Among stock market analysts, the discussion now centers around whether the bull market has ended, or if this is just a severe intermediate correction. The truth of the matter is that, at best, one can make an educated guess (or just a plain guess), but only the market itself knows what comes next, and it is not quite ready to reveal its intentions.
The matter is really quite simple. In order to confirm that it is in a bear market, the SPX would have to make a lower low by dropping below the July 1, 2010 low of 1011 — even if it does not do it right away. It could have a rally that fails to make a new high, with the next decline breaking below 1011.
So, how close to a low are we in the current decline? From a structural standpoint, it is likely that Friday’s drop to 1168 was the end of the move which started at 1347, and that the rally which ensued is a prelude to the final down leg from 1356. This down leg has a Fibonacci projection to 1143, and a Point & Figure target (based on the amount of distribution that occurred between July 7 and July 26) between 1158 and 1123. The different levels are the result of taking two separate counts, one using a 3-point chart and the other a 1-point chart. Since the Fibonacci projection is right in the middle, we can assume with a reasonable degree of certainty that this area is where the decline will end. 1150 is another important projection which is derived from the H&S top. Although not infallible, these predictions are based on proven methods with a high degree of reliability, so we should include them in our overall analysis.
Considering the short term, whether we are in a bear market or not, another low is likely, and the down-grading of US debt-rating by Standard & Poor’s, on Friday, may speed up the arrival of the final leg of the correction. A requirement for wave 4 of the decline (assuming that wave 3 bottomed on Friday) was that it retrace at least .236 of the decline from 1347. By rallying from 1168 to 1214, it has satisfied a little more of that requirement. Granted, the amount of time taken by wave 4 appears to have been insufficient however, the P&F chart — which does not take time into consideration — plainly shows that a completed 4 may have been made. The pattern established after the 1168 low is distinctly larger than any other consolidation during the decline. If we start selling off on Monday morning and go below 1168, the structure completed on Friday has the potential to drive the SPX down to 1147, which is in line with the other projections discussed above.
These assumptions are based on the current market action to determine what it might do on Monday! Nothing wrong with assumptions, providing that we follow the motto of “assume and verify”. If Monday’s market behavior is not what is expected, it will be “back to the drawing board!”
With this analysis as the basis for our expectations, let’s now move to the charts to see if we can, at least, begin the verification process.