Oil closed down almost $10 today after completing what appears to be an ending diagonal pattern on 5/3. Based on the ED pattern oil should reach the $84 to $87 range by the end of May if not sooner. However, shorting now would not be advisable as a sharp retracement could occur at any time.
The CRB continuous commodity index has broken a multi-month trendline and fallen back below the upper channel line of the entire rally from the 2009 low. This suggests that the ABC rally in commodities including oil is over. The trend should be down for many months to come and traders should be looking for shorting opportunities after a retracement rally. The real problem with the breakdown in commodities is that it may also prove to be an achilles heel for the stock market.
Today's action in stocks brought the NYSE McClellan Oscillator down to an oversold level, although it may still have further to go. Clearly, yesterday's low was not the low of wave (ii). For wave (ii) to remain valid it must remain above the 4/18 low of 1294.70. If that level is breached, then we would be left with a 3 - 3 pattern which would suggest that the current correction is minor wave 4 and not wave [ii].
In either case, higher prices will be seen before the rally ends. The only question is how much higher. At this point there is no easy answer, but probably just in excess of 1400.
What about the longer term outlook? The fact is that even if we see the end of the current rally around 1400 it does not mean that primary wave 3 down will follow. It just means that the overall rally is becoming more complex. We may see a correction of the entire rally from the 2009 low or just the rally from the July 2010 low followed by more upside in a large double zigzag or other combination correction. Or the rally may subdivide with an extended wave [C] up. There are a lot of possibilities, but the one thing to keep in mind is that it is now looking like we will definitely see a top of intermediate degree sometime in June, and probably from lower levels than originally anticipated. The collapse in oil prices will not help the SP500.