Okay...

The best way to describe where I think we are right now on the S&P 500 is to just show you the count. I am still knocking the rust off of my Elliott Wave skills, but I really do feel that there are a lot of technical aspects within the larger market that support my assertion.

If we count up from the lows set at the end of March, we can see that the S&P 500 has made three distinct waves up. The characteristics of these three waves on the daily charts indicates that this is a motive wave higher. That is, this could not have been a corrective three up. That means we will see more movement to the upside after a brief correction down to somewhere between 1450 and 1465. I will talk more about those price targets tomorrow.

Looking for Resistance...

So, the market broke through critical resistance this past week when it rallied above the 1485 level. 1485 was an important area of resistance as calculated by two methods of Fibonacci ratio analysis. Our new challenge is the identification of the next area for resistance. We can use these same methods again to determine the probable location.

The current wave up began from the low of 1412.84 made on March 30. If we assume that this rally will assume a length proportional to the initial wave that formed between March 14 and March 23, then we can use Fibonacci ratios to project its length. The first Fibonacci projection point would be at a location 1.38 times the length of the initial rally, which was 74.91 points. This would give the formation up from March 30 a length of 103.38 points, and suggest that the next level of resistance will be at 1515.91.

An alternate method of calculating the next potential area of resistance would be to assume that the wave up from March 14 to March 23 represents a proportional amount of the total wave length. Had this initial wave been 62% of the entire length, then the S&P 500 would have topped out at 1484.80. This did not happen, so the next degree of proportionality would assume that the initial wave 74.91 point rally represents 50% of the total wave length. This would mean that the total length of this rally would be 149.52 points higher than the low of 1363.95, and suggests that the next level of resistance will be at 1513.80.

This give us two methods of Fibonacci analysis that point to the 1513- 1515 area as potential resistance on the S&P 500 index.

And up we go...

So, I have spent a fair amount of time discussing why the S&P 500 looked like it was in position to begin a wave downward. I was saying this on the assumption that we were in the midst of a corrective wave that began around February 22. This was all proven incorrect on April 25, when the S&P 500 broke through the resistance around 1485.

When this index closed above the closing price of April 20, it created an extended wave pattern. Elliott Wave Theory tells us that this would not happen in a corrective wave, so that means we have already entered Wave 5 of a pattern that began in October of 2005. Because this is a motive wave formation, the S&P 500 will have to complete a pattern of at least nine waves. That means at least one more thrust up awaits this index.

More divergences...

Tonight I would like to share with you the chart from a slightly longer term view. Below you will find the weekly bar chart of the S&P 500, accompanied by graphs of Stochastics, the Relative Strength Index, and the Commodity Channel Index. This chart offers two additional arguments for a bearish scenario over the next six to eight weeks.

First of all, if we draw a line across the high set in mid-December, connect them with the highs set in February, and then extend that line out to the right, we can see that the S&P 500 rallied right up to the trend-line created by that series of highs. This suggests that the index will experience some resistance in this area beyond that created by the Fibonacci calculations I shared on Sunday.

Next we need to look at the collection of trend oscillators that I have included on this chart and compare them to the price behavior illustrated below them. Here we can see the S&P 500 rallying to new highs and finding resistance from a trend-line created by the recent highs of the index. Meanwhile, none of the oscillators included on this chart is reaching a new high. In fact, you could argue that they are all making a series of lower highs. This divergence between price and momentum offers further evidence of weakness in the current upward price trend.

Topped out...

The S&P 500 closed today below its closing price on Friday. I think that this is an important event for the short-term picture of the broader stock market. It is important because the lower close completed what might have been a corrective wave up.

If you will forgive the incorrect nomenclature in terms of degree, you will see that since the lows of March 14 the S&P 500 has completed two five-wave formations higher. Elliott stated that waves in such formations cannot extend. This suggests that if this upward movement was corrective in nature, then that wave must be complete. That would suggest the stock market will head down toward its March lows.

We can find support for the notion that this index is at or near a top by taking a look at the breadth and volume of the S&P 500 over the last three weeks. The chart above illustrates two points. The first is that even as the S&P 500 rallied to new highs, the number of stocks participating in that rally declined. The second is that the number of shares traded as these new highs increased began to decrease, quite dramatically in the last week. Both of these points suggest that the recent rally in stock prices was technically weak.

(My thanks to PARL for his discussions on the weakness in the McClellan Oscillator.)

Probable Resistance...

The S&P 500 rallied into the weekend with a closing price of 1484.35. This left the index just below an area of probable resistance. We can discern this by using two separate principles from Elliott Wave Theory.

If this rally up from the low of March 14 represents nothing more than Wave B of a larger corrective formation, then we can expect that it will consist of a three-wave pattern up where the first and last rallies are either equal or proportional to one another. This suggests that the wave up from March 30 will be roughly equal in length to the wave from March 14 to March 23. Since this latter rally was 74.91 points in length, we can expect the current rally to travel roughly the same distance. A 74.91 point rally up from the low of 1412.54 on March 30 would leave the S&P 500 at 1487.45.

Another method to calculate probable resistance assumes that the entire length of a formation will be proportional to the initial wave of the formation. In this case, we might assume that the rally from March 14 to March 23 represents 62% of the entire rally. Given that the initial rally was 74.91 points, the completed wave would have a length of 121.21 points. A 121.21 point rally up from the low of 1363.98 on March 14 would leave the S&P 500 at 1485.19.

Here we have two methods of calculating probable resistance both pointing to the same general area. This suggests that the S&P 500 can expect some degree of resistance between 1485.19 and 1487.45. Given that this index ended the week at 1484.35, we might expect any upward movement in the broader stock market to encounter some difficulty.

Benner-Fibonacci Time Cycles...

For those people who practice Elliott Wave Theory, one of the most important resources on the subject is "The Elliott Wave Principle" by Frost and Prechter. Most people focus on the practice of wave counting and calculation of Fibonacci retracements. Not so many people focus on the concept of time cycles. This is a shame because time cycles can be of great importance.

One concept discussed by Frost and Prechter is the Benner-Fibonacci Theory of Cyclicality. This is a theory born out of the work of Samuel Benner, who attempted to predict the fluctuation in prices of pig iron during the nineteenth century. A.J. Frost later combined this work with Fibonacci cycles and published it in the "Bank Credit Analyst" in 1967. When published in "The Elliott Wave Principle", this method was noted for its accuracy in predicting tops throughout the twentieth century. Unfortunately, the chart included in the book stopped in 1987, when it predicted a major trough would occur. Several years ago, I took the liberty of extending this chart through the beginning of the twenty-first century.

You can see that the Benner-Fibonacci Theory of Cyclicality accurately predicted the high of 2000 and the low of 2003. I think it is important to reiterate that this was a theory originally published in 1967, and that these peaks and troughs were the result of simply extending the predictions published in 1978. I originally published the above chart prior to the low of 2003. My point is that these highs and lows have not been adjusted or doctored to reflect recent history.

From the perspective of this particular theory, the low set in 2003 was a major trough. The next significant peak for the stock market will take place in 2010. This could be interpreted to conclude that we are now four years into a new bull market cycle that will eventually end in three more years. Such an assumption would be consistent with my interpretation that we are currently in Wave 3 of a 5-wave formation that began in March of 2003.