Reversal at 1397?

Between 1397 and 1400 the SPX will complete a 5 wave sequence from the 1392 low. That will complete a 5 wave inverted corrective sequence from yesterday’s 1389 low. Inverted corrective waves are indicative of strength in the underlying trend, which in this case is to the downside. We may now be heading back in that direction.

Thursday's Market

Yesterday we said we did not believe 1397.68 would be the low of this down move, and set our short term target at 1393. Within minutes of today’s open, the SPX hit 1392.96. From there the market staged a short rally, moving up to 1396.95 before turning back down. The move unfolded in two 5 wave sequences, completing a 5 wave inverted corrective wave from the 1400.65 Wave 1 low. What we labeled as Wave 2 yesterday was in reality Wave 1 of that sequence. From 1396.95 the market turned lower, hitting a fresh low at 1389.22 to complete Wave 3. The market then staged another short rally to 1394.93 for Wave 4. One final session low at 1388.73 completed Wave 5, and Wave 5, setting the stage for a move higher. The market did move higher towards the close, hitting 1394.51 before fading into the close to finish the day at 1392.78.

Completing Wave 5 from the 1414 top now puts the market at a decision point. If the market is to move to new highs, this could be the starting point. We still feel the risk is greater to the downside. We would expect a more substantial move from the Wave 5 top. A breakdown below 1388.73 would now signal a continuation of the downtrend, with Wave 5 becoming the first wave in another 5 wave sequence.  Our outlook would not change unless we break above 1414.

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.