Last week Avi noted that, “With the SPX being unable to complete a full 5 waves up off the recent lows at the end of this past week, and then breaking back below micro support noted at 2638/40SPX, the most likely perspective is that this wave (4) has not yet completed.”

He then further posed the question, “But, the question is whether we will complete it in the coming week with a final flush lower, or through a more complex pattern that takes us higher first, which can potentially push out the completion of this correction for another several months?”

This week the market did not provide the final flush lower that Avi mentioned last week but rather we saw several attempts for the market to breakout higher. This would have given us the initial confirmation that we were indeed following the more complex pattern taking the SPX up towards at least the 2780 area and potentially even back over the 2801 high prior to turning back down to complete this larger degree wave (4). Each of those attempts to breakout higher however, was met with rejection at very key resistance levels. While did manage to close the week in positive territory the pattern that we ended the week on left us with several potential paths, and unfortunately, left us with more questions than answers.

I will first note by stating that bigger picture really nothing has changed this week in that it is quite unlikely that we have completed all of the larger degree wave (4) as shown on the daily chart. This means that it will likely take some time prior to having confirmation that the markets are ready to breakout to new highs. We also have still have yet to answer the question that Avi posed last week thus leaving us with several potential paths for the SPX, both near term bullish and bearish. I will lay out what I am viewing as the most probable scenarios below.

Near Term Bullish Path:

Although the markets did fail to breakout in the most immediately bullish pattern last week we still have not invalidated the path that could still see this move higher in either the purple triangle count, or the yellow wave B count, both of which are shown on the 60 minute charts.

Now because the market was unable to breakout directly higher last week and we saw the break lower late on Friday after noon it’s very difficult to consider the move up off of the 2585 low as part of an impulsive wave structure. That move does rather count best as a five wave diagonal pattern. Under the bullish scenario we would count that five wave move as a leading diagonal as part of wave i of (c) of D under the purple count or as part of a larger wave a of y under the yellow wave B.

It is still a bit too early to tell which of these two near term bullish scenarios would be playing out at this time but as long as the SPX can hold over the 2643 - 2607 zone then this near term bullish pattern is very much in play. A break of the 2607 level would be the initial signal that this bullish pattern is breaking down with official and technical invalidation of this pattern coming with a break of the 2585 low.

We would need to see a sustained break back over Friday’s high followed by a move back over the 2703 level to give us confirmation that this bullish pattern is indeed playing out. A break back over Friday’s high but a failure to see a sustained move through the 2703 level would suggest that we are going to see an even more complex pattern within this wave (4) but we will take things one step at time and see if we can even get back over Friday’s high before getting too ahead of ourselves.

Near Term Bearish Path:

As noted above with the breakdown on Friday afternoon, the move up off of the 2585 low counts best as a five wave diagonal pattern. Under the near term bearish scenario we would count this move up off of that low as an ending diagonal as part of an abc corrective move up off of the 2552 low. Now this abc pattern up off of the 2552 low could still be counted as part of a larger abc as part of the purple triangle count which would still take this higher into May, but it also has the potential to have marked a top which could see the market break down lower to new lows under the lows that were struck in February. These two topping counts are shown in green and red on the 60 minute chart.

The green path would suggest that we are topping in a wave iv of C down off of the 2802 high whereas the red count would suggest that we are topping in a larger wave ii of C. This red path is potentially much more bearish than the green path and has the potential to see the market test lower end of the larger degree support zone in the low 2300s as is shown on the daily chart.

While I still would want to see further confirmation that this red count is indeed in play before giving it a high probability of playing out I do have several reasons why we should be cognizant of the potential at this point in time. First of all the size of the potential green wave iv is very problematic as it would be very large in comparison of the potential wave ii of the same degree. Secondly, the retracement up into Friday’s high hit the 50% retrace of the move down off of the 2802 high right on the nose prior to turning down. Finally, I simply do not have a good count on the VXX that is highly supportive of the green count on the SPX at the moment; I do however have a count that would be more supportive of either of this red counts on the SPX which would potentially match the purple count I am watching on the VXX. So for those reasons I cannot ignore the potential that this red count may be in play should we see a strong break of the February lows and feel that it is important to point out the potential for this scenario to be in play at this point in time.

While I wish I could narrow things down a bit more, unfortunately the market left us with several possibilities with the way in which this closed on Friday. The good news however is that given that we are running out of room in the smaller degree holding pattern we should have an answer as to which direction this is likely going to head sooner rather than later.

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