The ECB appears to have fired the much-anticipated 'bazooka', thus reducing the chances of a Lehman-like event in Europe.  Whether this will effectively contain the crisis or not remains to be seen, but let's face it: there's not much to worry about for the next few days. With that being said, we need to make a note of the worrisome earnings reports of RHT and ORCL. According to Citi, ORCL's shortfall is a Euro issue, and the likes of QLIK, ADSK, ADBE, FTNT, CTXS, and VMW are most exposed to similar macro risk. Please review my recent Cloud Computing blog in which I've voiced my concern about the charts of CTXS and VMW. 

Assuming the 'bazooka' will at least temporarily alleviate some of the concern, I can see the market continuing its march forward.  For one thing, the chart included in the Morning Report for 12/19/2011 clearly shows an impulsive rise (black wave 1) followed by a corrective decline (black wave 2) that came to an end shortly before Monday's close precisely where it was suggested.  Even if the underlying currents are bearish, the market still owes us one more up leg before turning back down.  This is best illustrated on chart 1 below.


Chart 1. Even if the overriding trend is bearish, the market still owes us one more up leg, namely, wave C.
Otherwise, expect wave 3 to extend into the 1300's, followed by waves 4 and 5 (not shown).

Bearish scenario: expect wave C to end near the top of the recent trading range, namely, 1267, albeit it can carry higher toward the late-October high or even the 78.6% retracement of the summer swoon.

Bullish scenario: on its way to the 2011 highs, expect wave 3 to encounter minor resistance in the vicinity of the 78.6% retracement line.

Both scenarios are strictly based on Fibonacci projections and should not be considered trading plans. Now let's take a look at chart 2 below; it reflects my bullish outlook on the market as long as the price of the S&P remains above the lower red trend line. In the context of an uptrend, the next milestone should be the top of the recent range (i.e., 1267), which happens to fall in the vicinity of the 50-week moving average and the blue neckline. Unless this rally is a mere oversold bounce, these hurdles must soon be overcome. (Note: the 200-day moving average currently resides at 1259).

One last note about chart 2 concerns the yellow line connecting the head and right shoulder; it intersects with the 78.6% line drawn on chart 1 above some time in mid January 2012.  Of course, there are so many hurdles to clear along the way, so let's take it day by day, one step at a time.


Chart 2. The outlook is bullish as long as price remains above the lower red trend line.

Finally, let's look at a market profile chart to identify where the potential value resides. Assuming this pre-market weakness is nothing more than profit taking on the heels of the ECB's action and ahead of the Existing Home Sales number, I expect the trend to resume soon, ending today's session in the green. Therefore, a safe entry point would be just above yesterday's high of 1242.82, which roughly coincides with November's POC (point of control) and the bottom of the high volume area (HVA). Once price gets inside the HVA, the odds are very high it will levitate toward the top end of it. Therefore, barring an unforeseen event, there should be no reason why the 1250-1260 range can't be attained in the next few days.      


Chart 3. The market profile chart.

Trade Well,

Peter