Yesterday, price finally reached the 1301-1310 target that I had discussed for weeks.  However, the ensuing decline had profit taking written all over it, which suggests the low 1300's will soon be retested. Therefore, we should wait for the S&P to find a bottom in the 1280's and then seize the opportunity to get back long the market.

Wave Theory suggests that blue wave 5 shown on chart 1 below is not yet over. Once it comes to a conclusion above Tuesday's high, expect a fourth-wave pullback to unfold, forcing the S&P back below 1300 (target to be determined). However, once this fourth wave finds a bottom, the next rally should carry the index back to the May 2011 high.  In the meantime, be careful not get chopped up.

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Chart 1. Blue wave 5 will bring green wave 3 to and end. A subsequent pullback in the form of green wave
4 should then set the stage for an assault at the May 2011 high.

Assuming green wave 5 does carry the S&P back toward last year's high, will the latter be exceeded on the first attempt? Probably not. Here's where Game Theory gets handy. You see, the doom-and-gloom crowd still insists that the 2011 swoon is a 'picture-perfect' 5-wave pattern, which it isn't. Instead, it's a double-corrective pattern that's often mistaken for a 5-wave impulse.  Their line in the sand is the 2011 high, not a penny higher, because second waves can NEVER retrace more than 100 percent of first waves. Therefore, you should expect them to make their stand just below 1370, not to mention those who will likely unwind their positions just in case the end-of-world theorists happen to be right. 

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Chart 2.  The Doom-and-gloom scenario.

Trade Well,

Peter