The Week Ahead

The week started out on a positive note, with the SPX hitting a new high from the 1340 low, hitting 1414.This completed a 5 wave sequence from that low, with a model value of .988. From there the index moved lower towards Monday’s close, forming Wave 1 of the down move, before edging up slightly into the close to form Wave 2. We were looking for a weaker market on Tuesday, and the SPX moved sharply lower at the open, hitting the Wave 3 low at 1397. The rest of the day was spent gaining back lost ground, with the higher opening on Wednesday; Wave 4 was completed, with expectations of the market moving lower from there. After hitting 1408 in the opening minutes, the market lost ground again, nearing 1400 before turning higher. After rising to 1407, it appeared the market had completed Wave 2 of 4, indicating another move lower. That move lower came at the opening, the SPX falling to 1389 before halting the slide. The move from the 1400 Wave 1 low, to 1389, turned out to be an inverted corrective Wave 2, followed by Wave 3. After rising to 1395, the market lost ground again to 1388.73, completing the 5 wave sequence with a model value of .982. Having finished that wave, the next move was expected to be up. After a higher opening on Friday, the market dipped below the 1388.73 low, and then rallied. This wave sequence turned out to be a semi-inverted corrective wave, with the end being 1399.18 near the close trading. From there the market lost ground to 1396, before turning slightly higher at the close to finish the week at 1397.11.

We believe the 1399 high represents the top of a correction from 1388, and we should now begin a wave 3 from the 1414 high. Semi-inverted corrective waves usually indicate substantial strength in the underlying trend, which in this case is to the downside. We anticipate the market moving lower beginning on Monday, taking out the 1388 low, and continuing to the downside as it completes waves 3, 4, and 5 from the 1414 high. Only after completing the upcoming wave sequence can the market think about moving higher once again. The first point to watch will be the 1399.18 high. Our model does not allow for a move above that level after a semi-inverted corrective wave. If that level is breached, our thesis will be wrong. If that level holds, a move below 1387 will result in a sizable move to the downside.