Last Week's Market

 

After completing a five wave corrective sequence on Monday, the market moved higher into Wednesday, temporarily topping out at 1399.42. Most of Wednesday was spent developing another corrective sequence, which was completed by that afternoon. From that point the market moved higher once again, ending the week at 1405.24. We discussed our very short term outlook in Friday’s post, our expectations being that the market should bounce between 1400 and 1407, before making a short term low at 1394-1401. This would complete a 5 wave inverted corrective sequence from the 1366.69 low made on Monday. That low would be labeled Wave 2, with all waves from Wave 1 being relabeled as waves of one lesser degree. At this point, a move below the 1390 level would be considered negative, and could signal the end of the uptrend. At the very least we would then expect a further move to the downside.

With that low in place, we expect the market to then move higher, our target still being 1414-1421. That would complete a 5 wave sequence from the 1340.03 low, the 1074.77 low from October 2011, and the 666.79 low of March 2009. The market should then begin a 5 wave corrective sequence.

We believe the high at 1414-1421 will be a significant top. The ensuing corrective sequence could play out in a number of ways. There is a high probability that a Wave 2 such as this will be, will become a complex wave, either an inverted, or semi-inverted corrective sequence. Each of those scenarios would permit the market to move above the 1414-1421 level after a Wave 1 move down. We will discuss the possible scenarios in future posts.

Our long term outlook is still bullish. Although it may turn out to be, we do not believe this is part of a larger corrective sequence from the all time highs.

As many of you are practitioners of Elliot Wave in one incarnation or another we would like to at this point re-iterate that we are in no way trying to represent these as Elliot Wave counts. Our model is not rooted in Elliot Wave Theory, and none of our work is based on any Elliot Wave tenets. Our model is strictly based on a specific mathematical relationship between waves that manifests itself at the termination point of any given five wave sequence. Our model is designed to identify when a wave sequence is ending, and when a trend reversal is likely to occur. Our model does not determine the wave degree, nor does it give any indication as to where the next five wave sequence will terminate.

Having said that, we do not believe that the two are necessarily mutually exclusive, but rather two approaches to trying to understand one underlying phenomenon. During wave construction Elliot Wave, and the 5 Wave Model will exhibit much different wave counts. We have noticed, however, that the two do converge at important turning points. For Elliot Wave counts we will defer to Tony Caldaro, http://caldaro.wordpress.com/author/oewcaldaro/. He has elevated Elliot Wave from an art to a science, more aligned with our thought process. Tony’s track record speaks for itself, and we have great respect for the work he has done.

At the moment our two outlooks on the market seem quite different, but it is entirely possible for oncoming waves to unfold in a manner that would satisfy both approaches. The real value may be in examining the future implications of each, perhaps giving a clearer understanding of what may be in store, and giving a means of recognizing trend reversal points as they occur.

Take, for example, our current outlooks. Both are indicating an imminent trend change, the only difference being the degree of that trend change. Our model allows for both an inverted, and a semi-inverted, corrective eave. Either of these could result in a wave structure that conforms to both Tony’s OEW count, and our 5 Wave Model. However this wave progresses, we trust that our model will identify the key turning points.

Friday's Market

In Thursday’s post we stated the afternoon’s low of 1398.82 marked the termination point of a corrective Wave 2, and that we should see the market move higher on Friday. We didn’t have to wait long for confirmation of that call, with the market gapping up at the open, and hitting 1405.82 in the first half hour. After that, however, the market turned lower, eventually dropping below yesterday’s close, before turning higher once again. The market made steady, if not spectacular, progress into the afternoon, and completed a 5 wave high from the 1398.82 low at 1405.88. The market then moved lower into the close, possibly completing 4 waves of a 5 wave sequence before closing at 1404.17. For the day the SPX was +1.57, or +0.11%.

