Factors to consider for the bull vs. bear equities market analysis after the drop late last week

Bull vs. bear? Keeping in mind that even the bullish case can factor in a pullback, so will it be "only a pullback" or something worse? That's what analysts are looking at this weekend, after the large drop Thursday (and small followthrough Friday in overseas markets like the German DAX (see DAX daily at right). Notice that the DAX doesn't look like it's violating support quite yet, as it touched to its 200-day moving average and the StochRSI isn't below 0.2 (though it is under 0.5). It can have done a wave 2 down of the larger Minor 3 down that Tony indicates for the SPX, and we may see a move up in its corresponding wave 2 tomorrow (with StochRSI testing back up to 0.5), before rolling over and down in wave 3 of Minor 3 (if that's the "right count" for the DAX). Will Monday be a good selling opportunity, without another good buying opportunity for weeks or months? Or will it be something else? Let's take a look at significant factors to consider in deciding what a decline in the markets may mean for swing traders and the bigger picture.

Factors to consider include:

- The "head and shoulders" idea that would have the markets pointed to about 850 in the SPX. One idea is that a pullback to about that level would form the right shoulder of a "bullish inverse (reverse) head and shoulders" pointing the markets up again. If that proves to be the case, it will be consistent with the interim "B" wave down scenario that Tony Caldaro shows for the Dow (and that, independently, Andre Gratian shows as a possibility as well). If this is the case, we'll see it with the wave characteristics and the technicals.

- Todd Salamone and his colleages at Schaeffer's Research have issued their Monday Morning Outlook: Summer Continues to Look Like a Trading Range (7/5/09) which deserves a read, in preparation for the upcoming week. They state in their preview: "Todd Salamone, Senior Vice President of Research, examines support and resistance levels for the S&P 500 Index (SPX), as well as the current impact of the CBOE Market Volatility Index (VIX). Then, Senior Quantitative Analyst Rocky White takes a closer look at quarterly seasonality, and what historical data might say about third-quarter performance for Wall Street. We wrap up with a look at some key economic and earnings reports slated for release this week."

- If the bulls think this is only a pullback down, they'll be looking for a retracement level that might be similar to the 850 SPX level, or just as likely to be according to the Fibonacci retracement levels in the chart below. Going deeper than 760 - which I consider a pivot, and it's also just under the .618 retrace level of 777.36 on the chart below - should be a warning sign that the markets are heading much lower.



- The SPX hit resistance at a downtrend line from the 2008 swing highs, which some (such as Allan at his AllAllan blogspot) are showing at the trendline where an EW wave 4 may have completed and point us to a wave 5 down. That idea would be consistent with my own ideas, especially for the SPX doing a large "C" wave down; and may also be consistent with the EW count that Andre Gratian tends to favor.

- The VIX touched to 24.80 which is close enough to that .786 retracement level I've kept in mind for months now - even though it poked under the uptrend line on my weekly chart - so the VIX may have bottomed out. Keep in mind three things: it may still need to actually test 24.78, even by poking under it for a day and then reversing upward again - not a guarantee, but theoretically possible. For that matter, the VIX hasn't yet made a new swing high, or gone above the 33.81 level that was the prior Fibonacci pivot. Also, it remains possible for a negative divergence to appear with equities pushing higher into mid-July while VIX makes a higher low. This could even happen with the Nasdaq pushing higher (perhaps with the Nasdaq Composite to 1912) while the Dow Jones Industrial Average and the SPX make lower highs.

- Speaking of mid-July, there's the Bradley model with a significant turning time window July 14-15. That can be either a high or a low in Bradley model terms. (There's recent research presented by Manfred Zimmel at his amanita website indicating that the Bradley is tracking with oil better than equities in the current time frame - although in response, we might consider that having the energy complex drop might be the factor that helps the broader markets drop during the Bradley declining time frame into November.)

- Dow Theory says that the markets remain in a bear market since neither the Industrials nor the Transports have bettered their secondary high point which was the January highs.

- The bear market has now in its 20th month. Often a bear market of this level takes at least 33 months, as documented by some technicians including Martin Armstrong. So there is reason to believe that we're only about 2/3 of the way through the bear market. This doesn't mean the bear market rally cannot go higher, but it does mean we must brace for the likelihood that it isn't over by any means.

