Is the sky really falling? Perhaps, but I believe the bulls have some reason for hope, but that hope has to come immediately or 1261-1245 will be an inevitability.  My two preferred wave counts are i) this is intermediate wave (4) of the bullish P[3] wave of the bull market that started March 2009, or perhaps, the even more bullish count, that this is minor wave 2 of intermediate wave (3) of P[3].  The evidence for the former count is a bit stronger in my opinion.  See the chart below and note the intermediate wave -red- (3) acceleration channel.  

This recent break down from this channel indicates that wave (4) is underway, the question is what shape is this complex corrective wave taking.  So far, it has traced out a double zig zag of almost perfect symmetrical proportions, a small dip to my target of 1295 will accomplish this, though it isn’t necessary.  A bounce from here can also merely be another x wave before a final corrective to make this a triple. In favor of the expectation for more downside is the larger bull market channel of the March 2009 low, the 2/4 line could be a strong magnetic force at this point calling intermediate wave (4) to its logical destination, the 2/4 line and level of the wave 4 of lesser degree -blue- minor wave 4 of (3).

In favor of a bounce beginning on Monday are: i) the strong support of the 1291 pivot, ii) the 61.8% retracement level of the recent rally @ SPX 1295, iii) the positive divergence building on the 60 min chart (bottom), and iv) the inverted hammer candles on the SPY, DIA, RUT, NDX and XLF, which will be confirmed as bullish reversals should the market close above Friday’s high on Monday.

See the chart above for the other major indexes and some other possible counts.  The intermediate wave (4) is supported by both the RUT and XLF, which are tracing out different types of corrections but ultimately coming to the same count.  The RUT peaked its intermediate wave (3) earlier than the rest and is now tracing a triangle for wave (4).  Note an alternative triangle count would have Friday’s move down as just the c leg.  The XLF, has been the weakest of the indexes and is tracing out a flat for wave (4).  Does its inverted candle mark the end of this correction?  Also, on the above chart is the case for the bulls best hope, that this double zig zag has been minor wave 2 of intermediate wave (3) of P[3].  However, this count needs to turn and turn quickly to have a chance.

For traders, Monday’s magic number will be 1291, a breach of that and there will be no reason to think about the long side until 1261 or 1250.  On the horizon looms a Puetz crash cycle window which begins June 9th.  Enjoy your weekend.