Tuesday's Market 09/03/2013

The day started off as expected, with the SPX gapping up at the open, and then continuing higher, stopping right at the 1651 resistance level. The index spent much of the remainder of the day giving back most of its gains. The SPX dropped steadily to 1633, and then moved higher into the close, reaching 1641 before pulling back slightly.

I had indicated in my last post that the SPX had likely completed a semi-inverted corrective wave Friday at 1628.05. This would result in a strong move higher, which occurred this morning. From that high, the SPX completed a 5 wave sequence to the downside, which completed at 1633.41. There were a couple of surprising things about today’s action, which I will now explain.

On August 16^th, I posted this chart, which outlined a likely path for the SPX:

The entire post can be found here, http://5wavemodel.blogspot.com/2013/08/fridays-market-08162013.html, but essentially showed a semi-inverted corrective wave, such as we saw on Friday, from the 1687 high. This wave would have the SPX moving lower from 1709 to either 1651 or 1621, then rally to 1685, which would be followed by a final move lower to end between 1560, and 1542. This is one of several possible scenarios, but after the appearance of the semi-inverted corrective wave on Friday, which indicated a strong possibility of a rally to the 1685 level, this scenario once again seemed most likely.

As I said, the SPX would have to rally to near the 1685 level to project a final wave to 1560-1542. Today I was looking for a move up to 1645, followed by a small pullback, which would then target 1685. The first surprise today was that the initial move carried to 1651. The next surprise was that the ensuing correction seems to have ended at 1633. If the pullback to 1633 was wave 4 from 1627, wave 5 would project to a minimum of 1693, which would exceed the limit of 1687 necessary for this larger corrective wave scenario. Given the 1651 high, this corrective wave should carry below 1632.

The SPX is now at a point of decision, and what happens here should give an indication of what is to come. If the SPX holds above 1633, and then rallies above 1651, it seems likely that the index will test the 1709 high, and surpass it. If the SPX pulls back to 1632-1628, and then rallies above 1651, I would expect a rally to 1685, and then, possibly a decline to 1560-1542. If the SPX breaks the 1627 low before getting above 1651, 1542 might be an optimistic target.

At this point I would be inclined to expect a further rally, with 1685 being a good target level. I will, however be keeping a close eye on 1627.

I believe I have pointed this out on at least one other occasion, and the larger wave structure is not exactly analogous, but the decline from 1422 in April 2012, featured a drop to 1357.38, followed by a semi-inverted corrective wave which carried the SPX back to 1415, before a precipitous drop to 1266.74.