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Some disappointing news from China yesterday was the catalyst behind the decline. Chinese manufacturing is in contraction and the news from the US was not better. US manufacturing PMI came in lower than expected. This reminded investors that the December job report may not have been an accident after all. While the reaction was normal, sentiment remains positive and the trend is still up but in the short term there are various scenarios. The S&P 500 has multiple wave count and the FTSE 100 has completed an impulse wave up.
The S&P has two possible bullish wave counts and one bearish wave count.
As we can see on this 90-min chart, the S&P has extended its decline but the pattern is still bullish. Wave (b) is now a double zigzag [a,b,c,x,a,b,c]. Wave (b) is over and the next move should be wave (c) of iii (circle). In this scenario the S&P is tracing out an ending diagonal pattern [i,ii,iii,iv,v (circle)] in which the third wave is in three waves [(a),(b),(c)]. This is the first scenario. The second bullish scenario is shown on the following chart:
The S&P may be tracing out an ascending triangle [(a),(b),(c),(d),(e)] on the 90-min chart. In this scenario yesterday’s low at 1820 will remain intact and the index will rally to 1850 to complete wave (d). After a period of sideways price action the S&P should break higher and rally to 1880-1900 during February. The third scenario is shown on the following chart:
This is the daily chart, the move from August last year can be counted in five waves [i,ii,iii,iv,v (circle)], the high at the end of December is the top of wave 3 and the current move down is wave 4. In this scenario the S&P will decline to 1797 or lower to complete wave 4. Thereafter the index should rally to new highs.
