I have a model bear scenario for the summer, and to deliver it we needed
to put in the low for the first wave down at the Feb low near 1040. I
think that the chances are strong that we have done exactly that, and
though there are a number of obstacles still in the path of a serious
wave 2 rally, which is counter-trend at the moment, the positive
divergences I am seeing on USD currency pairs and many indicators
suggest strongly that the short term bottom is in.

My model bear scenario for the summer is a chart I've posted a few times
before and here is the updated version on the SPX daily chart:

Among the positive divergences I'm seeing are from CADUSD, AUDUSD,
GBPUSD, which have all already peaked near or over their highs before
the fall from 1107 PX last week. EURUSD is lagging as ever recently, but
broke up through a very important resistance area yesterday.

Of the indicators I'm watching we have strong positive divergence
between the last two lows on NYMO, which has also broken up to +20 for
the first time since March. :

Vix made a much lower high on this recent SPX downswing, and is close to
support. For a serious rally to get going, Vix needs to break down
through 29.50 with some conviction. In the short term we have a possible
small H&S indicating to 21.50, and if we see a pullback today
as I am expecting, then we can put in a right shoulder on that pattern.

This H&S pattern would obviously be a continuation pattern
though, and though Arthur Hill was defending these patterns as
continuation patterns on his post last night, I am more doubtful, though
I have seen them play out before.

I will be watching USD very closely for confirmation of any rally, as I
don't think equities can sustain a rally in the face of a strong push up
in USD. On the DX chart I've identified the new rising channel
established since USD broke up from the original rising channel from the
2009 low, and we are close to the bottom trendline. A break of that
trendline would most likely signal that USD has topped for the moment:

In the short term we are hitting both a key resistance level on ES and a
key declining trendline on ES at the close yesterday and overnight, and
given that we have also only had one instance of two consecutive
positive close days since April, I'm leaning bearish today, though I do
have a possible bull scenario.

I favor the bear scenario as long as we can break overnight support
at 1078.5 ES with some conviction, and my possible bull scenario may play out if we see a break of 1084. That's the September ESU0 for
anyone still trading the June futures, currently 4.25 points lower than
June.

The bear scenario is a rising channel from the recent low with what
looks like the first two drives of Fujisan's three drives pattern. If
this plays out then we should fall to the support trendline in the 1060 –
1065 area before a third 35 point move up towards the very strong
resistance in the 1100 area:

If ES does break up through 1084 that may just be to make another touch
at the top of the rising channel, but there is a valid IHS with a broken
neckline that has provided interestingly strong support overnight. The
target is 1110 ES, though short term H&S patterns have been hit
and miss over the last three weeks. A more realistic target would be to
the strong resistance level in the 1100 – 1103 area: