Reading the crash (8/5/11) offers analysis, from a EWP perspective, on whether the sharp decline in stocks is the start of a larger bearish trend or the end of a multi-month correction.
The take-away is two-fold. First, each of these diametrically opposite scenarios has non-negligible odds. Second, the risk to net short exposure is already defined at the hope rally high but that to net long exposure is not defined until a five-wave decline from the early July high is over.
Notable uncertainties now exist on both macro and micro levels, but there are no clear answers. To recap the two key questions,
 Is the recent decline in stocks the end of a correction or the start of a larger bearish trend?
 Is the low of the decline from the early July high in place? [Technical note - Breaking below such a low would most likely confirm a five-wave impulse-wave decline from the nominal high in May and thus confirming a trend change to the downside. ]
This week’s price actions offer important clues from a EWP perspective as well as a macroeconomic perspective.
Clues from bonds …
If the late 2008 lows in 10Y AND 30Y UST yield do not hold, odds of a trend change in stocks and economic contraction would increase dramatically.
From a EWP perspective, the recent massive rally in bonds calls for a recount (Chart 1 and Chart 2). We now see an A-B-C decline in long-term yields from their recovery highs (blue). The more extreme recessionary count would be a thrust out of a large triangle (red).
Clues from SP500 E-mini …
In the current environment, wave structures in e-mini futures can be especially informative. Despite the thin volume overnight, price trajectories do incorporate Asian and European developments.
Chart 3 offers two counts on ES showing a completed five-wave decline since the early July high, and one count still expecting a fifth wave decline to lower lows.
 The blue count assumes a simple extended third wave (blue [iii] as marked).
 The green count assumes an extended wave 3 of 3 (red (iii) as marked) as well as a truncated fifth wave (green [v] as marked). Despite the proposed truncation, wave [v] is nicely longer than wave [i] (also see Chart 4).
The above counts suggest a benchmark low is already in place. Breaching this low would be eventually bearish.
 The red count, like the green count, assumes an extended wave 3 or 3 (red (iii) as marked), but sees the current rebound as wave [iv]-up, to be followed by wave [v]-down. In this case, the important benchmark low is not yet in place.
Chart 4 (ES) and Chart 5 (SPX) show these counts and the larger structure. Note that the wave labels are one degree higher in Chart 4 (SPX) than those in Chart 3 (ES), which only represent differences in notation.
Whether or not the benchmark low is already in place, it is likely in sight.