Betwixt and Between...

On Tuesday, the S&P 500 tested support at the lower trend-line we discussed yesterday. On Wednesday, this broader market index bounced up to test the upper trend-line, which we also happened to discuss yesterday. Will the S&P 500 break through the resistance at 1495, or will we revisit the lower trend-line one more time?

It is my personal belief that the S&P 500 should finish the week ending on May 4 at a lower price than it closed on Friday, April 27. This is because I think it would be most logical for the market to assume a formation like the one I posted on April 30. In order for this to happen, we need a down week.

This would suggest that Wednesday's encounter with resistance at 1495 on the S&P 500 will not be followed by a Thursday breakout. Instead, it would suggest that the market will somehow move lower over the course of the next two days.

This would make sense from a wave count perspective because it would create a three-wave corrective structure. The chart depicts that scenario. I think it is important to note that the lower trend-line that served as support on Tuesday has extended up to 1486.48 on Thursday. This may well serve as support again over the next two days.

Trendlines...

One of the most powerful methods of predicting future market behavior can be found in the concept of trend channeling. This is based on the concept that most price trends tend to happen within the confines of a well-defined channel. The recent behavior of the S&P 500 is no exception...

If we start a line at the highest price point of what I am calling the end of Wave 1 in May 2006 and extend it across the high point of Wave 3 in February 2007, we can see that the S&P 500 rallied right up to test this line when it made its highs of last week. We have backed off of that resistance for now, but I expect that this trend-line will continue to serve as significant resistance over the next few weeks

We can draw a similar line across the lows of 1363.98 set on March 14 and the 1434.01 set on April 12. If we extend this line up, we can see that it reached 1479.52 on Tuesday, May 1. The S&P 500 reached a low of 1476.70, but could not hold it. We might assume that this trendline offered some support to the downward movement seen on this day. If you are curious, this same support line will be at 1483.03 on Wednesday. We will see if this support holds for a second day...