Wednesday's Market

Today we were looking for a continuation of the down move from Monday. We cited the 1407.23 high as the point from which a break above would require another 5 wave sequence up. That level was breached this morning, but did so in a way that completed a 5 wave sequence from 1397.68. From 1397.68 the sequence would be, 1407.23, 1406.86, 1405.06, and 1407.61. This played out on a very small level, but does satisfy our model.

From 1407.61 we did see a move down, more in keeping with the first move of another wave down. The market completed a sequence at 1402.28 within the first hour, and then rallied to the flat line. A second move to 1401.48, and a final drop to 1400.68 y 11:00am completed Wave 1 of Wave 5.

Most of the rest of the day was spent completing what turned out to be a rather extended corrective wave. By 11:30am the market had rallied to 1404 for Wave 1, and then pulled back to 1103. Wave 3 took the SPX up to 1406, and after a drop to 1403.75, finished the sequence at 1407.20, shortly after 3:00pm.

The market came very close to making new highs at this point, but after coming within a fraction of the day’s highs, sold off into the close. We identified a minor 5 wave termination point at 1404.70, and after a feeble attempt to bounce off that level, gapped through it to the downside. That type of move is typical of an inverted wave 2. The market finished at 1402.89, down 2.63 for the day.

With what appears to be an inverted wave 2 underway, our view is the market will continue to the downside. We do not believe the 1397.68 level will be the low of the move down from 1414. Our short term target continues to be 1393. Any type of bounce from there, coupled with a subsequent back below that level, would be extremely bearish in our view.

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.