Tuesday's Market

Yesterday we said we expected a sell-off on Tuesday, and we didn’t have to wait long for it to materialize, the SPX hitting the day’s low of 1397.68 within the first half hour of trading. From there the index

tried to claw its way back up to the close. From its lows, it first bounced back to 1402.52, completing Wave 1 of a corrective wave. An inverted Wave 2 was next, taking the market to 1403.92, before finishing at 1400.97. Wave 3 brought the market back to 1405.35, before giving some of it back during Wave 4, dropping to 1403.6. From there the rally continued almost to the close, bringing the market up to 1407.23. At that point our criteria for a 5 wave sequence from the 1397.68 low were met. The SPX then dipped once again in the last half hour, hitting a low of 1404.06, before closing the day at 1405.52.

It would seem that today the market completed Waves 3, and 4 of a 5 wave sequence from the 1414 high. We would project a low for this sequence at about 1393. If the market moves above 1407.23, we would need to complete another 5 wave sequence to the upside, before continuing onto Wave 5. A move above 1410 before reaching our downside target would mean 1397.68 was the low of a 5 wave sequence from 1414 that we were unable to discern. The move from that low would then be a wave 2.

1414 is still the level at which we believe a major top was put in place. If we break through that level we will have to watch the 1421 level, the upper bound of our target range for the 666 low. That would most likely mean the previous high of 1378(which was within our target range), was the actual Wave 5 top, and we have begun an inverted wave 2. For now we still feel comfortable with our current take on the market.

Wave 5 Targets Met

In Friday’s post we said we expected to move lower on Monday, looking for a target low of 1400-1401. From there we expected to see the market move higher to 1407, and then make a final low between 1394 and 1401, which would make the move from 1366.69 an inverted corrective sequence. The market did move lower at the outset today, hitting 1402.43 in the first 15 minutes. From there

the market moved higher as expected, hitting a high of 1407.16, right on our target.

The market did attempt a pullback from there moving back down to 1404.45 before moving higher once again. The failure to hit our target of 1394-1401, and the subsequent move back above the 1407.16 high, eliminated the possibility of the move from 1366.69 being an inverted corrective wave, and meant that we were indeed in wave 5 of the sequence from the 1340.03 low. That move back above 1407 was an indication that we were in a corrective sequence from the 1407.16 high. That sequence completed at 1409.70, with Waves 3, 4, and 5 quickly following, pushing the SPX to 1414.00, right at our target level for the anticipated top.

The market started to drop after hitting 1414, completing a 5 wave sequence from that top by the end of the session, closing at 1409.75. Although not visible on the 30 minute chart, at smaller time frames it appears the actual low of that 5 wave sequence was 1409.61, with what looks like an inverted correction wave developing.

An inverted corrective wave is usually indicative of a fairly sharp move in the direction of the underlying trend, which in this case is to the downside. Therefore, our expectations are for the market to experience a sell-off on Tuesday. We won’t rule out a small rebound, but we fully expect the 1414.00 high to hold. A move above the 1414.00 would necessitate a re-evaluation of the wave.

The 1414.00 level completes 5 wave sequences from 1389.97, 1340.03, 1074.77, and 666.79. We believe this completes this phase of the bull market from the March 2009 low, and expect a significant correction from here.

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.