SP500 made fresh recovery highs Monday and Tuesday. That advance was likely the small-degree 5th wave discussed in Moment of Truth (8/3/12). The wave structure since then best counts as a zigzag decline followed by a fresh impulse higher (Chart 1, blue). The zigzag decline also served as a retest of potential new support (Chart 2 green trend lines), so far with success.
This development suggests additional bullish extension. But assessing the upside potential has been tricky in recent weeks. The tug-of-war between the bullish count (Chart 2 blue, new 2012 highs) and the bearish count (Chart 2 red, no new 2012 highs) remains. However, as discussed in Breaking (7/27/12), odds favor a breaking of the 2012 range to date.
For the very near term, the immediate bearish count (Chart 1, red) is much less probable but not dead. A forceful small-degree 3rd wave decline (potentially accompanied by a gap down next Monday) would support the bearish count.
In addition, market technical profiles as measured by advance/decline statistics and inter-market relative strength have improved but negative divergences remain (Chart 3). Technical profiles need to strengthen further to be compatible with a sustainable rally.
