Have we had 'the pause that refreshes' the SP500??

The past week/two weeks has seen largely consolidative price action as the market has geared itself up for some heavy news and data releases. The main event of course is this week's FOMC with the results due this Wednesday with the likely announcement of the details of the next bout of 'Quantitative Easing'. There is also the mid-term elections, although I think this will probably have limited market impact, more importantly we have some major data including the ISMs and the key employment data.

The strong rally in equities and the large sell-off in the the USD over the past two months has been largely on expectations of further easing actions by the FED. Last week was volatile but never went anywhere, despite ranging from 1171 to 1196 the actual closing levels on all of last week's days was within a tiny 4 point range of 1182 to 1186. The question for many is whether this has merely been corrective consolidation, or part of a topping process. My favoured view at this stage is that we are still within a bull run, and that the past week or two has been part of a consolidation that may be close to running its course, or may still have further to go, particularly if the reaction to this week's news sees a 'buy the rumour, sell the fact' reaction. I do not believe we are in a topping process, though one can not rule this out, though I do think the market will eventually top-out, probably sometime next year from somewhere in the mid to upper 1200s or maybe even a touch higher. I think it will take a failure of QE2 to ignite that, and if that occurs it is unlikely to be well into next year. The main features of the SP500 currently, are a strong rising trend, however some waning of momentum which could be suggestive of a deeper or more pronounced correction still to come, and also some hesitancy now that the SP500 has entered the consolidation zone from April of this year. (See chart below). I see three potential scenarios playing out here:

• The first one sees a very favourable reaction to the QE news, and a surge through the April highs over the remainder of November.
• The second scenario, is a 'buy the rumour, sell the fact' reaction. Possibly with the 'sell the fact' coming after Friday's payroll report and the following week. This sees a deeper correction possibly to 1130/40 maybe even lower on a spike, before basing then moving back towards the recent high, before eventually making a strong bull run in early 2011.
• Scenario three, would see the 'buy the rumour, sell the fact reaction', which is part of a major top, and is the start of a much deeper sell-off back to at least the summer lows. 

Scenario 3 is in my opinion the least likely, whilst I believe scenarios 1 and 2 are probably equally likely. Scenario 2 would be very interesting as it would see some mean price action which could at first trap some bulls and then create an even bigger trap for bears....