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I had expected only a little downwards movement to 1,918. Price has moved comfortably below that target.

Summary: If the bull wave count is correct then intermediate wave (2) must be nearing completion. The target is 1,884. If the bear wave count is correct then a strong third wave down should take price below the maroon – – – channel within a couple of weeks. The target is 1,826.

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Bullish Wave Count

S&P 500 daily 2014

The aqua blue trend lines are critical. Draw the first trend line from the low of 1,158.66 on 25th November, 2011, to the next swing low at 1,266.74 on 4th June, 2012. Create a parallel copy and place it on the low at 1,560.33 on 24th June, 2013. While price remains above the lower of these two aqua blue trend lines we must assume the trend remains upwards. This is the main reason for the bullish wave count being my main wave count. Using a traditional technical analysis approach, a breach of the lower trend line by more than 3% of market value would indicate a trend change.

There are a couple of things about this wave count of which I am confident. I see minor wave 3 within intermediate wave (1) as over at 1,729.86 (19th September, 2013). It has the strongest upwards momentum and is just 0.76 longer than 2.618 the length of minor wave 1. At 455 days duration this is a remarkably close Fibonacci ratio. The subdivisions within it are perfect.

Minor wave 5 is 20.24 points longer than 1.618 the length of minor wave 1. This is a 5.4% variation. I consider any variation less than 10% to be acceptable.

Ratios within minor wave 5 are: there is no Fibonacci ratio between minute waves i and iii, and minute wave v is 0.89 points longer than 0.146 the length of minute wave iii.

Minute wave ii is a single zigzag lasting 14 days. Minute wave iv may be seen as a double combination lasting 7 days.

The large maroon – – – channel is copied over from the weekly chart. It is drawn in exactly the same way on bull and bear wave counts. For the bull wave count this channel is termed a base channel about primary waves 1 and 2. A lower degree second wave should not breach the lower edge of a base channel drawn about a first and second wave one or more degrees higher. The lower maroon – – – trend line differentiates the bull and bear wave counts at cycle degree and monthly chart level.

Intermediate wave (2) is expected to be a very shallow second wave correction. The support provided by the base channel should be stronger than the tendency of a second wave to be deep. Intermediate wave (1) lasted 35 months. Intermediate wave (2) should not be nearly as long in duration; I would expect it to last only a few weeks, maybe only five weeks in total. So far it is in its third week.

S&P 500 hourly 2014

The depth of this downwards movement does not look like minute wave b within an expanded flat for minor wave B. The structure of the downwards wave for minuette wave (c) also does not look like an almost complete five on the hourly chart, and needs too much more downwards movement. That would see it too long.

It looks like minor wave B was remarkably brief. At 1,884 minor wave C would reach equality in length with minor wave A. This would complete the zigzag for intermediate wave (2).

Within minor wave C at 1,885 minute wave iii would reach 1.618 the length of minute wave i. This would see minute waves i and iii extended, so minute wave v may be expected to be short and brief.

Minor wave C downwards may find support at the lower edge of this channel, although sometimes C waves breach these channels. A clear strong breach of the lower edge of this channel may be an indication that the bear wave count is correct, as there downwards movement is seen as a third wave which should breach a base channel.

Within minor wave C minute wave iv may not move into minute wave i price territory above 1,925.25.

S&P 500 5 minute 2014

Bearish Wave Count

S&P 500 daily bear 2014

We should always assume the trend remains the same, until it is proven otherwise. The trend is your friend. I will assume the S&P 500 remains in a bull market until this wave count is confirmed.

To see the difference between bull and bear wave counts they must be viewed on monthly charts here and video here.

The differentiation between the bull and bear wave count is the maroon – – – channel. For the bear wave count this channel is a corrective channel about cycle wave b or x zigzag. When a channel drawn about a zigzag is breached that provides trend channel confirmation that the zigzag is over and the next wave is underway.

If this trend line is breached by a full weekly candlestick below it and not touching it then this bear wave count would be my main wave count and I would then calculate downwards targets at cycle degree.

Before final confirmation of this wave count we would have indication it may be correct with a clear breach of the lower aqua blue trend line. This line began in November 2011. It is reasonably shallow and repeatedly tested, it is extremely technically significant. If it is breached that would be a very strong indication that this bear wave count is actually correct. Because the implications are so significant (a huge market crash) it is important to wait for full and final confirmation before making such a huge call.

This analysis is published about 04:43 p.m. EST.