The rally from last week's 1102 low started after the break below the August 22 low at 1105 in the December e-minis did not result in further selling. The fact that the market has rallied swiftly back above not only that low but above three intervening lows shows that it is rejecting prices below the 1130 level. The midpoint of the drop from the August 31 top at 1223.75 to last week's 1102 low is 1163 and the rally has taken out this resistance level also.
These considerations all point to an ongoing rally which will probably equal the length of the August rally which was 152 points (blue dash rectangles). This suggests an upside target 1254 for the move up from 1102.
I have outlined with purple dash lines the structure of what I think is a corrective wave in Elliott terms which began from the August 9 low. The August rally and the September drop both show a clear three wave structure. These two swings are probably the first two waves of three wave rally. The market is in the last wave of this rally and the last wave of a three wave rally is typically a fast one.
Despite the short term bullish implications I draw from the past couple of days activity I still think stock prices are in a bear market which will eventually carry the S&P down to 950. The only development which could alter the situation would be a dramatic shift in Federal Reserve policy to another round of quantitative easing. Failing this we should see the 950 level during the first quarter of 2012.
