Back on November 26, 2008 I posted a weekly chart of the S&P 500 showing the Elliott wave count.  At that time, a PTI (profit taking index) used to measure the strength of the decline suggested that we would revisit the lows at a future juncture.  Well, here we are retesting the November spike lows.

The markets are at a critical juncture, since a trend termination often leads to a rip-roaring move in the opposite direction as either too many bulls or bears are caught on the wrong side of the price action.  This is what happens when a 5-wave count completes.  We already witnessed this phenomenon following the November lows, and are very close to another cycle of whipsaw action.  Based on the previous weekly count, I have now updated the daily chart with wave (4) highs and now the final countdown is in progress to the wave 5 of (5) to complete the downtrend since the 2007 highs.

Looking at a more finer granularity, the hourly chart is suggesting that wave 3 on the daily may be in place.  If so, we can expect a rather quick lift back into the mid- to high-700′s before the final retest of lows.  At that juncture, a rally lasting more than a few days will be possible.  Shorting the pops becomes an ever-more-dangerous trading stance and becomes now more of a game of looking for good entry points on long positions.

What type of signals do we look for to guide our trading stance?  The final fifth wave is one which will be marked by divergences in price action versus momentum and breadth indicators.  Some of the popular measures are the advance-decline ratio, the p&f bullish percent, or even the McClellan Oscillator shown below.