Excerpted portions of the most recent BullBear Weekend Report.

In last week's BullBear Weekend Report I continued to maintain a Bullish long and intermediate term bias on the S&P 500 while turning bearish on the short term. The week showed a continuation of choppy range bound action with a significant drop in trading volume. At this point I would continue to be bullish long term while turning even more bearish short term and possibly turning neutral on the intermediate term.

In the East there is a saying: "When the student is ready, the teacher will appear". We can carry that bit of wisdom into the markets: "When the market is ready, the reason will appear". If the market is technically set up, eventually it will produce an adequate excuse for the setup to fulfill itself.

We are now well into earnings season with 1/3 of S&P 500 companies reporting this coming week. This weekend the G20 meeting, with its focus on international currency markets, has concluded with an indeterminate effect. The mortgage banking crisis is gestating in the background and news on that front could emerge at any time. The midterm election on November 2nd will have a big impact on expectations for future fiscal and monetary policy. Speculation as to the size and scope of a Quantitative Easing program announced by the Fed at its November 3rd meeting will continue to grow. So we are in a window where news and speculative trading around news will be rampant.

There are many technical signs that a top of some kind may be building (or may have already been built) that remind me uncomfortably of the April top. Since the market has steadfastly refused to undergo a healthy, normal correction over the last few weeks--although the sideways action could itself represent a correction--it may mean that a more substantial top is forming. The high volume drop on Tuesday may have been a "warning shot" before a healthy decline.

At this time the permabears, top pickers and crash callers are more silent than at any time before the April high. I'll take that as a bearish sign. Measures of bull/bear sentiment are also running relatively high.

The recent run up in asset prices in anticipation of QE2, together with the initial boost provided by early earnings season reports, has probably created a "sell the news" setup. Earnings in the early part of the coming week may continue to lift certain sectors and stocks as the late and the dumb pile on at the end of the move. Smarter traders are likely selling to the late comers in this environment.

The chart below shows the beginning of earnings season as marked by Alcoa's announcement date. We can observe a fairly consistent pattern of a run up into earnings season followed by an initial boost after the first few weeks of report with a subsequent top and decline. This has happened in the last 4 cycles.

I would also note that RSI has tapped 70 a couple of times and has since dropped away while the market hovers at highs, creating a negative divergence.

Lunar cycles influence oceanic tides, female reproductive systems, atmospheric phenomenon, geo magnetic forces and mass human behavior. Irrespective of any other astrological or astronomic phenomenon, the phases of the moon have a demonstrable effect on markets. Below the Full and New Moons since March 2009 are charted against the SPX.

Moon phases have frequently accompanied market turning points within 3-4 sessions. Some of the more precise correlations have been: August 2010 top, April 2010 top, Februray 2010 bottom, January 2010 top, November 2009 bottom, October 2009 top, October 2009 bottom, September 2009 top, September 2009 bottom, July 2009 bottom, March 2009 bottom. If you provide for a window of 3-4 days on either side of the phase then you will find an even higher rate of correlation. Notable exceptions were during the March 2009-June 2009 and February 2010-April 2010 runs. However, if you look more closely you will find that even during these runs lunar phase accompanied short term tops, bottoms and breaks from consolidations.

I am not suggesting that one can trade from lunar cycles alone. However, when technical and sentiment conditions are set up and correspond with a lunar phase, then the probabilities for the setup to mature and come to fruition are significantly enhanced. "When the student is ready, the teacher will appear".

S&P 500 Chart Analysis

Let's have a look at the technicals to see if the teacher is ready to appear and what the lesson may be this time around.

My currently favored short term wave count has us at the beginning of a C wave in an ABC correction that targets support around 1150 after a completed 5 wave move from the September bottom.

My alternate bullish count has SPX at the beginning of wave 5 of the same move. A strong move above the purple resistance line that sticks would put this in play. The target would be the April 2010 highs.

An alternate bullish scenario has SPX completing a B wave for a lower high with a big C wave down about to commence to complete the correction off the April 2010 high. This could come into play if the mortgage crisis starts to gather force perhaps in combination with disappointment over the size and scope of the Fed's QE2 program.

10/28/10 UPDATE:

SPX now appears set to make its break for the downside after another week of consolidation. Technical indicators are showing divergences from price which suggests a correction is due. This top has taken quite a while to form and as a result we can expect the pullback to last longer and go deeper than we might have otherwise expected.

A close above the overhead band of resistance will be bullish and may signal a wave extension and a close below the lower rail of the primary blue channel will likely initiate a strong round of selling.

A look at the daily chart shows 6 dojis in a row with the bodies lined up in a narrow 5 point band.

In the context of weakening and divergent breadth and momentum this is most likely a topping formation.