I DISTRUST "V" BOTTOMS
The EWP from the May 22 high is corrective therefore the intermediate trend is not in danger of being reversed.
I rule out the price has carved a "V" bottom; instead in my opinion price will carry out a larger corrective pattern.
In the context of the large EWP count in my opinion price is unfolding the wave (B) of the last ZZ from the November 2008 low. I maintain as the target box the range 1536 - Trend line from the October 2011 low, which this week stands at 1487.
1508 is an interesting number since, there we have the 0.618 Retracement, it is where the 200 dma is now standing and it is also the 1.618 extension of a potential larger wave (C).
I am also aware that due to an already "extremely" oversold Summation Index we should not be overly aggressive on the downside target. The weekly stochastic has reached the oversold area where it can issue a new buy signal but it can remain oversold for some time like it occurred in mid March 2012.
For this reason we have to monitor the McClellan Oscillator, which has a positive divergence but should not cross the Zero line if the scenario of a larger correction is correct.
In addition we don't have to forget that the weekly MACD has a bearish cross that is suggesting a probable larger corrective phase.
With corrective patterns I always remain open-minded since most of the times they have the tendency to morph.
So far we have an overall 3-wave down leg that can be counted in several different ways. Lets resume the alternatives with four options, though each one of them has a caveat.
Green Option = Double Zig Zag ===> Price is now unfolding the wave (B) of the last ZZ. It should top in the range 1619 (50 dma) - 1629 (Gap). Once the wave (B) is in place the last wave (C) down will conclude the correction.
Caveat: The down leg off the May 28 peak is not impulsive; hence it is a doubtful wave (W).
Blue Option = Double Zig Zag ====> Price is now unfolding the wave (X). It should top in the range 1619 - 1629. Once the wave (X) is in place price will unfold the last Zig Zag.
Caveat: The down leg off the June 18 peak does not look impulsive; hence it is a questionable wave (W).
Red Option: Zig Zag or Double Zig Zag ====> Price is now unfolding the wave (B) or the wave (X). It should top at / below the 0.618 retracement = 1639.
The following down leg will be the wave (C) ending the correction or the wave (A) of the second ZZ.
Caveat: same as the option 2.
Black Option: Zig Zag ====> From the June 18 peak price has began an Ending Diagonal wave (C), hence now price is unfolding the wave (II) which should top in the range 1619-1629.
Regardless of which option is the correct one I consider the current rebound a countertrend affair, which will be followed by more down side action.
If this is the case the daily RSI should not break above the trend line resistance in force since the May 22 high.
Depending upon the weekly oed print the current rebound can extend into next week (I am thinking of a top either by next Wednesday; Thursday US markets are closed, or next Friday (NFP release).
So far we have a bullish weekly Hammer. If the weekly gap at 1592.43 remains closed or at least price remains above the 20 wma = 1586 then odds would favour more follow through to the upside for next week.
If 1508 is an important number for the scenario of a larger/prolonged correction, 1618 is a huge number for the current corrective rebound since it is almost the 0.618 retracement of the down leg from the June 19 peak and it is where we have both the 50 dma and the 10 wma. Therefore it is the likely magnet and candidate for the top of the current "oversold" bounce.
I don't know if price will go straight to the potential reversal zone or it will carry out first a pullback before mounting the last wave up which will have to concur with a buying exhaustion (And s/t extreme readings of breadth indicators).
Maybe the "small" negative divergence of the NYSE Adv-Dec Volume is warning of a potential pullback for today that should not close yesterday's gap at 1588.03 (Keep in mind the consequence of being above or below 1592.43 - 1586 by tomorrow's eod print).
At the moment I maintain as preferred count the Zig Zag option assuming that the wave (C) is unfolding an Ending Diagonal.
Lastly lets closely monitor the VIX, which is approaching an important support area with a gap at 16.44 and the trend line support in force since the May 17.