The correction towards the October low in stocks finally materialized this past week, sending SP500 down 77 points from its all-time-high to its Friday low of 2002.33 and into its 50-day moving average currently at 2000.73, effectively filling two of the three major upward gaps. See Chart 1.
If the remaining upward gap around 1905/1909 survives the current sell-off, odds favor the pullback being wave (b)-down of wave [e]-up of the proposed larger degree expanding EDT dating back to October 2013. See Chart 2 and Price and Time (12/5/14) for details and bearish alternatives.
In that case, stocks are likely to resume their wave [e]-up rally, perhaps as early as next week. Consider the following.
SP500 is now approaching its initial support cluster. As of Friday, primary support off the October low is at 2009. The 50-day SMA sits at 2001. The Fib-382 retrace of the prior advance is at 1981. The head-and-shoulders pattern highlighted in Chart 1 projects to the mid-1980s. Furthermore, the magnitude of the current pullback is now comparable to (b)-wave pullbacks for the proposed expanding EDT (Chart 2, green line).
Note that SP500 futures reached 1996.5 cash equivalent in the after-hours trading on Friday, effectively filling the middle day-bar gap.
The pullback took the form of a three-wave corrective decline so far (Chart 1). It’s also possible that the pullback is wave E of a bullish expanding triangle (Chart 3).
So far, market breadth appears to be more resilient than benchmark indexes. For example, while SP500 has already dipped below its September high, its cumulative advance-decline line has not only failed to do so but also shown a much shallower pullback. See Chart 4.
Stock market seasonality is consistent with the sell-off this past week and would be consistent with a potential rally over the next few weeks.
Interestingly, the pullback this past week took place in a time-period when the market has been relatively weak historically, netting a median return for the Dow of 0.12% since 1915 and 0.02% since 1963.
The following two weeks, however, has been relatively supportive of stocks. For example, the median return of the Dow during the week of the third Friday in December is 0.39% since 1915 and 0.43% since 1963 and 60-70% of the time the market has experienced a up week. The historical performance during the week of the fourth Friday is even better. See Chart 5 and Chart 6.
Let's see if a Santa rally shows up.