Editor's note: Also see Jason Haver's Primer on Techincal Analysis and Technical Analysis: Basics of Elliott Wave Theory.
My intermediate expectation for the decline to reach the mid-1200s is, as yet, unchanged. If the bulls could reclaim some key levels north of 1375, my outlook would need to be reconsidered.
The first chart is the S&P 500
(SPY) daily chart, and shows that bears have fired a strong warning shot across the bow. The top indicator panel depicts the Relative Strength Index (RSI), and shows that this month's decline officially entered into bear market territory. We can see that, since the March 2009 bottom, this has only happened one other time, and that was during the 2011 "mini-crash."
The other two indicators have not yet confirmed, but if the market proceeds to decline into the mid-1200's, then these indicators would almost certainly confirm my view that the market has (most likely) seen a trend change at intermediate degree, and will ultimately head significantly lower.
It's by no means a "done deal" for bears yet, but the evidence is mounting.
Click to enlarge
Short term, there are still some questions as to what the market's next move is. The day this rally started, I warned everyone to be on guard for a complex and unpredictable correction. Waves in this position often take strange forms.
As if for emphasis of this point, yesterday's action opened up the potential of a triangle in formation. This pattern should be easy enough to confirm or deny, as trade above 1328.49 would eliminate it from consideration. Conversely, if the market bounces back and forth between the triangular blue lines, then we can confirm this pattern.
If the market does rally above 1328.49, I will most likely shift my preference to the alternate count. This alternate currently appears quite reasonable, and is a pattern called a "double zigzag." A double zigzag (in this case) consists of two 3-wave rallies connected by a three-wave decline. The first rally is labeled as a-b-c to form (w), the decline is (x), and the second rally leg is a-b-c to form (y) -- with (y) being the final wave of the rally. The chart shows the rally from 1292 to 1328 as one potential a-b-c for (w), and the decline back to 1294 being (x). If this count is correct, yesterday's high marked the peak of wave a, and the decline to 1310 likely marked the bottom of wave b. Wave c-up would now be underway. The first target for that count would be 1338-1340; the second target would be 1352-1355.
Again, the double-zigzag gains preference only if 1328.49 is broken.
Click to enlarge
In conclusion, in early May, I stated that a close beneath the key S&P 500 level of 1380 would strongly favor the bears going forward, and I projected a decline to 1300-1310. So far, that's been exactly the case. There are some levels which could turn me back toward bullish, but the bulls have their work cut out for them. The longer the market hovers around down here, the more dangerous things get for the bulls. Trade safe.
No positions in stocks mentioned.
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