In Breaking(7/27/12), we opined that "the 2012 range (about 1270 to 1420 in SP500) is now most likely to be breached next - according to the development of the wave structure since the early June low. "
Now, a week later, despite the sharp downswing and equally sharp upswing during the week, our analysis and conclusion remain applicable. Chart 1 updates the top bullish and bearish counts. Please see last week's discussion for additional detail.
The moment of truth, whether the market can make a new recovery high or face an immediate trend change to the downside, is upon us. The squiggle count in Chart 2 suggests additional upside from a small-degree 5th wave of the current surge. However, by virtual of a higher high already in place, the minimum requirement for a top has been met if the bearish count is on track.
Notable weakness exists behind the current surge, which was also highlighted in Breaking(7/27/12). Junior indexes still lag the senior indexes, and the negative divergence in the advance/decline line associated with SP500 index constituents has only become more pronounced (Chart 3).
Unless the market profile turns more favorable soon, odds appear to favor pending weakness, likely associated with the bearish count as highlighted, with a potential twist -
(1) If no new recovery high is made, the advance since early June could be a B-wave or 2-wave.
(2) If a recovery high is made, the advance since early June could be a B-wave of an expanded flat or a triangle.