Thoughts for Thursday, May 24...

The market began a trust downward on Thursday. It is my belief that this completes the formation of a significant top. First of all, It is my belief that today's decline confirms the completion of the five-wave structure up from the low of March 16.

I say this because my primary concern in the progression of this upward wave was that it would expand into a complex wave formation. As I have stated on more than one occasion, this would have been inconsistent with the typical wave formation, but it was a possibility to consider. The decline today took the S&P 500 below the level that would be allow a valid expanded third wave within the formation up from March 16. This fact, along with the wave counts that I have discussed previously, were enough to turn me bearish on the S&P 500.

On Tuesday, we discussed the possibility that the recent rally performed what is called a throw-over above the upper limits of the trend channel that began with the rally from October 2005. We might debate about which highs to draw this line across, but they all make the same general suggestion. If the market rallied above the upper limit of this channel, then it will most likely drive below the support at the lower end of this channel.

If we use the trend-line that I have drawn on the chart above, then that would suggest a throw-over of 28.1 points. A similar decline below the lower trend-line drawn on the above chart would put the S&P 500 around 1376.83. This is significant because it is also in the same neighborhood as the low of March 16. It would also put the S&P 500 between the 38% and 50% retracement levels of the rally up from October 2005 to present. As a result, 1375 does not seem like a bad place to make our initial price target.