Yesterday we discussed a possible count that would make 1328 the completion of a 5 wave sequence from 1347, and wave 1 of a larger sequence from that point. We suggested that if the bounce off that low to 1334 were wave 2, we could expect the ensuing waves 3, 4, and 5 to play out something like 1317.40-1325.20-1311, with 1311 being our optimal target from the 1415 high.
1334 turned out not to be the end of wave 2, with the market rallying at the open to 1341.78, and in the process moving above 1340.54, confirming the possible count from yesterday. Despite what looked again like a pretty impressive rally, the market quickly reversed course, and headed to the downside. A drop to 1331was followed by a small bounce, and the another move down to 1327. Once again the market bounced, then fell once again until it hit 1326. This completed a 5 wave sequence from the morning’s 1342 high, and wave 5 from 1347. Interestingly, had this drop started at yesterday’s 1334, it would have taken the market to 1317.80, very close to the price we discussed yesterday.
The market attempted to rally from there, but made it only to 1331 before moving lower still. The SPX continued down into the close, reaching 1324.79. This number is significant in that the SPX is now below 1325, and within the range we have been targeting as the termination point from the 1415 high.
While the market has reached the target level from that high, it has not yet reached the target range from 1347, nor 1342, which for both are at the 1319-1320 range. Ideally we would like to see the market hit those levels, reaching the target from 1415 would be sufficient to call this the bottom. We have noticed that when the market closes very close to a target level, but not quite within it, it turns out to be a termination point. That may well be the case here.
The move from 1342 appears as some sort of triangle, with a move to the lower trend line of that triangle bringing the market within both of the above target ranges. These triangle formations can turn into rather extended formations, completing one 5 wave sequence, which turns into wave 1 of another sequence, which forms in ever smaller ranges. Until we break through those trend lines, we can assume that scenario is in play. By our current count, a move above 1331 would mean that all the waves from 1415 have been completed.
We do, however, continue to believe that this is only wave 3 from the 1422 high. We do expect a substantial rally from this point, but it would only be wave 4, and should not surpass the 1422 high. This rally should be followed by another move to new lows. Again, with our current wave counts, the less pronounce the rally, the lower wave 5 will carry. The best case scenario is a move back near 1400, which would be followed by a low only slightly below the current one. Should we see a short-lived rally, wave 5 will project much lower.
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