Wednesday's Market 08/22/12

The market opened slightly lower, and soon the selling accelerated bringing the SPX down to 1408.51 after a few minutes of trading. The market then moved higher, rallying back to 1413. The market sold off again, this time falling to 1408. After another rally to 1410, the market fell to the low of the day at 1406.78. The market then rallied in stair step fashion through the afternoon, first to 1408, then 1410, followed by 1413, until reaching the high of the day at 1416. The market then fell slightly, back to 1413 near the close.

 

Yesterday the market completed a 5 wave sequence to the downside after hitting a new uptrend high at 1426.68. This morning the market completed another sequence from 1427, forming a contracting wavelength sequence. As I have noted in the past, this is generally a signal of a strong move in the opposite direction, and this was no exception, with the market rallying just less than ten points from the low. This rally unfolded in a 5 wave sequence, which terminated at 1416.12.

 

Today’s low of 1406.78 seems to complete wave 5 of the inverted corrective wave 4 from 1267. We should now be in wave 5 from that low. The rally to 1416 satisfies my model for wave 5, which fits the failed wave 5 scenario I mentioned yesterday. The upside limit for this wave could still carry the SPX higher from here, most probably taking out the 1426 uptrend high, and possibly higher. I do not see this wave making it up to my next target level of 1497.

 

Once wave 5 has completed, we can start looking at the downside potential for the corrective wave. As I see this as the completion of wave 3 from 1267, there are still possibilities for the market to continue higher. Wave 2 of this sequence was not a complex corrective wave, so the odds favor wave 4 being complex. This could mean an inverted corrective wave, which would only require a minor correction. I will discuss this further as the wave develops.