SPX, INDU, TLT: Still 'Just a Correction' Until Proven Otherwise

By Jason Haver  OCT 10, 2012 9:35 AM

Further near-term weakness would be the norm -- but unless key support is broken, it's still likely this is simply a correction.


MINYANVILLE ORIGINAL Tuesday saw continued downside -- and as I warned in my last article, bulls indeed "dropped the ball" for the near-term.  Currently, it's expected that this is only an extension of the correction from the 1474 pivot high, and that it will ultimately resolve higher over the intermediate term.  Bears do have a shot to turn the decline into something more meaningful, but will need to force a decisive breakdown of support to begin shifting intermediate prospects to their favor.

The S&P 500 (INDEXSP:.INX) trendline chart below highlights a pivotal confluence zone, which crosses 1425-1430. The chart should also note 1453 as a bear warning level.

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It appears reasonably likely that the market will test this zone before this wave is complete. Keep in mind, however, that bears do not particularly want to see overlap with the blue wave (1) low (see chart below) in the near term, since this would imply a potential for new swing highs more directly.
We can count a clear five-wave decline, which means the decline has already completed the minimum expectations for a (c ) wave, and as such isn't required to head lower. Lower would be more "normal" though, so on the chart below, I've positioned the (3), (4), and (c ) labels to reflect the roughly-expected path of a typical (c ) wave.  A choppy sideways/up mess is the usual for wave (4), which could start quite soon.

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The Dow Jones Industrials (INDEXDJX:.DJI) outlines the two most likely prospects -- however, as long as the swing low of 13425 remains intact, this leaves additional bullish options (not shown) on the table, and trade above the key short-term overlap levels outlined on SPX and INDU would suggest a more directly-bullish resolution. Larger degree prospects for SPX are essentially the same as shown on the chart below.

It currently appears likely that the next swing low will mark ALL OF wave (c )-down, but the potential does exist for it to mark only wave i-down of (c ), which would be corrected by a rally in wave ii-up of (c ).  We'll watch the structure as it unfolds to determine if the next rally is corrective (alt: ii) or impulsive in nature.
Keep in mind that, as always, I am working within the space constraints of the chart and am not intending to project a time-component, only the price structure.
Click to enlarge

Finally, a quick update on the iShares Barclays 20-year Treasury Bond Fund (NYSEARCA:TLT). As long as bond bears maintain the wave (A ) high, they are in the clear to push lower -- but a break of the level outlined would give bond bulls an opening to push this market rapidly higher over the near-term. 

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In conclusion, while five waves down can already be counted in the decline from 1470 SPX, it does appear likely that the near-term weakness will continue for several more sessions. Conversely, trade back above the blue wave (1) pivot low (second chart) would suggest that weakness is over.
For the intermediate term, there are presently no indications that this wave is anything other than an ongoing correction, meaning the rally is likely to continue to new swing highs when it completes -- however, any breakdowns of key intermediate support will call for more bearish prospects to be considered.  Trade safe.

No positions in stocks mentioned.

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