Bearish interpretation is on track
The bearish count has been tracking the market well. From the April high, minor wave 1-down ended at the May low. Minor wave 2-up took the form of a flat and ended at the August high.
The sharp reversal down over the last two weeks is wave (i)-down of [i]-down of 3-down. Regarding the wave degree, last Friday’s low could be one degree larger as [i]-down of 3-down. See the red labeled count in Chart 1 and Chart 2.
Wave (i)-down (or wave [i]-down) most likely was complete at Friday’s low. After a brief second wave rebound to about 1100 in SPX, a strong wave (iii) of [i] of 3-down (or wave [iii] of 3-down) is likely to be range-busting and push the market beyond its July low.
* SP500 E-mini
Near term bullish tactical contingency
However, Friday’s low ended with notable technical divergence and the sell-off since the August high has not been as swift as one would expect from an assumed ending diagonal from the July low to the August high.
Thus, from a risk management perspective by strategic bears and near term positioning by tactical bulls, it is important to leave room for near term bullish possibilities.
The most credible near term bullish count is the one that has minor wave 1-down complete at the July low in the form of a large leading diagonal. Minor wave 2-up may still be in progress and the recent decline is only wave [b]-down of 2-up. Minor wave 2-up will eventually advance beyond the June and the August highs. See the blue labeled count in Chart 1 and Chart 2.
Wave [b]-down is likely an expanded flat, which most likely ended at Friday’s low. Thus, Friday’s low is a key level to monitor.
In addition to the positive divergence seen at Friday’s lows, this bullish contingency count can accommodate the wave structure in SPX futures, SPX cash index, the Nasdaq indices and the Russell 2000 index and brings these indices in sync with each other in terms of their wave counts. (See Chart 3, Chart 4 and Chart 5)
* SP500 Cash, Compq, RUT
Appendix - Building on a small five up into the close and the after hours pump.