Weekend Outlook 11/02/2014

Six weeks ago the SPX reached an all time high of 2019.26. This week, the index traded just below that mark at 2018.19. Usually this would be described as a sideways trading range, but it felt like anything but. After hitting the all time high, the SPX embarked on the largest decline in over three years. After falling to a low of 1820.66 the index has rallied for two straight weeks, lifting the SPX back within two points of the all time high. A review of my count from the March 2009 666.79 low may put some of this recent action into perspective.

From the 666.79 low, the SPX rallied to 1219.80, forming the first wave of the current 5 wave sequence. A pullback to 1010.91 completed the second wave. The third wave took the index to 1370.58, and the fourth to 1074.77. The fifth wave was the just completed extended rally from 1074.77 to the recent all time high of 2019.26. While 5 separate waves have formed, this did not complete a 5 wave sequence, meaning that a complex corrective wave is forming. My current count from 666.79 is this:

Wave 1 – 1219.80

Wave 2 – 1010.91

Wave 3 – 1370.58

Wave A of 4 – 1074.77

Wave B of 4 – 2019.26

Wave C of 4 – 1820.66

This would put the SPX in Wave D of 4. The rest of the sequence from 666.79 may play out something like this:

Wave D of 4 – 2035

Wave E of 4 – 1930

Wave 5 – 2070

In my model, the first, third, and fifth waves of a given sequence are proportional. Wave 1 of this sequence was about 550 points and Wave 3 about 360 points. This implies that Wave 5 will have to be considerably less than 360 points. While in theory Wave C of 4 could have been longer than Wave A of 4, and thus Wave E of 4 longer still, this would not have allowed Wave 5 to reach new highs. With Waves A, C, and E of 4 becoming increasingly smaller, it does allow for a higher high. This is my working count, but by no means the only possibility. It is simply the one that fits all the data up to this point.

Looking at the 1820.66 low as Wave C of 4, I am now tracking the advance from that point. When a 5 wave sequence from that point completes, it should complete Wave D of 4. This sequence completed the first wave at 1869.00. From that point it had been forming an inverted corrective wave. As of my last post, I had identified three waves of this sequence at 1835.02-1949.31-1926.83, and given a target of between 2006 and 2021 for the fourth. Friday morning the SPX hit a high of 2017.45, within this range, and looks to have completed the fourth wave at this point. I had mentioned earlier in the week that once this wave completed I would expect a pullback of something less than 22 points. This was based on the first two pullbacks of 34, and then 22 points. The decline into Friday afternoon to 2010.77 thus could have completed Wave E of 2, and the entirety of that wave. With two waves now completed from 1820.66, I am looking for three waves higher to complete the sequence. I am currently looking for something like 2028-2019-2035.

This would complete Wave D of 4 as I discussed in my longer term count above.