[Update 7:50PM: SPY filled its gap nicely. Retrace is 70%. As I always say about bear wave two's, they wish to seek out and challenge the previous wave one breakdown point. If a bear wave two can conquer that breakdown point and hold as support, it then wishes to not be a wave 2 and instead be a bull wave and make new highs. A failure to conquer the breakdown point results in a bear wave 3 unfolding.
Usually by the time the wave two reaches the breakdown point of the previous wave one it is exhausted by the sheer effort to get back up and is unable to conquer. The exhaustion coupled with a greatly re-newed affirmation of the breakdown spot by a new wave of selling causes bearish reversal.
Note that wave two's usually only get one shot, relatively speaking, of conquering this spot. "Hanging around" at this challenge spot is usually not the norm. Thats why wave two's usually take the form of a 5-3-5 zigzag. The price peak of C is what challenges the wave one breakdown spot. It can end on a weakening diagonal triangle that expends the last of the bull's energy. Or it can end on a spike. Or it can just whimper out.
It is no accident that the market is exhausted in a wave 2 just as it is meeting its wave one breakdown point. This seems to be the case here. This exhaustion coupled with re-affirmation and a big new wave of selling, results in a strong(er) wave three down and a new point of recognition downstream that is larger than the previous. Then real panic sets in depending on the degree of wave. It is here where the wave three must "play itself out" and run its course of panic.
If it is a Minor sized wave three (as we have counted for here) the decline can be devastating.
But end it always does if its a wave two. Such is its nature.
For the DJIA, challenging the top of the flash crash candle at 10879 to the 78.6% Fib at 10900 would be an equivalent. The flash candle is front-flanked by a ridge that will add to the resistance layer that lies here.
So we are getting close if this is a wave two which still is the best interpretation at this juncture.
[Update 5:04PM: The market is certainly not too far off of its P high. Yet why is the Fed so afraid? Whatever happened to "exit strategy, green shoots and all that crap? This is not the psychological makings of a great bull market. It rather seems the makings of a build-up to another mass panic. Thats my opinion of course.
The Fed is not omnipotent. The "1984" doublespeak statements they put out will be their doom. People are tired of the lies and looting. The market(s), in a sense, particularly bonds, are one big lie. After all is that what not a Ponzi is? A big lie?
The insanity will continue until its clear that every last person is "ALL IN" even if many of the people truly realize what madness it is! Surely no one in America believes we will repay anything do they? The math doesn't add up so how can we?
But "all in" what? Well pick your market. It really doesn't matter does it? As they are all based on a blind faith that some computer digits gives you a right to something real. It takes a strong rule of laws to ensure a system such as we have works. But trust and ingrained faith have been steadily eroding...drip...drip..drip over many years to the point where we cannot measure the precise degree to which it has shifted. Yet shifted it has. So what is left pinning up the markets if faith is lost to the point of no return? Every day the Orwellian doublespeak that keeps spewing from our gangster government and bankster overlords slowly and surely poisons us just a little bit more every day.
Somehow we now work for the government and banks and not the other way around. Thats the new reality. We work for Charlie Munger's pleasure. And it doesn't sit well with the masses even if they cannot precisely put their finger on it that which is pricking their nerves. Social mood will guide them nonetheless.
Dollar, Gold, Equities, Bonds, Euro, various commodities.... There is an emerging picture that these various markets are all playing out toward sentiment momentum run-ups (or down in the case of the dollar). So its becoming clearer that they may all or mostly turn at the same time.
Certainly the dollar sentiment is hammered with likely less than 10% Daily Sentiment today. With all the talk of Fed QE2, it seems a consensus "no brainer" that the dollar will go on to make new lows, worthless, etc, etc. But yet the dollar is still far above its 2008 low. The market has a way of spoiling the best laid plans and crushing sentiment when it swings towards an extreme one way or another no matter what the wisdom of the day says.
But the dollar wave pattern does not yet seem finished. Now in a confirmed C wave (at the least) 5-3-5 zigzag, it will again need to seek support and surprise and turn upwards. From an EW standpoint, its a wave (2) and the next wave would be (3).
Certainly gold has been on a run and sentiment is high. So dollar and gold will likely turn near the same time roughly. Of course the Euro is running opposite the dollar. Gold's long term inverted H&S pattern has $1305 roughly as a target. We are about there.
Bonds? Bonds may have more time here. They will do what they may. It took 30 years to advance after all. But there is no doubt a serious cramming into yield chasing lower grade bonds and such. Whats one to do? How sane is it to "invest" anything into un-repayable debt? Including that of the US Treasury? Can interest rates stay low for long?
So yes we have reached beyond the sane and into the world of crazy. A generation or three from now they will say "what were they thinking?" Were they all blind to the dangers? The mania continues on in its own way, battered and bruised but still capable of sucking in the masses. Is it no wonder the SPX low of 2009 was 666? Devilish...
The timing of it all is why we count waves. The primary count is still P unless 1219 is breached, thats what it is. And the lower count is that the market is setting itself up for a Minor wave 3 down of pretty good size. When? Well again thats why we count waves!
1130 is clear support and as many eyes are glued to it as 1040 was. It held today. So it will only break support when its ready.
Chasing the quarterly results may be helping a lockup in fund flows. Once the quarter is passed, we'll see some re-shuffling for sure. A damn that breaks usually only starts with a trickle....
Again, we'll give the bull count the benefit of the doubt and suppose we are missing a subwave up. But they better break out the dip buyers soon as there is not much support room to spare.