The Week Ahead

The week started out on a positive note, with the SPX hitting a new high from the 1340 low, hitting 1414.This completed a 5 wave sequence from that low, with a model value of .988. From there the index moved lower towards Monday’s close, forming Wave 1 of the down move, before edging up slightly into the close to form Wave 2. We were looking for a weaker market on Tuesday, and the SPX moved sharply lower at the open, hitting the Wave 3 low at 1397. The rest of the day was spent gaining back lost ground, with the higher opening on Wednesday; Wave 4 was completed, with expectations of the market moving lower from there. After hitting 1408 in the opening minutes, the market lost ground again, nearing 1400 before turning higher. After rising to 1407, it appeared the market had completed Wave 2 of 4, indicating another move lower. That move lower came at the opening, the SPX falling to 1389 before halting the slide. The move from the 1400 Wave 1 low, to 1389, turned out to be an inverted corrective Wave 2, followed by Wave 3. After rising to 1395, the market lost ground again to 1388.73, completing the 5 wave sequence with a model value of .982. Having finished that wave, the next move was expected to be up. After a higher opening on Friday, the market dipped below the 1388.73 low, and then rallied. This wave sequence turned out to be a semi-inverted corrective wave, with the end being 1399.18 near the close trading. From there the market lost ground to 1396, before turning slightly higher at the close to finish the week at 1397.11.

We believe the 1399 high represents the top of a correction from 1388, and we should now begin a wave 3 from the 1414 high. Semi-inverted corrective waves usually indicate substantial strength in the underlying trend, which in this case is to the downside. We anticipate the market moving lower beginning on Monday, taking out the 1388 low, and continuing to the downside as it completes waves 3, 4, and 5 from the 1414 high. Only after completing the upcoming wave sequence can the market think about moving higher once again. The first point to watch will be the 1399.18 high. Our model does not allow for a move above that level after a semi-inverted corrective wave. If that level is breached, our thesis will be wrong. If that level holds, a move below 1387 will result in a sizable move to the downside.

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.