Fake breakout or continued consolidation
The downward reversal in stocks mid-week pushed SPX to close below its decade-long resistance zone (Chart 1), raising the prospects for additional declines after a fake breakout or further consolidation. From a long term perspective, it makes sense for the market to be rejected by this long term resistance zone as well as to consolidate along this zone. As Chart 1 indicates, SPX monthly bars have been hugging this resistance zone for the past five months.
The downward reversal this week likely has the form and the personality of a third wave or a C wave. As a result, the top candidates for this largely side-ways structure are
(1) a lengthy triangle from the Feb high, currently in wave C of the triangle (Chart 2, red)
(2) a downward expanded flat from the Feb high, currently in [iii] of C (Chart 2, red-alt).
Note that this scenario has the potential for SPX to morph into a triple zigzag (perhaps to 1430) as discussed in QE Fractal and Projection (5/27/11) on additional QE-type monetization (Chart 3).
In fact, the QE fractal has continued to track this past week. The decline into the weekend is likely wave 7 (or to a lesser extend, wave 5) of the pattern (Chart 4).
(3) on the most bearish side, part of a major top - a zigzag advance since the March 2009 low is already complete (Chart 2, blue).
Down the probability scale, two other counts are worth mentioning.
(1) A budding ED from the March low, currently in Wave [b] of ED (Chart 2, purple). Of course, while appropriate, it is a more speculative count at the moment as much of the ED is yet to form.
(2) A downward complex three (w-x-y) from the April high finishing a small-degree second wave decline (Chart 2, green) or from the Feb high to conclude wave (X) (Chart 2, red).
Price and time - long term possibilities
The correction since the Feb high has already lasted 15 weeks and counting, much longer than any pullback since the July 2010 low, and comparable to the 10-week correction from April to July 2010.
Thus, in addition to the completed zigzag count (Chart 2, blue, topped) and a potential triple zigzag count (Chart 3, perhaps to 1430) on the bearish side, the above observation has raised two notable possibilities on the bullish side. While speculative at this stage, these counts have become contenders (Chart 1, green).
(1) The super bullish count has the Feb high as wave 1-up of (3)-up, with the current consolidation as 2-down of (3)-up.
(2) The bullish count has the Feb high as wave (3), with the current consolidation as wave (4). Since wave (3) is smaller than wave (1), wave (5) is capped (say, between 1600 and 1700 depending on where wave (4) ends).
Appendix - near term squiggles