Weekend Outlook 05/04/2014

The SPX entered Monday trying to halt the sell-off from the previous week.  At the outset it looked as if it was going to do just that, staging an early morning rally to 1877. The rally ended there, with the SPX moving to a new short term low at 1850.61. That also marked the low for the week, as the index rallied sharply from that point, making it all the way back to 1873 near Monday’s close. The rally continued into Tuesday, with the SPX moving up to 1880.60. After a small pullback to 1872.69, the index drifted mostly higher through the week, topping out at 1891.33 on Friday.

From Monday’s 1850.61 low, it appears the SPX completed a simple 5 wave sequence as 1880.60-1872.69-1888.59-1879.96-1891.33. The completion of this sequence at 1891.33 opens the possibility for several longer term counts, which I will try to expand upon one by one.

I will start with the count I have been carrying for some time. This count has the SPX completing the first three waves of a 5 wave sequence from the October 2011 1074.77 low as 1292.66-1158.66-1422.38. The fourth wave of this sequence was an inverted corrective wave that completed as 1266.74-1474.51-1343.35-1687.18-1560.33. Since 1560.33 I have been waiting for a 5 wave sequence to complete, which would complete the entire sequence from 1074.77

From 1560.33, the SPX completed the first wave at 1709.36. Wave 2 was an inverted corrective wave that played out as 1639.43-1669.51-1627.47-1729.86-1646.47. A sequence then completed at 1850.84, and was followed by a sequence down to 1737.92. These may have been waves 3, and 4 from 1560.33, and would project a minimum target for Wave 5 of 1957, with an optimal target of 2001. In this scenario Wave 1 of 5 completed at 1882.35, and was followed by three waves down, which would likely be Waves A, B, and C of an inverted corrective wave. If the SPX holds above the recent 1850.61 low, this would be the most likely scenario, but cannot be ruled out unless the index falls below 1814.36. This count has held up pretty reliably for some time, and given the nature of this market I would be reluctant to discard it unless there is more confirmation to the contrary.

The second count is the same as the above until the SPX reaches 1850.84. The move from 1850.84 to 1814.36, 1737.92-1882.35-1837.49-1872.53-1814.36, can be counted as an inverted corrective wave. This would make 1850.84 only Wave 1 of 3 of 5 from 1560.33, and the move to 1814.36 Wave 2 of 3. It is then possible that Wave 3 from 1560.33 completed this week as 1850.84-1814.36-1884.89-1850.61-1891.33. This would mean the index would need to complete Wave 4 to the downside and Wave 5 to the upside before completing the sequence from 1560.33, and from 1074.77. The target for Wave 4 would be first 1849, and then 1775. Wave 5 would then be longer than Wave 3, which was about 245 points.  Whereas the first scenario I outlined would indicate higher prices from current levels, the second would indicate a further pullback before prices advance again.

The third scenario requires a slightly different count from the 1074.77. In this count 1292.66 as Wave 1, but then has 1158.66 as Wave A of an inverted corrective wave. 1422.38 would then be Wave 1 of B, which was followed by the same inverted corrective wave as discussed previously as 1266.74-1474.51-1343.35-1687.18-1560.33 to complete Wave 2 of B. Waves 3, 4, and 5 then completed as 1709.67-1627.47-1729.86. This would have completed Wave B from 1292.66, with Waves C, D, and E completing as 1646.47-1850.84-1814.36, and thus completing Wave 2 from 1074.77. Waves 3, 4, and 5 would then have completed as 1884.89-1850.61-1891.33. This would mean that the sequence from 1074.77 completed on Friday at 1891.33. Again, I would be looking for some confirmation before becoming convinced of this scenario.

Given these three scenarios, it is likely that the SPX will continue higher, possibly to at least 1957, although this pullback may continue a little longer. 1850 seems like an important level to watch.