For U.S. stocks, a fourth wave correction (with ambiguous degree, see below) or an outright trend change is likely in progress. Please also see discussions in Shift (3/23/12) and Outlook (3/29/12).
Based on the working assumption that the Hope Rally is a cycle-degree b wave advance, Chart 1 illustrates where the market likely stands.
(blue) A fourth wave correction with respect to either the November 2011 low or the October 2011 low is in progress, to be followed by higher highs (Chart 2). Cycle wave b-up will be over when the Hope Rally completes a simple zigzag.
(green) A fourth wave, wave (D) correction within an ending diagonal triangle (EDT) dating back to the 2010 low. Note that the EDT is largely driven by quantitative easing (QE) and has a tendency to loose steam around the end of each QE episode. If so, another round of stimulus is likely to accompany a wave (E) overthrow.
(red) A double zigzag completes the cycle wave b advance at the recent high. A trend change or a cycle wave c decline is underway.
Odds favor the fourth wave interpretation as long as SP500 does not meaningfully breach its decade-long support/resistance zone (Chart 3). At the moment, a potential retest of the breakout is in progress. The bearish count would be significantly strengthened if we have a false breakout with support around 1300 failing.
For the near term, the proposed fourth wave correction could take up more time and price range. See Chart 4.