Wed 8/28/2013. Pre-open Update.

I corrected my last post to say the channel line will be at 1590ish in the coming weeks, not 1540ish.

Reviewing DRSI (Dynamic RSI...my own custom indicator which I tried to make work for my System one year...it showed promise so I still consider it but I couldn't master it well enough) on the Dow, it is plausible that we are completing a wave 5 from the top and that the previous 2+ day rally was wave 4. Although SPX could be in the same count by EW rules, SPX DRSI does not confirm that, but Dow has been leading in recent months. Having said that, wave 5 RSI most often falls short of the w3 RSI and sometimes ends in the same area. Currently, Dow hourly RSI is just about the same as it was at the low 5 days ago, so there is not much room for price to go lower without RSI behaving abnormally for a wave 5. The equivalent of SPX 1620-1625 where we have a trend support line, Fib target and lower OEW pivot range would probably be OK if price recovers pretty quickly back to the 1630s. I also see a potential 2-3 hour EDT to end the 3rd or 5th wave of the larger wave 5, and the target for that is 1627-1629.

So, it is technically reasonable to conclude that SPX will complete 5 waves down from 1710 to the 1620s, and the eyeball test concurs on the daily chart. It's tough to say wave-wise on the hourly level whether we need 1 or 2 more lower lows, but we can draw a clear conclusion for trading. SPX is likely to retrace the 1710-->1620s downtrend for 1-2 weeks in a wave 2/B starting today or at least this week. If 1620 is broken and RSI far exceeds the level seen to end wave 3, SPX is likely in a more bearish count. A wave 2/B retracement would typically be at least 38% and likely 50-62%+. If we use 1710-->1625 to do our calculations, that means SPX should rally to at least 1657 and probably 1668-1678+. The potential wave 4 high was 1670, the gap down occurred at 1685 and the H&S neckline breakdown is at 1680-1690. Thus, my projection is for SPX to conclude its current downtrend in the 1620s this week then rally to 1670-1690 for 1-2 weeks followed by a drop to the 1500s into early October perhaps exacerbated by the Fed, but there is a more bearish scenario for a rapid drop into the first two weeks of September if SPX 1620ish is broken. Good fortune.