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Time for a Healthy Dose of Bear Caution


The rally has come within six points of May's downside projections. Bears should stay cautious now, because a strong snapback rally is expected to develop soon.

MINYANVILLE ORIGINAL Most targets have been reached on the downside, with a bit more potential still lingering out there. During the first part of May (and ever since), I made a projection for the decline to reach 1240-1260 on the S&P 500 (SPY). So far the low is 1266, which is awfully close. This is a time for bears to be cautious.

Unless the SPX can get through 1298.98, there is still a chance for one more downdraft into the original target zone. So far, the rally appears corrective -- so I'm still favoring that outcome of a lower-low by a slight margin, but the market is definitely getting into that "tough call" zone.

The first chart I'll share is the intermediate picture SPX, because I do believe bears need to remember that a strong snapback rally is expected for wave (ii) after the current decline bottoms (assuming it hasn't already). This is worth remembering, because one does not want to short the entire way up during wave (ii) and potentially give back the lion's share of one's profits.

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Next is the "scary bear chart" for the Russell 2000 (^RUT), which I discussed over the weekend. Since the first precursor I mentioned (a whipsaw below and back into the diagonal) has come to pass, this potential definitely bears watching here.

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Finally, the short-term SPX chart, annotated with my best-guess of the current move. As I said, this is a tough call right now, so stay on your toes.

Converse to my bear warnings, here's a warning to the bulls: If the market breaks 1298.98 and then stalls for some reason near resistance at 1300, then things could actually get more bearish than discussed. We'll have to watch the market carefully over the next few sessions.

Click to enlarge

In conclusion, the potential does exist for a lower low over the short term, but this is definitely not the time for bears to be complacent. Assuming the market behaves "normally" here, a strong snap-back rally should be waiting in the wings. Trade safe.

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