Market still not reacting to the bears' growls

Table-pounding bearish calls have died down some over the last week, with the market still not reacting to the bears' growls. But will the bears have their day in the sun, or will the market simply continue to climb?

Last week, I noted how many analysts and pundits were paraded through Marketwatch and CNBC calling for a correction. I also said that the correction will not occur when all these people expect it to. Well, as the voices of the "correction advocates" have died down or become much more unsure of themselves over the last week, the market has now taken another step toward a correction.

Also note that the type of correction to which I refer is more likely going to be a pullback of 3%-5%, as the full 10%+ correction is much less likely just yet. But much depends on how high we go before the correction begins. If we continue higher to the 1550 ESH3 �region, then there is a greater likelihood of a 10% correction before we see another rally to new highs for the year.

As I have also said many times before, a 3rd wave is not a pattern in which one should be shorting until a clear break down of support is seen, which would then signal that the market is in a 4th wave corrective decline. Yet, many are attempting to short at every 10-point increment, and those shorts have been seriously shaken. Therefore, no one should even be thinking short until the 1508ES level is taken out, and confirmation of a 4th wave is seen with a break down below 1490ES.

Over the last week, we have seen what is best described as an ending diagonal in the E-mini's, since most of the waves are best counted as 3's rather than the standard 5 wave impulsive moves. Also, we have finally hit the 1520/21ES long time target we set back in December of 2012. The market has struggled moving through that level, and has, so far, been turned away 3 times.

Normally, I would consider all the factors I am seeing on the ES chart as indicating that a top is in place exactly right at our long-time target level. But, when one analyzes a market pattern, one has to take into account all reasonable possibilities, especially when the market stubbornly refuses to break support. Additionally, we often label diagonals and triangles as completed prematurely.

For those who do not know me, you will learn I am a strong proponent of trading only clear setups. Since the ES chart is not providing the clearest picture due to the messy wave count, I went back to the Select Sector SPDR-FinancialXLF �chart, and have found a very clear Elliott Wave structure, which adheres almost perfectly to Fibonacci Pinball, and suggests that one last rally is in the cards. As you can see from the XLF chart linked below, we seem to have completed a textbook 4th wave flat right into the standard target of the 1.00 extension.

In fact, if you follow this pattern all the way through, it is almost a textbook Fibonacci Pinball structure as well. Wave i of wave 3 topped at the .382 extension, and wave iii of wave 3 topped exactly at the 1.00 extension.

While wave iv of wave 3 was a bit more shallow and maintained support at the .764 extension, it led to wave v of wave 3 that topped right at the 1.618 extension. Wave 4 then pulled back and maintained support right at the 1.00 extension, which sets up wave 5 which will target the 2.00 extension at 17.98, or it may come up short and top at the 1.764 extension at 17.91.

But we will need to see a full 5 wave structure targeting one of those levels to know that the pattern is coming to completion. A drop below the 17.70 at this time would invalidate this count.

As for the ES, I question whether we will be able to exceed the 1525ES level. But, ultimately, I will likely be keying off the XLF chart, and when a 5 wave structure has completed into our target region, I will expect a correction to begin around that time. And when the ES takes out the 1508ES and 1490ES support levels (assuming it is not able to first attain the 1540ES+ region as shown on the daily chart), then we will know we are in a correction, targeting the 1470ES region.

See charts illustrating wave counts for S&P 500 Emini & Cash (INX) as well as Financials (XLF).