- Robert McHugh is on yesterday's audio discussion at FinancialSense.com weekend audio, discussion his technical analysis that he says indicates very large "head and shoulders" topping patterns (must be on the monthly, rather than daily charts) in certain foreign stock markets. Further, he says these markets are indicated to go "almost to zero" based on his technical analysis. Folks - sometimes McHugh gets it right, and sometimes not - I'm not going to point readers in his direction. All I'm saying is that he's out there with a very bold prediction so it's something that we can keep in mind and try to test on our own. I've posted a monthly chart of the DAX below (I think it's one of the indices he mentioned in that audio, I listed to it last night). I bet some of my readers will think the same as I on looking at it - if it isn't a large EW flat, or the beginning of a zigzag down, then it could also be the opening part of a very large ending diagonal triangle with a couple more large zigzags up into two more new highs interrupted by a deep zigzag low in between. Will see, I haven't been able to more fully analyze it (looking at whatever count Tony Caldaro has for it would be good too); it does at least look like a possible double top.

- The Elliott Wave analysis is very sobering and as summed up well by Tony Caldaro in his weekend update (also posted here yesterday), several markets have already confirmed downtrends and the SPX looks like it may do the same soon.

- The SPX found resistance almost directly on the .382 Fibonacci retracement to 2008 swing high that I've been showing on my weekly chart since early this year, and the indicators on the weekly chart have also documented the loss of momentum. The McClellan Oscillator fell back from the trendline I've marked onto it, and even the Summation Index has definitely weakened.

- Terry Laundry posted today at his T Theory website that his idea of a new, bullish "T" has not confirmed yet. I know that Terry Laundry's T Theory has been telling him there should be a new bullish "T" in the making, but as he acknowledged today, it hasn't confirmed yet. I'm concerned about three things there - one is that his oscillator may be subject to the same issue as we've documented in the McClellan Oscillator, that there's a declining pattern that it may not be able to break above at this time. The other is that his theory rests on a cash buildup phase that precedes and then turns into an equities accumulation (bullish) phase for the rally of the next side of the new "T". But, the "cash buildup" during 2008 as the markets dropped, was also the deleveraging and popping of a credit bubble. That may mean there really isn't enough cash to put to work in a new bull phase. Yes, people talk about a lot of cash on the sidelines - I haven't yet seen charts that prove it, and the long-wave cycle theory states that any such buildup of cash is more likely to be hoarded and/or used to pay down debt rather than being risked in equities for a while longer.
The other concern I've begun to have about the idea of a new "T" is that the point of measurement might be not quite right. It's an idea I started to have based on what looked like a typo on my GS chart. (Wasn't a typo, it was my way of abbreviating "TCZ", but gave me a good idea nonetheless.) Many markets including Nasdaq and stocks including GS bottomed in late 2008, and did not make a new bottom in March. If you look at the time frames and chart patterns, well, it looks to my eye that we are have already just finished the right-most edge of a "T" that would have bottomed in late 2008.

- For those who, like me, enjoy looking at long-wave cycle charts, you should also check out Terry Laundry's "megaband" T Theory Super Cycles chart today at his T Theory website. It goes back to slightly before 1800 and charts out a 40-year oscillator cycle. He still has a statement on there that "T Theory expects the next low Zone in the 2010-2020 period. And the oscillator has been testing the 40-year support level. So you'll want to see that, as well as listen to his audio comments that go along with it.

- I've posted below my monthly and weekly SPX charts, as well as a monthly chart of the DAX which I think is one of the indicates that McHugh was talking about. I'm not seeing the DAX as a classic head and shoulders on the very big monthly chart, but I could see it working out a large "flat" ABC similar to one of the theories I've got on the SPX. For our purposes, suffice it to say that these equities indices do face challenges.

But I've gotta run for now, I see I've got the ChartsEdge forecasts to post and then I plan to go boating (when I can fit it in, I also want to read Tim Wood's new July indepth cycles letter - sorry I cannot share it, it's for subscribers only, but it does inform my overall thinking of course). Then I'll also be looking forward to Andre Gratian's newsletter to "put it all together" later this afternoon. I'm not sure I was able to cover every single significant idea but I know I got a lot of them in ... So much to do, but it's all good! Enjoy your day!