Yesterday we said we thought we were at, or near a 5 wave sequence high from 1292, and we would expect a lower opening. Instead, the rally from Monday carried over into today’s open, and the market moved higher, to 1319, still within our target range. At that point we did see our pullback, and when the market moved above 1319, another 5 wave sequence to the upside was confirmed. The rally appeared as strong today as it did yesterday, as the market quickly moved up to 1328, which completed the 5 wave sequence.
Things went south from there, with the SPX dropping to 1320, and then bounced around between 1320, and 1325. However, 1320 couldn’t hold, and the market fell to 1310, before staging an almost seven point rally into the close.
In yesterday’s recap we said we expected 1323 to prove a resistance level. The range for that level was 1320-1328, exactly where the market stopped, both at the top, and on its way down.
We see 1328 as the termination point of a 5 wave sequence from 1392. The move down to 1319.82 was a 5 wave sequence, as were the moves from 1319.82 to 1324.94, 1324.94 to 1319.92, and1319.92 to 1324.89. From there the market formed a 5 wave sequence at 1317, which then became wave 1 of a sequence that terminated at 1310.04. As of now we do not see the completion of a 5 wave sequence from 1328, to 1310. In fact, we see something quite different than a mere corrective wave from 1328. We see 1328-1320 as wave 1 down, followed by wave 1 of an inverted corrective wave 2, which terminated at 1324.94. The move to 1319.92 was another wave 1 of lesser degree, again followed by wave 1 of an inverted corrective wave 2, which terminated at 1324.89. These wave structures do not end well, usually indicating a sharp move in the direction of the underlying trend, which is down.
The wave from 1370 to 1077 had a very similar structure, and we’ve included a chart for comparison. This is normally how these waves play out, with a sharp move, followed by increased volatility as the waves resolve themselves. I am not comparing the magnitude of the move, only the structure of the wave.
At the moment, if this plays out as we’ve lain out; we would expect the lower limit of this move to be 1280. Over the weekend I posted a possibility of the market rallying to 1322 from current levels, then move down in wave 3 from 1422 into the 1276-1238 range, followed to a move to 1238-1164 after wave 4. Right now that appears to be the track we are on.
Of course, we have been wrong before, and we will be wrong again, but we see this as the most probable scenario given the current wave structure. 1328 now becomes a critical level. If we can surpass that, this scenario would be eliminated, with higher prices expected as the market completes another 5 wave sequence to the upside.
There is some hope for this scenario. After wave 1 from 1328 terminated, the market trade between 1320, and 1325. There were three moves to the upside, and this 5 wave sequence which almost, but did not quite, meet our criteria. Had it met our criteria, it would have qualified as an inverted corrective wave itself. From that termination point, there is a count from 1328 that almost, but again, just doesn’t quite, meet our criteria. That’s why, for the moment, we prefer the first scenario. A move above 1328 would make this second scenario valid.
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