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US Stock Market: Bulls Pass Their First Test


The near-term charts suggest a bounce, but the intermediate battle continues.

Friday's stock market saw a bit of a fake-out lower which then rebounded with reasonable strength. I was expecting a new low for this wave, but the decline fell 1+ point shy of my first target zone.

When we look at the S&P 500 (INDEXSP:.INX) chart below, we can see the decline from 1768 counts best as three waves. The first implication of this pattern is that the market is forming a flat correction. There are several types of flat patterns, but the most common is the expanded flat -- and if this is an expanded flat, then ideally, it should travel up into the blue box target zone before reversing to new lows. If it's a running flat (less probable), then it will stop shy of that target.

That's the Elliott Wave perspective -- but looking at this pattern from a classic technical analysis standpoint, the decline and subsequent bounce qualify as a successful back test of support. So, looking at the other side of the trade, the alternate count considers the option that the low (once again!) fell short of the usual targets and the Fed, I mean the bulls, will push this stock market to new highs. Barring the lower-probability running flat, both the preferred and the alternate count point higher for the short term.

Click to enlarge

One of the things I find interesting about the expanded flat count is that the suggested target for the pattern lines up just about perfectly with another test of the black trend line on the chart below. This chart also notes the typical near-term upside targets in the event the market sustains trade above the all-time-high.

Click to enlarge

During the last few sessions, not much has happened of intermediate significance, and ultimately we're still stuck inside the battle zone. I'm bringing forward a chart depicting the Wilshire 5000 (INDEXNASDAQ:W5000), a market-cap-weighted index of the market value of all actively traded US stocks, to illustrate this. Bears have the rejection at the confluence of long-term trend channels working for them, while bulls have Friday's rebound from the breakout line from which to draw encouragement.

Click to enlarge

In conclusion, the pattern which presently appears to be highest probability, by a narrow margin, is an expanded flat. This pattern basically amounts to a retest of the all-time-high -- and previous highs/lows are always fair game for the opposing side to take a shot at. On the flip side of that coin, bulls have held the line where they needed to, so it's not a slam-dunk call here. The good news from a trading standpoint is that the stock market is providing clear informational levels, so either way, we should have our answers fairly directly. Trade safe.

Follow me on Twitter while I try to figure out exactly how to make practical use of Twitter: @PretzelLogic.

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No positions in stocks mentioned.
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