Despite the positive seasonality, the market hasn't been able to get out of its own way, mainly due to fears concerning the European debt crisis and an apparently slowing global economy. Still, from a technical standpoint, I remain optimistic about the prospect of a coming powerful rally, one that should prove at least as thunderous as the one that emanated from the wreckage of the November decline.  

Analysis

Chart 1 below depicts my wave interpretation of the S&P's price structure. Assuming it holds water, we should expect one more down leg to put the finishing touch on this corrective pattern. As for the price at which the S&P will ultimately find a bottom, I'd say somewhere in the 1200 to 1184 range. For those like me who believe in the market's tendency for mean reversion, please note that the 100-day and 20-day moving averages currently reside at 1203 and 1200, respectively. While the 100-day is closely watched by institutions, the 20-day is also important to traders in that it constitutes the basis of the Bollinger Bands.  With that said, I don't expect the market to turn on a dime without some positive news from Europe. Should a market-moving headline make its way across the Atlantic in the next coming days, it's likely to coincide with an important technical level (i.e., Fibonacci, pivot level, etc) from where the market will swiftly reverse course.   


Chart 1. The S&P's wave structure following the late-November bottom.

Personality

Mass psychology is of paramount importance to a wave analyst; every wave is a reflection of the crowd's collective mood at a given time. Emotions are manifested at various intensity levels, thus the multiple degrees of trend (blue, red, green ,black) shown on the chart. Typically, first waves are constructive, displaying a notable increase in volume and breadth. This is consistent with what we saw during the post-Thanksgiving rally (i.e., black wave 1 on chart).  As for second waves, they often retrace so much of the preceding first wave that most realized profits are eroded away. The nature of the recent correction is very compatible with this characterization (i.e., black wave 2 on chart).  

Volatility

Another important aspect of second waves is that they often end on low volume and volatility, a sign of waning selling pressures. In light of the recent action, this could very well be the reason for the low volatility ($VIX) that has so many traders scratching their heads.  (For more information pertaining to wave personality, please refer to Elliott Wave Principle by Frost and Prechter).  

Finally, even Jim Cramer has recently moved to DEFCON 2. This makes me wonder if there are any bulls left out there. Maybe that's why we should start thinking bullish thoughts.  Furthermore, the October rally and November sell-off are somewhat reminiscent of those of July and August 2010, something to keep an open mind about.

Trade Well,

Peter