangle/sideways pattern.

To summarize, my top 2 market predictive indicators (cycles and leading indicators) favor a significant market momentum low in mid-to-late January and further into mid-to-late 2012 while sentiment and EW are supportive of intermediate-term sideways-to-down action and credit/currency markets are a big wildcard due to interventions from the powers-that-be.

Let me speak to the wildcard by reviewing the US Dollar, because that may be the determining factor as to whether SPX can reach 1300-1400 and counteract the downside pressure in 2012. I added a public USD chart to my list. I'll point out a few things on that chart.
1. The 4 trends of $4-5+ in the last 8 months (red and blue lines) pretty well prove the recent inverse correlation between SPX and USD on a multi-week basis.
2. The circles indicate some of the multi-day pivots around the 20dSMA and each trend typically has multiple retests.
3. The blue and red arrows indicate when the 20dSMA, 50dSMA and 200dSMA first turn up or down respectively. You can see that the SPX rally to 1371 occurred after the USD moving averages aligned down, and after what looks like a 4-6 month bottoming process, the USD moving averages are now aligned up as of the last couple weeks.
4. USD price is above its 20dSMA, 50dSMA and 200dSMA after retracing Fib 38% of its most recent bottom.

The last 2 times the current bullish USD configuration happened (price above key MAs with all MAs turned up for 2+ weeks) was in mid-March 2010 and late August 2008. The SPX top occurred 0-4 weeks later. If you traded SPX and/or USD based on the bullish/bearish moving average alignments since 2006 (and probably earlier), you would have made a ton of money. Even the bullish alignment before that in early July 2005 led to an SPX top 4 weeks later followed by a 3-month 6% drop. One slight problem is that SentimenTrader shows 4 of 5 indicators being overly bullish USD, but 2 of the sentiment indicators look like they've recently been more predictive of direct, rather than inverse, USD action and the sentiment setup looks very similar to August 2008 before USD rallied sharply higher. Short-term, a deeper USD drop to its 50dSMA or lower for the next couple weeks would not be out of the question historically, but the odds are not strong in either direction and recent years suggest the USD uptrend is in its early stages thus putting pressure on SPX for months to come.

All in all, the evidence is fairly neutral short-term so the choppy triangle count and 1290+ zigzag count topping in the next 1-2 weeks are both possible for SPX. But the intermediate-term and long-term evidence is heavily weighted towards more downside pressure. Assuming SPX does not gap up big on Monday as has happened in a couple TRIN rebound cases, a lot probably depends on the USD reaction to the Tuesday FOMC meeting. I am not expecting much from the FOMC except maybe a discount rate cut to match the swap rate cut and more jawboning, but even a 1-2% USD drop would probably allow an SPX test of 1290+. Despite my evidence for a bearish 2012, once the FOMC decides to turn on the monetary spigots again whether that is in Dec or in January or March as I suspect, I'd expect the USD rally to end, sentiment to reach sustainable bullish levels and leading indicators to turn up temporarily likely around the time short-to-intermediate term cycles are bottoming all in support of a multi-month SPX dead-cat bounce. So, I view my indicators as generally indicating a horrible 2012 for SPX depending on the timing and extent to which the Fed decides to pump money into the system, and it is thus my educated guess that SPX will continue to form a large triangle from March 2009 as the tug of war between deflation and inflation wages on. Good luck.