Keene Little : 6/9/2008 12:54:44 AM
Monday's pivot tables: Link
After Thursday's big rally we had many leaning bullish and now after Friday's big decline we probably have many leaning bearish. Ready for another switch in directions? That's a somewhat facetious question but at this point I wouldn't be surprised to see traders get whipsawed a little more (maybe a lot more). From an EW perspective I can argue a big move in either direction and I'll show both scenarios using SPX daily charts. I was asked for an EW projection into next year that maintains a typical Fib relationship between the waves.
The immediately bearish setup is for a strong decline to continue. The bearish wave count on this chart is at the start of a 3rd wave down that could see SPX down to 1260 (the March low) before the end of the month: Link
. The drop down to 1260 follows Fib relationships in both price and time and would take 62% of the time it took for the March-May rally.
A short-term bullish wave count (labeled in pink on the next daily chart) needs another rally leg to finish the count for the move up from March: Link
. This scenario calls for a little lower (although not necessary since Friday's decline met a minimum Fib projection for the leg down from Thursday) and then a rally into early July and up to the broken uptrend line from October 2002, probably reaching 1460-1470. That rally leg would then be followed by a strong decline well below the March low.
Both scenarios are bearish but the difference is when the next big decline will hit. Based on the longer term price pattern I do not see a bullish scenario that will take us back up to the 2007 highs. For the immediately bearish scenario this weekly chart gives an idea how it could play out (again using typical Fib price and time relationships): Link
This wave count assumes for now that we're going to see a huge sideways consolidation between the 2002 low and 2007 high that takes us through the secular bear market (into 2016-2018). A sharper decline would come out of the pink wave count that calls for a steeper impulsive drop into the end of this year, rally into the end of 2009 and then head much lower again in 2010 and beyond. The monthly chart shows how truly bearish the stock market could become (essentially wiping out the rally from 1994): Link
And on that fine note, let's first see how Monday plays out. The VIX spiked way above its Bollinger Band, something that has led to short term bottoms in the past, but only after price turns back down inside the BB channel. If it continues to push higher, and push the upper band of the BB higher, then the bears rule. But bears be careful here--we could get a strong reversal (of the reversal of the reversal). Link
The one caveat is that I had been warning of a big move out of the narrowing range in the moving averages and the BB and suspected it would be a move to the downside. Therefore it can't be assumed that the big spike in the VIX is necessarily bullish (from a contrarian sense). We may truly have started a big move to the downside.