Last Week's Market

This week was marked by increased volatility, with strong moves in both directions, but yet after a sizable drop on Tuesday, the SPX actually traded within a fairly narrow range.

Before we talk specifics about this week, we’ll first discuss our views as to where we believe the market Is at longer term. Starting from the March 2009 low on the SPX at 666.79, the market completed a 5 wave sequence, which terminated at 1422.38. We label the 5 waves as 1219.80-1010.91-1370.58-1074.77-1422.38. In our model the termination points of waves 1, 3, and 5 are correlated to specific parameters we derive from the wave structure itself. As wave 5 of a sequence completes, this correlation approaches 1.

After completing wave 5 at 1422, the market entered a corrective mode, which initially carried the SPX down to 1357.38. We expect this sequence to take on one of three basic patterns. The first would be a simple 5 wave sequence down. This would be the most bearish scenario. Second, the wave could become a semi-inverted corrective wave. This would consist of a first wave down, followed by wave 2 which would carry us above the previous 1422 high. Waves 3, 4, and 5 would then take the market below the termination point of wave 1. At the moment we view this as the most likely scenario. The third form this wave could take is an inverted corrective wave. This would be the most bullish scenario, with a small wave 1 down, an impulsive looking wave 2 carrying to new highs, a small corrective wave 3, another impulsive wave 4, and finally another short corrective wave 5.

We believe we are in wave 1 of this corrective sequence, having completed waves 1, and 2 up to this point. From 1422, the market completed a 5 wave sequence to 1378.24. 1404.62-1413.38-1392.92-1401.60-1378.24 is how we would label this. This in turn became wave 1 of a larger sequence from 1422, with 1378.24-1387.34-1365.99-1367.57-1357.38 being the termination points of the sub-waves.

Wave 2 then ensued, with wave 1 taking the market to 1388.13. A semi-inverted corrective wave 2 was next, bringing the market back down to 1358.79. Wave 3 brought the market to 1390.81, and after a short wave 4, wave 5 found the SPX at 1415.32.

1415.32 ended wave 2, and at the moment we have completed 3, and perhaps 4, waves of wave 3 from that point. Wave 1 was fairly straight forward, with stopping points at 1410.38-1412.31-1405.25-1405.81-1393.92.

After a short corrective wave 2, terminating at 1403.39, the market then began wave 3. This wave turned out to be quite complex. First, a 5 wave sequence was completed at 1388.71. Wave 2 was an inverted corrective wave, dropping the market to 1369.95, before terminating at 1372.35. Waves 3, 4, and 5 were relatively small, and wave 3 from 1415 was completed at 1367.96.

This week started with what we believe to be the completion of wave 4 from 1415. This was a semi-inverted corrective wave, playing out as 1372.41-1363.94-1371.82-1370.33-1373.91.

After completing wave 4 on Monday, the market turned lower, first tracing out a 5 wave sequence, which terminated early Tuesday at 1358.48.

in turn became wave 1 of a larger degree sequence from wave 4, with 1362.91, 1351.65, 1353.26, and 1347.75 completing that sequence.

The rest of Tuesday was spent completing a 5 wave sequence higher, in what we interpret as wave 1 of a semi-inverted corrective sequence. This brought the market back up to 1365.74.

Wednesday opened with a gap down, part of an inverted corrective wave 2 from the 1365.74 high. Once that inverted wave completed, several smaller waves completed the sequence from 1366, and wave 2 of the inverted corrective wave from 1347.75.

From that point the market rallied in a 5 wave sequence that took the market to 1363.73, and completed wave 3 of the semi-inverted wave. The market then turned lower until the close, dropping to 1354.32, to complete wave 4. The market moved sharply higher at the open on Thursday, rising to 1365.88, which completed the 5 wave semi-inverted corrective wave 2 from 1347.75. The  semi-inverted corrective wave took the form 1365.74-1343.13-1363.73-1354.32-1365.88 from 1347.75.

Having completed the corrective wave 2, the market once again turned lower, dropping quickly to 1356.94, and then recovering to 1364.64. The drop to 1357 we see as wave 1 of wave 3 of wave 5 from 1415. The recovery to 1365 turned out to be wave 1 of another semi-inverted corrective wave from 1357. From 1365, the market turned sharply lower into Thursday’s close, culminating in a gap down opening on Friday, bringing the SPX to 1348.49. This sequence, 1363.01-1363.55-1358.90-1360.52-1348.89, completed wave 2 from 1357.

After the gap down on Friday, the market staged a pretty impressive rally, moving up to first 1361, and then after a slight pause, up to 1365.66. This completed the semi-inverted corrective wave sequence from 1356.94.

Upon completing wave 2, the market immediately turned lower, and continued to move steadily lower throughout the day. 1361.49-1362.73-1358.49-1360.93-1356.97 completed a 5 wave sequence from the high.

After a short move higher, the market completed one more 5 wave sequence near the close at 1352.82.