[1] Near term: A larger rebound or a bearish small-degree 4th wave consolidation is likely in progress. Confirmation is still needed.
[2] Hope Rally: The prevalence of three-wave structures across many time frames likely suggests further subdivisions higher.
near term outlook
Most benchmark U.S. stock indexes had experienced an inside week, with the exception of the Dow which had made a marginal lower low.
Based on price patterns over the past week, the key question regarding market direction is whether the initial decline from the May high is over (Chart 1, red-bullish, blue-bearish) or a near term bearish small-degree fourth wave (triangle or zigzag) is in progress (Chart 1, pink).
Wave counts on 1-min bars over recent days (Chart 2) illustrate the rationale -
(red-bearish) A potential zigzag or triangle from the nominal low in SPX could be in progress. Under this interpretation, we could have a bearish expanded flat or triangle consolidation in the Dow.
(blue or green - bullish) A series of 1s2s from the nominal low in SPX or an initial rebound from a truncated low in SPX could be in progress.
Technical Damage and Support (5/18/12) highlighted potential areas of near term support for the market. These potential support remains in place in case a small-degree fifth wave decline does materialize.
longer term thoughts
The prevalence of three-wave structures across many time frames invites us to take another look at the larger picture - the Hope Rally since the 2009 low.
Chart 3 presents key observations. The Hope Rally has likely been progressing in a triple-three structure according to the blue count. Wave [W] and [Y] count well as a 7-wave double-three structure (see the black labels) while the two [X] waves count well as a simple three wave structure.
Under this interpretation, the market is wrapping up wave number 4 (wave (X) in EWP terms) of wave [Z], with wave number 5, 6 and 7 to follow. The ultimate upside potential depends on when the Hope Rally
would end, whether shortly before or after the U.S. election. The golden vertical line indicates where wave [Z] and wave [Y] reach equality in time.
It's possible/probable that the Hope Rally has already ended at the May high (see the red count), around the not-so-uncommon mid-channel line. However, there's no confirmation yet and odds appear to favor further subdivision higher based on certain wave structures, near term technical support and policy expectations.
