Thoughts for Thursday, May 17...

Sometimes the market does not make a lot of sense. Take the current situation. The real question is whether the S&P 500 remains within the fourth wave of a five wave structure, or whether it has already entered into that fifth and final wave. If the S&P 500 declines and closes below 1505.85, that would confirm that we remain in wave 4. This remains my primary count. If I had to guess, this is what I would say will happen.

.

If we rally from this point, then it will suggest that the market has reached an important top. I try not to go through life making grandiose or flamboyant statements. Nevertheless, if the S&P 500 rallies to close over 1520 (but less than 1525) on Friday, then I would view that as a major shorting opportunity.

If you take a look at the chart above, you can see that the S&P 500 continues to hug the lower side of that trend-line extending across the March 14 and April 12 lows. This trendline extends up to 1525.05 on Friday. At the same time, the Relative Strength Indicator (shown above the price chart) has developed even more sever divergences that when I mentioned it last week. When divergences get this severe, it is either because we are in the middle of a corrective formation or approaching a major top. If we close below 1505.85 on Friday, it will confirm that we are in a corrective formation.

Let us assume for a moment that I am wrong. Let us assume that the S&P 500 completed Wave 4 with its low on May 10. If this is the case then we have already completed the first three waves of Wave 5, and could be ready to make the fifth and final wave up. I have illustrated this hypothetical count above. Wave 1 began on May 10, and ended on May 11. It assumed a length of 14.38 points, using closing prices. Wave 3 began on May 15 and ended on May 16. It assumed a length of 12.95 points, also using closing prices.

This means that the fifth and final wave should not exceed a length of 12.95 points. There is alway the possibility of an extended wave, but there is usually only one extended wave per five wave structure and the rally from March 28 to May 9 served that role. This means that the S&P 500 cannot rally above 1525.70 in this scenario. So, any rally above 1520 could be considered a potentially major top. I would seriously consider an immediate bearish position, should this scenario unfold.

You might also notice that this would put the S&P 500 in the neighborhood of the 1522 target that I have discussed previously. It would also put this index back at the resistance formed by the March 14- April 12 trend-line. We are also reaching a time cycle point on Monday.

I do remain faithful to my insistence that the S&P 500 needs to finish the week below 1505.85 in order to create Wave 4 on the weekly chart. I also tend to think that the severe divergence in the Relative Strength Indicator on the daily chart is most likely due to an incomplete corrective formation. That said, I am mindful of the possibility that the market could rally, and have shared with you the important implications of such a possibility.