It appears that the choppiness of Friday’s session may carry into Monday, at least at the outset. It does not appear that we have completed a 5 wave sequence from the 1405.88 high on Friday. A move back down to the 1400-1401 level would complete that sequence. That would complete Wave 4 on the 30 Minute chart. Given that 4 wave structure, Wave 5 would project to about 1407. As labeled, this should be Wave 5, but it does not satisfy our model’s criteria for a 5 wave sequence. A move down from that 1407 level to 1394-1401 would meet the criteria for a 5 wave inverted correction from the 1374.76 Wave 1 high. Waves 2, 3, 4, and 5 would then be re-labeled Waves 1, 2, 3, and 4. The ensuing move to 1394-1401 would then be Wave 5, and Wave 2. Once we reach that level, we can begin moving back up to our target range of 1414-1421 for Waves 3, 4, and 5. That will complete the 5 wave sequence from the 666 March 2009, and begin a 5 wave corrective sequence.

A lot of information I know. To summarize, we are looking for a move down at Monday’s opening to 1400-1401, a move back up to 1407, and then one final move down to 1394-1401. From there we look for a last move up for this rally to the 1414-1421 level.

We are already in the topping range for the 5 wave sequence from 666, and are only waiting for the last few minor waves to complete, so we urge caution.

Thursday's Market - How Much Higher?

With the SPX completing Wave 4 yesterday afternoon, we were looking for a move higher today. The initial move up from those lows yesterday afternoon turned out to be the first wave of this move up. The market did move higher initially, hitting 1396.61 in the first half hour, before turning lower. There was some choppiness during the morning, as the market formed an inverted corrective wave from that initial move, completing that at 1393.74. From there the market turned higher once again, completing Wave 3 at 1398.76, just shy of the Wave 3 high of 1399.42. A short pullback to 1395.37 formed Wave 4. From there we were looking for a projected move to the 1400.5-1402.5 level for Wave 5. During the midday hours the SPX hit 1402.35, completing Wave 5.

From that high we moved lower once again to 1398.82. This completed a 5 wave sequence which would either become Wave 2, Wave 1 of an inverted corrective wave, or possibly Wave 1 of a larger corrective wave. From that point the market moved higher again into the close, finishing the day at 1402.60. The move above the Wave 1 high of 1402.35 indicates 1398.82 would be the low of this minor correction, and we would be looking for another move higher. The move today puts us well within striking distance of our target range.

In the very near term we are in Wave 2 or 3 of the move from 1389.97. This wave should complete all higher degree waves from the 666 low.

In the short term we are in Wave 5 of the rally from 1340.03. Our target for this wave is 1414-1429.

Medium term we are in Wave 5 of the 1074.77 low. This wave should terminate between 1398 and 1428.

Long term, again, we are in Wave 5 from the 666.79 lows of March 2009. Our target for this wave has been 1378 to 1421.

Looking at the market from the 1340.03 low, we are in Wave 5, which we project to terminate between 1414.45 -1429.92. As we move deeper into this wave, we should be able to narrow our projection. Our projection for the top from the March 2009 low remains 1378.79-1421.75, exactly where we sit now, the current wave should terminate in the range of 1414.45-1421.75.

Our wave count from the 1074.77 low has been troublesome since the initial reaction to the 1378.04 high. That reaction was not as we anticipated, and we have been unable to identify a future scenario that would satisfy our model given our current wave counts. That, plus the fact that the current wave, and the 5 wave sequence from the 666 low, are both converging on the same point, makes it obvious to us that we have erred, either missing a wave, or misinterpreting a wave. We have identified a wave structure from the 1074.77 low, which would also project into the same level. The range for that count would be 1398-1428, exactly what we would expect. At this point that seems a more reasonable count. We are continuing to re-evaluate that wave to understand the minor waves, and the complete structure of the wave.

However, we are still quite convinced that we in the range of a major top, with the completion of a 5 wave structure from the March 2009 low of 666.79 imminent. All wave degrees are converging on the same point, giving us confidence on this viewpoint. With only minor waves left to complete, it looks like this major wave will top between 1414 and 1421. From there we can expect a major move down to begin the next wave 2.