The reprieve period known as Minor wave 2 up has persisted longer than expected, as well as a deeper than expected retracement unfolding. Nothing important has changed as the May 2011 high has not been taken out yet, although the DJIA is going to get very close to doing so. The reason is that market fundamentals continued to weaken over time even as the reprieve period stretched out longer than expected.
In spite of the rally losing momentum, people continue to get more and more bullish. Virtually everyone is bullish on the stock market, economy, and the job market. If there is ever a time for bears to capitulate and give up en masse, it is now. The VIX has also fallen below 20 as well, fulfilling another expectation for the character of the peak of Minor wave 2 up.
For example, volume on the weekly chart has been on a steady downtrend throughout the reprieve period, indicating that the rally from early October 2011 still displays characteristics consistent with the right shoulder in the larger head and shoulders top.
Here is the weekly chart of the DJIA, which is showing that volume has been falling as the market rallied:
The reprieve period could stretch out for a few more weeks, possibly going into early February 2012. Here is a chart of the last part of Minor wave 2 up with Minuette wave (c) of Minute wave [y] of Minor wave 2 up in focus:
The projected upside target is 12825. The DJIA is going to get very close to hitting the May 2011 high, but is expected to ultimately fall a hair short of the benchmark. It is important to recognize that the reprieve period is now running on borrowed time. The call for Minor wave 3 down unfolding as a waterfall decline still stands. The longer the rally stretches out with weakening momentum, the more vulnerable the market will be to a sharp decline when the rally is over. A very nasty "bleeder wave" is in the forecast.
Here is a chart showing all of Minor wave 2 up in the DJIA:
Here is a chart of the DJIA / gold ratio:
Notice that the DJIA / gold ratio peaked in late December 2011. This is yet another indication that the current rally is on borrowed time. When markets rise in nominal terms, but not in terms of real money, the rally is on borrowed time. In a bull market, the stock market rallies in both nominal terms and in terms of real money. The bear market rally from the March 2009 low lasted until May 2011 in nominal terms, but peaked in October 2009 in terms of real money (DJIA / gold). In August 2011, the DJIA breached the March 2009 low in terms of real money, but stayed above the July 2010 low in nominal terms.
The reprieve period should stretch out for a few more weeks. As the last of the current rally from the October 2011 low unfolds, the market internals will continue to weaken, which will ultimately make the markets vulnerable to a sharp decline once the rally exhausts itself. Just before the peak is reached, the last of the bears will almost certainly capitulate and give up -- even the bears that held firm in their bearish outlook in May 2011 will face a very strong temptation to throw in the towel and give up. If there is ever a time for bears to capitulate, it is now.