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SPX Update: Crash Wave Ready; Confirmation Still Pending

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The market is hovering just above critical support; a break could send stocks plummeting.

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There's been no material change in the counts since yesterday's update (see SPX Update: Looking for Confirmation of the Crash Wave), however, I have narrowed down some possibilities for the current retracement rally.

(If you're new to the discussion, or to Elliott Wave Theory, it would be quite helpful to familiarize yourself with the big-picture long-term market projections, which have played out quite well so far. See The Big Picture: SPX Long-Term Count and Projections.)

The retracement rally off the 1226 print low has fulfilled the minimum requirements for a second wave. While there are several options for the structure to take from here, two possibilities jump out at me as the most likely:

1. We have seen most, or all, of the Wave 2 rally.

2. Thursday was part of an a-wave leading diagonal (see chart, below).


Click to enlarge

I am slightly favoring the leading diagonal interpretation, simply because it counts a little better given what the market has revealed so far. However the rally could also be counted as a series of zigzags, which makes for an unpredictable outcome. It reminds me a lot of the beginning of the rally off the November 1 lows; it's simply an ugly structure. So the third option is that it will evolve into a similar type of rally as the previous one -- although, this being a smaller degree wave, it won't retrace as many points.

The critical knockout level for my preferred count remains the October 27 high of 1292.

I continue to feel that the important support levels are 1215 and 1190 SPX. If the bulls can't hold those levels, we will almost certainly see a rapid drop to the next meaningful support zone near the SPX 1000-1050 area. This first leg down would then set up a much larger crash wave, which could ultimately take the SPX as low as the 400s. The chart below reveals the intermediate picture, if these critical support levels don't hold:


Click to enlarge

The bullish alternate counts are still floating around out there at 20% odds. However, given all the bullish sentiment, the fundamental mess the world is in, the double-failure at the 200 day moving average and head and shoulders neckline, and the cross-market comparisons I've been publishing for a couple weeks (the dollar, copper, Apple (AAPL), etc. -- Apple and the dollar, incidentally, are so far performing exactly as projected), I continue to have a difficult time viewing this as anything other than an important top.

As a result of all these studies, I believe it's highly likely this crash wave will occur, and am favoring it at 80% odds. But it's not like I've never been wrong before (just ask my wife, she'll gladly verify this).

In any case, it's a bit of watch and wait right now. The market is perched on the edge of a cliff, and what happens next could determine this market's future for a long time to come. Trade safe.

This article was originally published on Pretzel Logic's Market Charts and Analysis.

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No positions in stocks mentioned.
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