WIth all of the negative sentiment swirling around the market, the seeds may be sown for a continuation of the relief rally off of the November low.  Yes, the initial push up that ran smack into the cycle change point in January was choppy and unconvincing, but that doesn't mean that we won't see a continuation of the rally.   Remember, the decline off of the May 2008 high unfolded into a five wave, impulsive pattern.  Recovery waves off of five wave patterns are typically more complex and longer than the "one and done" variety.  In this post, I will look at recent price action and bring in one of my favorite methods for pinpointing time zones for probable reversals - Gann time clusters. 

W.D. Gann used the circle as his basis for time measurement.  The circle contains 360 degrees and the calendar year contains 365 days, so this methodology is highly correlated to our year and seasons.  Using Gann time analysis, one must also pay close attention to anniversary dates of market highs and lows.

In the example below using the S&P 500 daily chart, I have marked calendar day counts from important highs and lows in the past.  Notice the close proximity of dates (in the red box) that are counted from the November 21 low (60 days), and also the one year anniversary date from the January 2008 low.  Special attention must be paid to anniversary dates.  They are treated the same way as cycle change points in that a reaction can be expected, but not necessarily a change in trend.  For example, notice the spike, reactionary low on October 11, 2008.  That is one year from the October 12, 2007 major high posted in the market.  It did not cause a trend change at that point, but the market did reverse course for a time and hold that low for over a month.

That brings us to the current situation.  The time cycles suggest that a short term change of direction can occur in this time frame which would reverse the decline off of the January 6 high.  In looking at price action, the decline has stalled with three straight days of indecision after the nasty selloff on Tuesday, January 20.  Also note that the indecision has occurred right at the 61.8% retracement of the November 21 - January 6 advance.  The momentum oscillator has crossed up while the RSI is holding the 40 area - both mildly bullish.  

If the S&P does reverse higher from here, where is it going?  A probable target is 1000 - 1010 on the S&P.  That would satisfy the requirements for an A-B-C correction off of the November low as well as hit the 38% retracement of the May - November decline.

So while things are as negative as they can seem economically, etc., it is always a good time to take a look at one's own thought process and make sure that he or she is not falling prey to the 'sentiment trap' by saying things such as "there is no good reason whatsoever why this market should go up", or "if more bad news comes out, this could be it."   Way too many players are now overly fearful to play the long side and are looking for the best chances to play the short side.  With way too many leaning to one side of the boat, that tells me that things are getting a tad skewed and it is time for Mr. Market to shake things up and re-adjust some mindsets.  Does that mean I think that the worst is over for the world economically?  NO!  But I am a trader and it is my job to look for opportunities in the market, and a golden opportunity may be in the process of being presented to us here. 

The first thing I would like to see is a solid up day on higher than average volume.  Volume has been coming back into the market and the indices have been holding, which is a good thing, but now we need to see some upside price action to go with it.  If the market can get something going, we could see a strong advance, possibly into March (notice the time cluster in the March 14 - 22 time frame).  Stay tuned.