In honor of QE2, U.S. stock market is approaching the moment of truth for the second time this year (MoT2) – whether the April high will hold. Note that the April high is also the retracement high since the financial crisis.
Recent market developments suggest that the market is more likely to first surpass the April high than to test the July low. The Nasdaq 100 Index and the Transport Average have already conquered their April highs. The recent retracement high in the Dow is less than 11 index points (or 0.1%) away from its April peak and the rest of the pack is not far behind (Chart 1). At the same time, initial signs of a reversal from retracement highs (i.e. a motive wave down) remain elusive in all indices, despite signs of near term fatigue with respect to the recent advance. Globally, the list of markets that have exceeded their April highs as well as their 2009-2010 retracement highs continue to grow (see Unfinished Business (update 2) (10/22/10)).
While an immediate reversal remains a possibility, it is increasingly less likely and needs to be priced accordingly. For an immediate reversal to take place, the most sensible wave structure requires the April high to also remain intact for the Dow, suggesting a truncation or a very shallow breakout.
If the April highs are surpassed, the bear market rebound continues (Chart 2 and Chart 3). Interestingly, the proposed long term wave structures since the Y2K high become more intuitive and consistent between junior and senior indices from this perspective. A call for a new bull market remains premature (See relevant discussions in Potential Reversals in the USD and Bonds, Will Stocks Follow? (10/15/10)).
For the Nasdaq 100 Index (NDX), a likely target is around 2462.84, where [Y] = [W], or 15.23% upside potential from its recent retracement high of 2137.33.
For SP500, a likely target zone is 1352.67-1378.31 where (C)=0.618(A) and a 15.23% increase from the recent high based on the target for NDX. A second (less) likely target is 1222.16-1228.74 where (C)=0.382(A) and a 0.618 retrace of the 2007-2009 crash).
Regarding the near term wave structure from this "bullish" perspective, current signs of a top could be associated with the end of wave [iii] of 3 of (C). (Chart 4 and Chart 5).
The advance since the August low being wave B of a regular or expanded flat (i.e. a potential fake breakout) is another possibility, but a less likely one for two reasons. First, the risk of rushing the count with a bearish tilt is high. Second, the most likely implication of this scenario is that the pullback from the April high is primary wave  of a new bull market, which remains a less likely scenario at the moment (see above.)
Appendix - bearish squiggles