Is The Bear Rally Ending At A 50% Retracement?

Market Overview

The last short-term top formed a H&S pattern which gave a projection that was almost filled by the following decline. Although there were some potential lower price projections, they were ignored by the SPX which created a double bottom with the January low of 1812, and started a rally from 1810 that rose 120 points to 1930 before taking a breather. After that, the uptrend continued, creating a pattern which, last week, lent itself to the following speculative forecast:

“If we do make an a-b-c pattern, will it complete the entire corrective rally, or only one phase of it?  If it is followed by another minor a-b-c pattern to the downside, it could be in process of making an irregular which would complete with a 5-wave move to the upside.”

There is a 90% chance that this will turn out to be correct. As you will better see on the hourly chart (below), this looks precisely like what we are doing. Putting the final touch on this corrective pattern would spell the end of the “bear” market rally and set up the probability that the next bear phase is about to start.  Just to make it a little more convincing, the following was also written last week:

“Also relevant is the probability that this time period is a cycle high and that some downside pressure should ensue.

The current market action makes next week a good candidate to put a final touch on the rally top.

SPX Chart Analysis

Daily chart 

It is not easy to discern the path of short-term moves on a daily chart.  As we will see, they are far more distinct on the hourly chart. But both time frames (as well as the weekly) are invaluable for a correct assessment of the market position.

Market analysis should always start with the longer trend. Defining it is essential in order to correctly identify the present and future trend of the market. The following daily chart has been condensed in order to show that the bull market which started in 2009 ended with a five-month pattern of distribution which, translated in Point & figure count, forecasted the severe correction which is currently underway. We know that during this six-year bull market, the S&P 500 rose 1469 points. If we assume that what we are witnessing is a normal correction of the previous uptrend and use a simplistic formula (.382 measurement) to determine its extent and duration, we come up with a decline of 600 points which should last a little over 2 years years! Granted, the actual measurements could vary substantially by the time it’s over.  It is interesting, however, that the combined three phases of the primary distribution top, give us a count of 612 points! That would bring the index down to the 1500 level before the correction is over.  Of course, that should be considered a minimum measurement. If we were to retrace 50% of the bull rise, we would drop 750 points to about 1400, and there is plenty of “weak” count to the left of the top to accommodate this projection.