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Market Looks Poised to Reverse Hard to Downside Within Days

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Reversals in the market often come when few expect them -- whether they come near bottoms or tops.

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The market has been in the process of a near 13 Fibonacci week corrective rally since the October 4, 2011 lows at 1074 on the S&P 500. So far the highs reached on the initial rally of 218 points were in October at 1292. That has remained the high-water mark as we have consolidated over the last many weeks. I expect the market to complete this countertrend ABC bounce during the Dec 27-29 window, followed by a good-sized correction into mid-January ahead of the earning season.

The patterns that I am seeing are based on crowd behavioral Elliott Wave analysis, and this analysis now favors a 70% probability of a bearish decline beginning very shortly to the 1150s area on the S&P 500 index. To wit, Investment Advisors in recent surveys have over 45% bulls and only 30% bears with typical tops forming around 47-48% bulls in surveys. In addition, the rally has been on light volume and recent action seems to be forming a rising "bearish wedge" pattern at the same time.

Reversals in the market often come when few expect them, whether they come near bottoms or tops. My most recent forecasts called a bullish turn after Thanksgiving Day when most were bearish in the 1160s on the S&P 500 index. We then rallied 109 points to a 1267 high, which we are re-testing now. As we recently pulled back into the low 1200s, I again said to watch for a major market turn on Dec 20. We then immediately rallied so far into the 1270 area from the 1203 lows.

Below is a chart I sent out on Dec. 24, having projected a continuing rally into the Dec. 27-29 window of trade.



Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

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No positions in stocks mentioned.

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