Cyrstal Balls14 May 2012 15:52
The SPX is at a critical juncture which will determine whether it puts an end to its correction here and now, or if it extends its decline. On the Point & Figure chart, all the trading above 1398 looks like a distribution pattern which could have an ultimate count down to 1265, and perhaps even a little lower. A more conservative count would be satisfied at 1305. Since cycles determine the basic market rhythm, and cycles appear to be down into late May, and perhaps even mid-June, the amount of distribution established at the market top should give us an idea of how far the market will decline into those time periods.
The reason why the index has been holding so well above 1342 is because it represents a completed phase of the total count and it is normal that it should pause at this level and catch its breath. Furthermore, for those EW analysts who are looking at this correction as a wave 4 to be over, 1340 represents the ideal level at which it should end before starting wave 5.
The market is peculiar in that the top distribution pattern is normally confirmed by the next lower level of distribution. In this case, the SPX first declined to 1360 and had a strong rally before it declined further to 1344. That left all the activity between 1360 and 1415 as a secondary distribution phase which, on the P&F chart, does confirm the original counts. It gives us a conservative projection to about 1305, and a more liberal one to 1368. But the confirmation process does not stop there! It appears that we may have created another smaller distribution pattern between 1344 and 1365, which may now be complete.
On Friday, the SPX made what appears to be a final attempt at moving above the 1365 resistance for the third time. After an opening down-thrust and a sharp reversal, the index made it once more to 1365.66 and stalled. It then started retracing its advance under no apparent selling pressure - but even less buying -- drifting down past one level after another where it could (should) have reversed if its intention was to rise above 1365. By the end of the day, it had gone past what I considered to be the point of no return (1355) and closed near its low of the retracement at 1353.57.
That looks like bearish action, and it makes me think that the pause in the downtrend may be over. At the very least, 1344 is likely to be re-tested, with a strong possibility that the SPX is about to make a new low.
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