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The Fork in the Road for Stocks Is Right Here, Right Now!


Currencies and bonds still mixed in their messages.

Can you hear that stretching sound? That's the patience of the majority of risk bears out there. All it took was a modest inflation reading out of China and FOMC meeting minutes that are somehow being interpreted as market-friendly to keep the party going in stocks. So far, though, key currency and bond charts are still mixed in their messages. Hey, at least the messages aren't uniformly bearish! The old saying in baseball is "the tie goes to the runner." Well, in the markets, when messages are ambiguous, "the tie goes to the existing momentum." Seemingly, it will take something unexpected to stop and/or reverse the momentum – neutral or mixed messages will not do (for the bears).

Let's take a look at where the S&P (INDEXSP:.INX) stands technically.


The S&P is trading slightly above projected (monthly) resistance for the "bear case."

Heading into the close Wednesday, the S&P 500 ($SPX.X) was trading slightly above both the 2007 intra-day high (1,576.09) and the projected wave "c of B" high (based on the 100% Fibonacci projection). First and foremost, the initial reaction should absolutely be to admit the continued higher price action is bullish. Secondly, however, I must point out that the chart below is a monthly chart – so a daily and/or a weekly breakout above monthly resistance is great, but it won't mean a thing if the breakout level does not hold up as support into the end of the month. What would be real bad (for the bulls) would be if both 1,581.34 and 1,576.09 were to fail as support before month's end. Unless and until all that happens, though, the bulls clearly have the edge right now.

Even if the "bear case" is not necessarily the reality, the market should stop and correct lower before advancing much higher.

The bear case (where the 2007 peak was wave "V" and the 2009 bottom was wave "A" of an "ABC" correction to the downside) is one of two possible realities that I've laid out here recently. The other scenario is far more bullish and has the S&P ending up in the 1,700s within the next couple of years. Even in that scenario, though, we should be at or near a short-term market peak.

The daily chart of the S&P 500 below shows the S&P in wave "(v) of v". The question is whether it's "(v), v and B" for the bearish scenario or "(v), v and 1" for the bullish scenario. The reason I feel that the market is near a short-term top even in the bullish scenario is that 1,589.63 represents the projected peak for wave "(v)" in either case. This is based on the idea that wave "(v)" will roughly match wave "(i)" in magnitude. (For the record, Wednesday's intraday high was 1,589.07).

Assuming I'm correct about this being a short-term top, the possible pullback targets will be approximately 1475 (over 7% lower), 1403 (over 11.5% lower), 1,345 (over 15% lower) and / or 1288 (almost 19% lower). Those are all Fibonacci retracement levels and all of them correspond pretty well with horizontal line support lines. I must also mention that in this scenario, the S&P could possibly even retrace 100% of the rally that started in October of 2011 and that has lasted until now (meaning it's feasible that 1,100 could be tested).

Now, that we've checked in with the S&P, let's take a look to see if any clear messages are being sent by the currency and bond markets.
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No positions in stocks mentioned.

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