Wednesday's Market 05/23/2012

Yesterday we outlined a double inverted corrective scenario from 1328.49, which we felt had the potential to move the market below its previous low of 1292, and possibly down to 1280. The market did open lower today, dropping below 1306 before rallying back to near 1312. This completed waves 2, and 3 of the first inverted corrective wave, which terminated with a drop to 1298, and a final rise to 1303. This also marked the end of wave 2 from 1324.94.

With this wave completed, the market moved lower once again, this time forming waves 3, 4, and 5 of that sequence in quick succession, finishing wave 2 from 1319.82 at 1296.53.

Up to this point things were going pretty much as expected. Although these types of waves can unfold in many different waves, we would normally have expected a small move higher for wave 3, followed by a larger wave 4 down, and another small move up for wave 5. Following that would be a 3-4-5 move to the downside to complete the entire sequence from 1328.49. Waves 2, and 4, are less predictive than waves 1, 3, and 5, and act like impulse waves in an inverted correction.

We did get a small move higher at this point for wave 3, but wave 4 was quite short. Wave 5 of this sequence carried the market to 1306.11. We did then see a 3-4-5 wave move down to 1300.33 to complete the 5 wave sequence from 1328. After wave 5 the market staged a strong rally, which unfolded in a neat 5 wave sequence which lifted the market to 1320.73. The SPX then faded slightly into the close, without completing a 5 wave sequence.

Although today’s move did not carry as far as we thought it might, it did play out as expected. The resultant wave structure is rather odd looking, but satisfies all the criteria of our model. There are several, make that many, counts that come close to satisfying our model, but fall short in one aspect or another. For that reason we will stick with this count unless the market says different.

The action today was interesting in several respects. First, it failed to take out its previous low. Secondly, despite an extremely strong rally into the close, it failed to move to a new high, or even make it past 1325, a point we think may be significant. One of the counts we were looking at is wave 1 from1328-1320, wave 2 from 1320-1325, and wave 3 from 1325 to 1297. The rally failing to move above 1325 keeps this count as a viable alternative, with wave 4 terminating at 1320.73. Of course the projection for that scenario is 1280, a number that seems to keep popping up.

For the moment, we see the market opening lower, having not yet completed a 5 wave sequence from 1321. From there we will be waiting t see if the market can break first 1325, and then 1328. A move above the latter would signal another sequence to the upside. We see support between 1310 and 1307, and should we break that we will watch 1300. If we also break through that we will probably be entering another sequence to the downside, with a move to new lows confirming the new downtrend. We maintain the view that 1292 completed a 5 wave sequence from 1422. From there we formed a 5 wave sequence to 1328, and what appears to be a 5 wave sequence down to 1297. From here it is a bit of a waiting game to see which way the market will break.

I do not follow the DJIA as closely as the SPX, but with the previous thought in mind, that index appears to have completed an important sequence that could offer clues as to which way the market will go. From the April high of 13297.03, that index seems to have just completed a semi-inverted corrective wave. From there the market moved lower to 12711, and then made a new high, rising to 13389. A 5 wave sequence took the index to 12792, holding above the previous low, and then rose to 12932. The index then completed a 5 wave sequence to 12312. This also is within the range for completing the semi-inverted corrective wave from 13297. These waves cannot be followed by another sequence in the same direction, and therefore signal trend changes. If the DJIA can move above 12576, we would most likely have seen the bottom. A move above 12932 would confirm this. There is still room within the range to move slightly lower, but a move higher at this point would give us reason to believe we are on our way back up.