Traders, as if last week did not offer enough volatility and twists and turns, get ready for some more. While perhaps most of the market expected at some point that our debt would be downgraded, most were not expectng it on Friday.

What will be the impact? Most of what I read and heard over the weekend suggested the market would be negatively impacted by this - that may well be the case - at this point until the futures markets open nobody has the correct answer. However, assuming the traditional correlations remain intact, with DXC (Dollar Index) selling off in early Asian trading, equities should be higher.

Yet, with this new information (i.e. downgrade) I at least had to go back and see if we missed something in the S&P 500 count that does in fact paint a far more bearish outlook. The one thing that Todd and I have gone over several times is whether or not the May 2nd high was the 5th wave of Wave C - a very common count that other EW analysts are proposing. That count is seen below in a very simplified form:

S&P 500: bearish count

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In our view, the yellow highlighted area invalidates the bearish count as it does not constitute a 5-wave advance. The chart below pinpoints the area from the March 16th low to the May 2nd high.

S&P 500: detailed view

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Thus, we come away with the following count:

S&P 500: still room for more downside but higher afterward

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Again, we want to emphasize we are not trying to be bullish, merely looking at the wave structure and drawing some conclusions. We should have some answers over the next 12-24 hours as to how the market will react. Stay tuned - it is going to be interesting and likely very fluid.

Given that the 'negative' news regarding all things economic, political and investment are now at a fever pitch, this is the ideal time to begin looking for the market to begin swinging the other way. CHF/JPY seems well positioned to take advantage of a shift in bearish sentiment.

For more from Dave, visit Aspen Trading for more updates.