Back in August I said there were two potential target zones to watch for in the S&P 500. The lower end was in the 1048 to 1053 range while the higher end was in the 1121 to 1158 range. On Friday the S&P 500 reached 1048 so it has reached the lower end target zone. 1048 was calculated by taking 61.8% of the move from 667 to 956 (Wave A) and adding that number (179) to the bottom of Wave B which was at 869. Thus 869 + 179 = 1048. In addition also notice the 50% Retrace from the peak of Wave 2 to the bottom of Wave 5 was at 1053.
Furthermore if you look at a longer term chart of the S&P 500 and connect a trend line (black line) with the 1990 Recession Low and the 2002 Recession Low notice it comes into play around the 1050 level as well. Thus there appears to be a significant resistance zone in the 1048 to 1053 range.
For those that follow Wave Theory (I know some hate it) the question is what part of the ABC corrective rally are we currently experiencing? The bearish scenario is that the last move from 869 to 1048 is the final C Wave as the ABC corrective rally is nearing completion. If that is the case then we would eventually see the development of Primary 3 to the downside over the next several months. The key level to watch in the S&P 500 that would confirm Primary 3 has developed would be a break below the 869 level.
Meanwhile the more bullish scenario is that the move from 869 to 1048 is just minor Wave "a" of C which would be followed by minor Wave "b" of C before the final minor Wave "c" of C occurs. Once a pullback occurs then Wave C would complete somewhere in the 1121 to 1158 range. 1121 is the 50% Retrace from the October 2007 high to the March 2009 low. Meanwhile 1158 is calculated by adding the length of Wave A which was 289 points to the bottom of Wave B (869) which equals 1158 (869 + 289). In addition also notice the longer term downward trend line (black line) would also come into play in the 1121 to 1158 range as well.
If the above scenario is going to occur I would think the S&P 500 would hold support near the peak of Wave A which was at 956. In addition also notice the 200 Day EMA (blue line) and 23.6% Retrace from 667 to 1048 is very close to 956 as well so this would be a key support level to watch if a pullback were to develop.
Finally there continues to be an inverse relationship between the US Dollar and the major averages. The chart below compares the US Dollar ETF (UUP) to the S&P 500. Notice when the UUP has fallen (points A to B) the S&P 500 has rallied (points C to D) and vice versa. Thus the question is will the US Dollar continue to fall or will it begin to reverse to the upside?
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