Tuesday's Market 02/25/2014

The last two days have been interesting in terms of wave structure. From Monday’s 1858.71 high, the SPX dropped to 1854.69. After an inverted corrective Wave 2, the index opened lower this morning to complete Wave 3 at 1847.66. After a small bounce to 1849.94 for Wave 4, Wave 5 completed at 1843.49. The SPX was not finished moving to the downside however, as the index want on to complete a larger degree wave as 1843.49-1845.34-1840.79-1842.42-1840.19. Waves of this structure often reverse sharply after moving beyond Wave 4, which in this case was 1842.42. This was no exception, as the SPX climbed to 1847.60 once clearing that level.

After pulling back to 1843.56 the SPX continued higher, this time reaching 1852.91. The index then went into an extended pullback throughout the remainder of the day. The SPX first formed a 5 wave sequence that completed at 1845.24, and then formed an inverted corrective wave then terminated at 1845.15. From there, the index made another small move lower to 1842.43.

Looking at the wave formation from the 1840.19, the SPX formed three waves to the upside, 1847.60-1843.56-1852.91. With the subsequent move below the second wave low of 1843.56, the move from 1852.91 to 1842.43, this could be interpreted as the beginning of an inverted corrective wave, which would indicate lower prices to come. But taking into consideration the fact that the 5 wave sequence lower from 1852.91, and the inverted corrective wave that followed both completed between 1847.60 and 1843.56, the first two waves from the 1840.19 low, it opened the door to another interpretation, namely the formation of a semi-inverted corrective wave. When the small drop from 1845.15 to 1842.43 completed within my model’s parameters, this was confirmed.

Generally these formations are followed by a very sharp move in the direction of Wave 1, which in this case is up. If this interpretation is correct, I would expect the SPX to move slightly above 1855, undergo a shallow pullback, and then continue higher.

If the SPX moves below 1842.43, this interpretation is wrong, and the index should move to new short term lows. A move above 1858.71 would confirm this scenario.