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|Includes: SPDR S&P 500 Trust ETF (SPY)

In early June I indicated June 19th to be FIB day 21, a day of potential significance for a high or low.

Reviewing price action into this date on June 25th: based on heavy selling, over bought RSI<2>, over bought Stochastic and 61% retrace of the low, a higher probability was favored for this being a ending sub wave; expecting the next significant date or time to bring in Wave 1 completion. (Remember, I do not favor a count with WAVE1 already completed.)

I indicated a secondary probability of the index exhausting into a high on the next significant date or time. The next significant date or time was noted as July 1st thru 10th, or 90 days from the yearly high.

Turns out, Fib 21 day was a bear trap. Despite no reason for the market to push higher and every other tradeable asset class reacting as expected to the bearish reality, the stock market pulled another rabbit out of the hat. With this in mind, we need to explore the secondary count probabilities.

The secondary count assumes EW1 completed at the 200 day moving average.

Starting a FIB count at the 200 day low point, FIB day 5 brought in selling; FIB day 8-just hit, again bringing in selling.

EW theory does not allow for sub wave 3 to be the shortest wave. If FIB day 5 was the completion of sub wave 1, then it is likely that sub wave 3 will complete on July 19-20th, FIB day 13; 1.61xs sub wave one, or 1400 S&P.

Because major wave 2 can not retrace all of major wave 1, sub wave 5 would then need to be truncated or not exceed sub wave 3. The large retracements that we have seen is another reason I favor the primary count.

Notice in the secondary count, sub wave ii of major EW1, retraces almost all the way back to the April high and sub wave iv does not overlap any of sub wave ii. These are strong indications that this count is wrong.

The next chart is my preferred EW count. This one is easy to read and understand. SPY has a megaphone downtrend pattern for EW1. SPY exhausted higher into FIB day 8 to complete sub wave iv. Now we expect a pull back to our previously defined target of 1220 range to complete EW1.

The next two charts give us some technical indicators to watch that will clarify which count, primary or secondary the market is in. The third option is a massive bull market and both counts are wrong.

Two common candlestick patterns are bullish and bearish kickers. A bullish kicker will have three red lower low candle patterns in a row and the fourth day kicking higher-a bear trap. The bearish kicker is the opposite, three white candle patterns with a break lower on the 4th day and follow thru-bull trap.

The important thing to note is all patterns in technical analysis are only as valid as the trend they are in. In other words, if the trend is higher, and the market shows a head n shoulders, the pattern will fail. If the market trend is lower, the head n shoulders pattern will work. (This is an omission that many miss in technical writing attempts)

The SPY chart shows both bullish and bearish kickers in the uptrend leading up to the April high. Note that the Bearish Kicker was denied by the market moving higher, again a bear trap. The Bullish Kicker was very profitable to longs as the weak hands got shaken out, given bulls a lower, thus more profitable entry point.

The Bullish Kicker worked, because the larger trend was higher.

The point of all this is the SPY has a bear kicker into the 90 day from the high window on FIB day 8. If we are in major wave 2, then this Bear Kicker will be a Bear trap and we can expect the market to move higher into the July 19-20th, FIB day 13, price target of 1400 S&P.

If my preferred count is correct, then the Bear Kicker will be valid-moving the index lower to complete EW1.

The next chart reveals longs are profitable at SPY 132. Secondary count Wave 2 would allow the market to test this area, then bounce up to complete sub wave iii at 1400 around July 19th-20th.

If my primary count is correct, SPY will break below 132 after a small bounce test, sending bulls into panic selling mode; bringing in the completion of major wave one about 80-100 S&P points lower.

The third option is while ROME burns, we all play fiddle and watch the S&P soar to all time highs, 100xs earnings p/e, along with $100 per gallon of gas, $1000 oil and $50,000 per share Apple.

Tim Kathlina

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.