Famed Elliot Waver, Bob Prechter is “quite sure the next wave down is going to be larger than what we’ve already experienced,” and take major averages well below their March 2009 lows.

Tony Caldaro is an Elliot Wave analyst who maintains a great blog, “The Elliot Wave Lives On” about the stock market. Here is part of his weekend post:

During the strongest (+289 SPX points), longest (3 months) and best performing (+43%) uptrend of this entire bear market. We heard a lot of media noise about “green shoots”, the economy has turned around, and the recession is over. While following all the economic data on a daily basis even before this downturn began. One can agree with the media in one regard. It no longer looks like a recession is underway. It looks more like a depression. International trade has fallen off a cliff. Banks are failing nearly every week. Real unemployment is between 16% and 20%, and some of those that are employed are having their hours cut back and/or taking pay cuts. Housing prices, in some areas, have fallen over 50%. The eight largest economy in the world, California, started the month by issuing over $300mln in IOU’s. On top of all this, States have been raising fees and taxes to increase revenue. Also there is word that the government has something similar in the planning stages. Last but not least, the mega banks, which have been the major recipients of cash infusions, asset swaps and loan guarantees, have been building excess cash reserves to astronomical levels. Historically excess cash reserves have been about $20bln, currently they are over $800bln. Either the banks have a lot more bad assets than are being reported, and/or the economy is a lot worse than most expect. Dark clouds are still coming over the horizon.

Technically, the stock market continues to look vulnerable to downside surprises. From the Oct 07 bull market high at SPX 1576, to the Mar 09 low at SPX 667, we counted a zigzag (5-3-5) Primary wave A. This was defined by three Major waves: Major A Mar 08 (SPX 1257), Major B May 08 (SPX 1440) and Major C Mar 09 (SPX 667). A few days after the low we anticipated the start of Primary wave B. For three months (Mar- Jun) it had been underway as the SPX rallied to 956, for a 43% gain. This was a bit short of the typical 50% gain often associated with Primary B waves. Nevertheless, nearing the high we counted a completed zigzag pattern and warned of a potential top. Over the past two weeks the major indices SPX/DOW/NDX/NAZ all confirmed new downtrends, affirming that completed pattern. Now that Primary wave B has completed, and Primary wave C is underway we see two potential scenarios unfolding over the next many months. The first would be a five wave pattern down to the Mar 09 lows at SPX 667, to complete an elongated flat. The second would be another extended zigzag pattern breaking through that low and bottoming in 2010 in the neighborhood of SPX 400. It is too early to tell which scenario will unfold. But this remains a treacherous stock market.

NEoWave Institute’s Glenn Neely is forecasting the largest vertical drop of the decade for the S&P 500. Neely predicts the stock market will decline 50% in the next 6 months. Neely is an Elliot Wave theorist:

“Technically speaking, according to NEoWave a correction began at last October’s low; the March-June rally is the final leg of that correction,” Neely explains. “The March-June rally is now ending, allowing the bear market to resume. During the next six months, the S&P will decline 50% or more, breaking well below 500!” Currently, the S&P is hovering around 917.

Other Elliot Wave analysts are also tentatively calling  either an end to the rally now, or that it is coming soon.  For example, Tony Caldaro:

MEDIUM TERM: uptrend that may have topped

‘If we count the SPX 956 high as the end of the uptrend. Then the decline from that level can be counted as a five wave Minor wave 1: 936-946-920-928-904. From today’s oversold levels we would now get a rally, Minor wave 2, back to the previous 4th wave (928), or even challenge the 935 OEW pivot. This should generate an overbought short term momentum reading before the market turns over and enters a declining Minor wave 3. The 935 OEW pivot should act as significant resistance during this rally. Should the market break through this resistance then some other wave count is at work. Should the market break below SPX 904 before rallying above 920, then Minor wave 1 would be extending.”