Wednesday's Market 04/24/2013

After the wild swings in the market yesterday, today’s action was somewhat muted.  The SPX traded in a narrow range, in a series of higher highs, and lower lows. The action of the market today would seem to confirm my analysis from yesterday.

After falling at the open, the SPX quickly reversed and rose slightly above yesterday’s close to 1581.34, which was near my 1580 resistance level. The market pulled back after that, falling back to 1575.80. The SPX then turned higher once again, rising to 1583.00. One more pullback towards the close took the SPX down to 1577.90.

Yesterday I said the market completed a 5 Wave sequence from 1536.03 at 1579.78. I said I thought the market was still heading higher, and labeled that high as Wave 1, and the sharp drop from that high Wave 2. Wave 1of 3 to 1578.55 was next, and was followed by a 5 Wave sequence to the downside, which could have been Wave 2 of 3. I then said it was quite possible that the market would form a complex corrective wave from either the 1578.55, or 1579.78, high.

It would appear that the market did exactly that, forming a 5 Wave sequence from 1578.55 as 1578.55-1573.13-1581.34-1575.80-1583.00-1577.90. This would be an inverted corrective wave, and would complete Wave 2 of 3. I would now expect another move higher, as the SPX needs to complete Waves 3, 4, and 5 of 3. As I said yesterday, I would expect this next move to carry to 1591, perhaps as 1577.90-1587-1585-1591.

There is a negative divergence on the 60 Minute chart, with the SPX coming off very overbought levels. However, the small decline into the close took the Hourly RSI into neutral territory, while a positive divergence appeared on the 3 Minute chart, and the 15 Minute chart showed oversold levels. This could set up a move higher.

Often, after a sharp move as we saw from 1536 to 1579, the market can make several higher highs to form a 5 Wave sequence resembling a wedge. When this happens, it usually means a sharp move in the opposite direction. We can see that set-up here, as three separate highs can be counted from both the 1536.03, and 1563.03 lows. From 1536 we have the sequence 1536.03-1579.58-1573.13-1581.34-1575.80-1583.00. This has an R^2 value of only .8134, well below my model’s threshold. From 1563 we can see the sequence 1563.03-1578.55-1573.13-1581.34-1575.80-1583.00. This has an even lower R^2 value of .9685, still well below the threshold. For these reasons I would discount both of these scenarios.

It appears the SPX has now completed two waves from the 1536 low, and two waves from the 1563 low. I expect the market to next move to 1591, via 1577.90-1587-1585-1591. This scenario will hold true unless the SPX falls below 1576.90. In my view, even a breach of this level would simply mean a further correction from either the 1578.55 or 1579.78 high, as I still believe Wave D has further to go on the upside before the next move down.

Thank you.