The other day we advised listening to the market, and today, the S&P 500 closed below our first "line in the sand" at 971, having previously made an assault but failing to overcome its 200-day moving average.

This now leaves us with the following situation: We had a clear 5 waves down in the move that transpired between November and mid-March, but also a pretty clear (although more minor degree) 5 waves up in the mid-March to early April rally. Presuming that the overall trend remains incomplete to the downside, such a countertrend rally cannot under Elliott rules be complete if it is 5-waves, but must instead just be part of a larger A-B-C corrective pattern.

Now the question becomes, have we already had the A-B-C corrective pattern in its entirety by counting the rally from late July 2002 into November as the A-wave up, the Nov-March downswing as the B down, and this last little 5-wave upswing as a complete C-up? Or could this C itself sub-divide into another smaller a-b-c?

To satisfy ourselves at all levels, a bit more a-b-c action would not surprise us before the real downside fun gets started. Thus, our latest expectation (within an admitted series of recent whipsawing views) is that we are now likely to experience b-wave down toward the 938-945 region, before another minor c-wave up transpires. This c could obviously go higher than the "flat" c we have depicted above, but the broader complexion of this chart suggests perhaps a "flat" is all that we may get at this stage.

In any case, the immediate implication of the chart pattern shown above is immediately bearish, but if 838-845 is reached in the next few days, one will need to be attentive once again whether more time to this pattern is still required before we can get truly excited about a downside 3-wave smash toward 735, and then a potential 5th-wave low for this daily move near 712.

Yet we fully expect that by our late July PEI cycle date, such a downside target -- at a minimum -- will be reached.

Our troops may be marching through Baghdad, but at home, the sick over-indebted economy remains a much more difficult foe to conquer.

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