Weekend Outlook 05/05/2013

It has been quite a ride for the last several weeks, with the market making both sharp moves higher, and lower. These moves were difficult to decipher at first, having followed the more straight forward trends that had been in place since the 1074.77 low back in October 2011. A couple of weeks ago I identified the sub-wave structure from that low as a series of nested inverted corrective waves. These are denoted on the Daily chart as a series of 1’s, followed by A’s. In a normal wave sequence, you would have a 5 wave impulse sequence, numbered 1 through 5, followed by a 5 wave corrective sequence, which I letter with A through E. In a sequence with an inverted corrective wave, you have a 5 wave impulse sequence to form Wave 1, followed by a counter-trend Wave A. Wave B then forms a 5 wave sequence that exceeds Wave 1. Waves C, D, and E then complete in either a “zig-zag” fashion from Wave B, or with Wave D exceeding Wave B. Wave E will not exceed Wave A.

From 1074.77 you can see Wave 1 completes at 1292.66, and is followed by Wave A at 1158.66. Wave B then forms a 5 wave sequence that does not complete until 1597.35. Wave 1 of that sequence, which is the move from 1158.66 to 1422.38, also contains an inverted corrective wave. As you can see on the Daily chart, several of these waves formed from 1074.77 to 1426.19. The SPX has been in the process of completing these inverted corrective waves since it hit 1530.94 back in February. This explains the series of three waves up, followed by three waves down that have occurred since that point. On Wednesday the SPX completed Wave 2 of the largest degree sequence which began with the 1074.77 low. Once this sequence completes, we could finally see a meaningful correction.

It felt like a roller-coaster ride this week. The SPX spiked up 14 points on Monday, completing a 20 point rally that started the previous Friday. That spike was promptly followed by a 10 point sell-off Monday afternoon into Tuesday. By Tuesday’s close, however, the index had gained back that entire loss, and then some. Wednesday saw another sell-off, with the SPX dropping 16 points. Once again, the loss did not last long, as the SPX recovered on Thursday, hitting another all-time high. On Friday the market was sharply higher again, with the SPX making still another all-time high, smashing through the 1600 barrier, and hitting 1618.46.

Wednesday’s 1581.28 completed Wave 2 from 1074.77, and Wave 3 of that sequence may have ended on Friday. From here I would expect a drop to 1599, followed by a move to 1630 to complete the sequence. Once that sequence is completed, there are several scenarios that may play out. None of these involve this being the end of this bull market.

I am continuing to count the move from 666.79 to 1370.58 as a complete 5 wave sequence. If that count holds true, 1074.77 would remain Wave A of an inverted corrective wave, and 1630 Wave B.  The inverted corrective wave should then complete for Wave 2 from 666.79. We would then see Waves 3, 4, and 5 to complete the entire sequence from 666.79 before this bull market ends. There are variations of this theme that are possible, but elucidating on them is best left as they arise. Should the current wave end at 1630, support for this correction should be near 1545.

Most of the scenarios that I foresee would keep that 1545 level as support. There is one scenario, however, that does point to sharply lower prices. My original count had the rise from 666.79 to 1219.80 as a complete 5 Wave sequence, and I have been leaning back to that count as of late. I then had the move from 1010.91 to 1370.58 as a separate 5 Wave sequence. With this count 1219.80 would be Wave 1, with the correction to 1010.91 as Wave A of an inverted corrective wave. 1370.58 would then be Wave B, 1074.77 Wave C, and 1630, or the upcoming top, to be Wave D. This would mean that Wave E would need to complete below 1245. This would complete Wave 2 from 666.79, with Waves 3, 4, and 5 left to the upside. Admittedly this seems like a low probability, but after the run-up we have seen, and with sentiment so high, I think it is worth keeping in mind.

For now I will continue to take this market one step at a time, and not try to get too far ahead of it. I think we see a correction to around 1599, followed by one mare rally to 1630. After that I would expect some sort of correction, with support at 1545.

Thank you.