SP500 fell 5.27% from its all-time high to Thursday’s low in a likely three-wave structure before rebounding off its 50-day moving average (Chart 1). From a bearish perspective, as discussed in Monthly Outlook Update (5/31/13) and Bull or Bear (5/24/13), we associate three tracking counts with the recent sell-off (Chart 1):
[blue] The recent sell-off is part of wave (4)-down of [C]-up. Thursday’s low is likely A of (4) and Friday’s rally is B of (4). Wave (4) will either see further declines towards 1550 or a sideways consolidation to consume time (e.g. triangle). The subsequent wave (5) up likely offers some meaningful upside potential.
(Subjective) probability - Given the magnitude of the sell-off - note that Thursday’s low came within an index point of the April high in SP500 and overlapped the April high in the Dow - this count appears the most likely at the moment. Under this interpretation, wave (4) could have ended at Thursday's low, a probable but relatively less likely scenario at the moment.
[green (arrow)] The recent sell-off is wave (iv)-down of 5-up of (5)[C]-up. Wave (iv) ended at Thursday’s low and wave (v)-up of 5(5)[C]-up is in progress. In this case, wave (v) will reach equality with wave (i) at 1702.88 which is less than 1% above the May high of 1687.18 (Chart 2). As such, only a minor new high is likely and soon to be followed by a more meaningful sell-off.
(Subjective) probability - While the count is viable, the magnitude of the sell-off is undesirably large for the proposed wave (iv) as noted above. Thursday’s low needs to hold and net upside potential is limited at 1% beyond the May high.
[red] The Hope Rally has topped in May. The initial sell-off is likely a series of first and second waves (Chart 3, blue).
(Subjective) probability - Support at Thursday’s low needs to fail first and the nature of the accompanying sell-off needs to favor a third wave (rather than wave C of (4)). Neither condition is at hand at the moment, although risk-reward is quite attractive for bearish exposure if this count plays out.
Finally, we present the bull market tracking of the Hope Rally with the latest price data in Chart 4. See Bull or Bear (5/24/13) for discussions.