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SPX and NDX: Will Bulls Seize This Opportunity?

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This market is in a perfect position for bulls to launch a strong rally, but we'll also discuss what to watch to determine if bears are gaining control.

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MINYANVILLE ORIGINAL Wednesday's update noted that the market was approaching an inflection point, and to watch the SPX 1440-1455 zone for signs of a reversal. Later in that same session, the S&P 500 (INDEXSP:.INX) reached an intra-day high of 1438.59 and reversed strongly. This is again a very interesting position for the market, because the decline has unfolded in an apparently impulsive fashion, and can now be counted as five complete waves down. Normally that would suggest at least one more leg lower, of at least equal length -- but I have my doubts for a number of reasons, and suspect the market may find a bottom fairly directly.

I am currently viewing the decline as a complete (or nearly complete) c-wave lower to wrap up yet another second wave. This suggests a strong rally is waiting in the wings. I'll cover a couple reasons for this view, beginning with the SPX chart below. I'll caveat with the note that this is a very vague wave structure on SPX, though, so the possibility does exist that a larger decline is beginning. Once the market sees its first decent bounce and retraces somewhere in the 50% zone, we'll be able to consider the prior swing low as important to the near-term bull case.

The chart below is the interpretation I'm presently leaning toward, and suggests a bottom fairly directly, followed by a strong rally to new highs.


Click to enlarge

Examining the hourly chart yields a slightly different perspective on the alternate potential. The odds favor that bulls will find a bottom directly, but if they can't, then the shape of the previous rally would force us to consider the possibility that the present decline is part of the larger wave (2) which could retrace 50-62% of the total rally.


Click to enlarge
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No positions in stocks mentioned.
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