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Our main wave count yesterday expected downwards movement. Price moved above the invalidation point on our hourly chart, which was very close by, but remains well below the invalidation point on the daily chart and the wave count remains valid.

Importantly price has found resistance at the lower edge of the parallel channel on the alternate daily chart. We now have a clear trend channel breach.

Click on the charts below to enlarge.

S&P 500 daily 2012

Although price breached the invalidation point on the hourly chart this daily chart still has a very good look. With the parallel channel on the alternate daily chart now breached this main wave count has again increased in probability. I can now say with more confidence that it looks like we have a high in place and a new downwards trend has begun.

The last strong downwards trend labeled here (A) black began in a similar manner. It was not until the structure moved into the third wave at minute degree that momentum to the downside became very strong. At this stage we should expect the trend to be overall downwards, but not that momentum should be especially strong.

At primary degree wave A would be an expanded flat correction because wave (B) black is a 123% correction of wave (A) black. We would expect wave (C) black to most likely reach 1.618 the length of wave (A) black a 967. If price moves through this first target then the next (less likely) target would be where wave (C) black reaches 2.618 the length of wave (A) black at 685.

S&P 500 hourly 2012

With movement into wave 1 purple price territory above 1,370.3 this upwards wave may not be a fourth wave correction and we must be seeing a series of overlapping first and second waves. When we see this we may liken it to a spring winding up. There is increasing potential energy stored which may be released in explosive downwards movement when the middle of the third wave begins. This should happen this week, and possibly tomorrow.

If wave (2) aqua is complete, and on the 5 minute chart it subdivides perfectly as a zigzag, then tomorrow price should not move above 1,375.57. The small downwards wave from the high labeled (2) aqua subdivides into a perfect five wave impulse on the 5 minute chart, which supports the idea that (2) aqua is complete. We would therefore most likely expect downwards movement tomorrow. At 1,329 wave (3) aqua would reach 1.618 the length of wave (1) aqua. This target may be reached tomorrow.

If price moves above the short term invalidation point at 1,375.57 tomorrow then wave (2) aqua may be extending higher, or the alternate wave count below may be correct. Wave (2) aqua may not move above the start of wave (1) aqua. This wave count is finally invalidated with movement above 1,387.4.

S&P 500 hourly alternate 2012

Alternately we may be seeing a leading expanding diagonal unfold in a first wave position. Because leading diagonals are less common than impulses this alternate has a lower probability than the main wave count.

The diagonal should be expanding because wave (3) aqua is longer than wave (1) aqua, but wave (4) aqua is slightly shorter than wave (2) aqua. I have seen many diagonals which do not have expected wave lengths, but conform to the structure in all other respects. Sometimes the third wave is still the longest. This may be what is happening here, but it reduces the probability of this wave count further.

Only if price moves above 1,375.57 tomorrow would I use this wave count. At that stage wave (4) aqua would be longer than wave (2) aqua and the diagonal would have a better look.

Wave (4) aqua may not move beyond the end of wave (2) aqua. This wave count is invalidated with movement above 1,387.4.

Alternate Daily Wave Count.

S&P 500 daily alternate 2012

We now have a clear trend channel breach. Price has found resistance at the lower edge of this parallel channel. If tomorrow price moves strongly lower this channel breach would be more convincing and I would discard this wave count. At this stage it only has an extremely low probability and this may be the last day this wave count is published.