Friday's Market 06/29/12

On Thursday, after a steep decline to start the day, the SPX hit the 1313 support, and then started to rally. The previous 5 wave sequence from 1334 broke down into 5 sub-waves, with the impulsive waves diminishing in length. This usually signals an impulsive move in the opposite direction is imminent. The initial move of this rally took the market to 1318.71, which surpassed the previous wave 4 high of 1317.54. This normally confirms the change in trend. The SPX then rallied into the close, nearly reaching 1330.

The rally continued at the open on Friday, with the SPX opening significantly higher. This gap opening was part of an inverted corrective wave 2 from Thursday’s 1313 low. The market continued higher, nearly reaching 1356, and then traded in a narrow up-sloping trading range until hitting 1358.41, right at the 1358 resistance line. After dropping a couple of points to 1356, the SPX moved higher into the close, topping at 1361.63.

Although I had remained bullish as the market was on the verge of breaking down, I have mentioned that the short term waves were a bit confusing. Much of that confusion cleared up today when the SPX hit 1361.63. The market has now formed a clear 5 wave sequence from 1309 to today’s 1362 high. I believe this completes wave 3 from 1307. The fact that the market did not take out the previous high of 1363 is not troublesome, in my view, due to it being part of an inverted corrective wave.

Even though the recent market action was cleared up with Friday’s move, the entire move from 1267 still leaves us with several resolutions. I continue to see this as wave 3 from that level, with wave 3 of 3 completing today. My target for wave 3 has been 1393, and that is still a possibility. However, given the current wave structure, the SPX would have to undergo another rather lengthy correction, back down near 1313, which seems unlikely, for that scenario to play out. Last weekend, I mentioned a secondary target for wave 3 of near 1475. This scenario would require a much smaller correction, which seems more reasonable. The maximum length of this corrective wave would bring the market back down to near 1335. This correction could be much smaller, but given the diminishing impulsive wave lengths from the recent 1313 low, a break below wave 4, at 1356, could trigger a larger correction, with support being near 1345.

One other possibility assumes that my counts to this point have not been correct. The SPX is in a zone that would complete a 5 wave sequence from 1267, and probably mark the end of this entire uptrend. This would require the move from 1306.62 to 1363.46 to be counted as a 5 wave sequence, something that I do not see. It is a possibility, so it deserves a mention. The current move to 1362 would be wave 5 of this sequence. A move above 1365 would nullify this scenario.

I will go into all of this in more detail over the weekend.