Last week's pullback likely represents a retrace of the recent rally in stocks. Chart 1 shows that the SP500 index bumped into trend line resistance (red) and is now retesting prior neckline and 50-day moving average (green).
Early in the week, there was indeed follow-through buying. From prior Friday's close to Wednesday's FOMC announcement high (12/12/12), the Dow had gained another 1.33% and SPX 1.45%. Thus, we must consider the low of the prior pullback coincided with the early December low. See Nonconfirmation (12/7/12) for details.
However, the market sold off following the FOMC announcement and the decline was swift and meaningful. We offer some observations below. Despite the relative weakness in NDX, the wave structure in NDX counts well as a five-up and three-down. Moreover, prices have been sticking to typical trend channels under this interpretation. Chart 2 illustrates.
The development in NDX raises the possibility that the current pull back is part of of a wave 2/B retrace in other indexes rather than the start of a down swing that threatens the November low (Chart 3-SPX, blue). To be sure, the picture / wave structure is far from clear cut in other indexes evidenced by a number of competing tracking counts (Chart 3-SPX, green and red).
Under the interpretation that the current pullback is corrective, the squiggle counts in Chart 4 (SPX) suggest that the minimum requirement has been met or nearly met. Friday's decline appears to be wrapping up a small degree (c) wave of a double zigzag or an EDT, or a 5th wave in the bearish case.
