Last Week's Market

On Friday we surpassed the previous Wave 5 high, signaling the need for another 5 wave sequence to complete. The market took out that high in the first hour, reaching the 1375 level, before drifting lower the rest of the day to close at 1370.87. 

The week started exactly as expected, with the markets moving sharply lower from the 1378 highs. After completing a 5 wave sequence at 1340, the market rebounded, also as expected. At this point we were looking for a rally, before a resumption of the downtrend. This rally has extended further than expected, however, and although the 1378 high remains intact, the current market action has caused us to re-evaluate our previous wave count to that high.

The wave from 1074-1378 unfolded has a nested wave sequence, and although we arrived at a completed wave count, it did not have the look of a completed nested wave. Normally in a nested wave, the middle of the wave is a nearly straight move in one direction, consisting of series of trend waves, and inverted corrective waves. When nearing a top, the fluctuations generally become larger, as the market completes the final waves. We did not see this happen, and there is a possibility that the market is still in a topping formation. Additionally, the top at 1378.04 fell just short of our target range. We have identified an amended wave count that allows the market to complete these larger fluctuations, and completing this wave within our target range. We still believe that we are in a topping formation, and still expect the market to undergo a significant correction in the very near future.

In the near term, the market has not yet completed the 5 wave sequence from the 1340 lows. At this point a move back up slightly above Friday’s highs to the 1375 level would complete a 5 wave sequence. That could be the start of another move down, with a move back above that level would require another 5 wave sequence to the upside.

Longer term, we now believe the 1378.04 high was the termination point of Wave 2, for the reasons discussed above. That would make the move to 1340 Wave 3, and the current move Wave 4.This count would indicate another move down to test the 1340 low for Wave 5. One, or possibly two more moves back to the 1378-1422. This would complete Waves 3, 4 and 5. This market action would be more characteristic of a nested 5 wave sequence, and complete that sequence within our original Wave 5 target range from the March 2009 lows.