Another Move Down?

As of Tuesday’s close, we said the market had completed a 5 wave sequence from the 1419 high at 1412, with a rebound expected. If that rebound failed to carry above 1419, and then broke through 1412, we could expect another sequence to the downside.

Wednesday the market opened slightly lower, actually moving wave 5 within our model threshold, falling to 1411.65. From there the market tried to stage a rebound, rising to 1413.65. The rebound was short lived, and the SPX quickly fell back below 1412. That was our signal that the market was headed lower, and head lower it did. By 11:00AM the market had fallen to 1406, and by noon had fallen below 1400, hitting 1398 before trying to move higher. The index made it back above 1400, to 1402, before dropping once again, hitting the low of the day by 2:30PM at 1397.20. At that point the buyers took over, pushing the SPX back to 1405.67. The index dipped slightly into the close, finishing at 1405.54.

With the initial low of the day at 1411.65, the market completed Wave 1. The small rebound from there became Wave 2, with the drop to 1406 forming Wave 3. The move up to 1408, followed by the another move down to 1398, formed Waves 4, and 5, completing a 5 wave sequence from 1419.

From 1398 the market rose to 1402 in a 5 wave sequence, and followed that up with a 5 wave sequence terminating at 1397. Moving back below a wave 5 low usually signals another move down, but once the market surpassed 1402, it became clear the market was in the process of forming a semi-inverted corrective wave. Our target for this wave would be 1404-1406.5, exactly where we closed today. Should the SPX rise above our upper bound of 1406.5, our analysis of an inverted corrective wave in progress would most likely be wrong, and we could expect the rebound from 1397 to continue. A drop below 1401 would confirm our analysis, and we can expect another move lower, with another 5 wave sequence needing to be completed.

Tuesday's Market

The market continued yesterday’s strong move to the upside at the opening this morning. Within the first half hour the SPX hit what would prove to be the high for the day at 1419.15. From there the market worked its way lower to 1415 where it found some support. Failing to hit a new intraday high, the market made it to 1418, and then moved down once again to the 1415 level. The market tried one more time to move higher, but as it neared 1418 for the second time, it once again reversed course. This time the market came under some selling pressure, breaking through 1415. The selling accelerated into the close, with the index closing the day at 1412.52, slightly off its low of 1411.92.

Yesterday we said it appeared the index was forming an inverted corrective wave from the 1399 high, and that we were watching the 1421 level, as that would complete a 5 wave sequence from the 666 low. As it turned out, the SPX actually formed a straight forward 5 wave sequence from the 1387 low. The 5 waves turned out to be 1387-1399, 1399-1397, 1397-1409, 1409-1408, and 1408-1419. This yielded a model value of .9965, well above our .99 threshold.

While we set our target at 1421, that was the high end of our range. The 1419.35 high gives a model value of .9962. It would appear at this point that 1419 completes a 5 wave sequence from the 666 low.

From today’s high of 1419.35, the market completed a 5 wave sequence 1411.92. The expectation now would be to see a rebound from that level. Should we fail to get above 1419, and then break 1412, we would be headed for another sequence down.

When You're Wrong You're Wrong

Over the weekend we said we believed 1399 marked the high of wave 2 of a larger correction from the 1414 high, and that a move above 1399 would invalidate that count. We didn’t have to wait long for us to be proven wrong, as the market opened above that level, and continued to move higher throughout the day.

It would now appear that 1399 was a wave 1 of a larger move to the upside. The slight pullback on Friday turned out to be wave 1 of an inverted corrective wave, with wave 2 occurring at the opening today. That wave carried the market to 1412 before pulling back slightly for wave 3. Wave 4 is in progress now, with another small pullback of three to five points expected for Wave 5. That would complete wave 2 of the move from 1386, and waves 3, 4, and 5 should follow.

So now that we have made new highs for this move, it would be easy to jump into the bullish camp. In our analysis we see one more hurdle for the market to clear before we turn bullish. If we reconsider 1378 as the completion of a 5 wave sequence from the 666 low, there is a possibility of completing another 5 wave sequence slightly above where the market is today.

Using 1378 as the termination point of wave 1, the 1340 low could conceivably be wave 2. 1414 becomes wave 3, 1387 wave 4, giving us a projection for wave 5 around 1421. If the market complete a 5 wave sequence from 1387 in the neighborhood of 1421, that would complete a 5 wave sequence from the 666 low. From there we could expect another move to the downside.

Should the market move above that level, the next most likely scenario would be 1378 as the termination point of wave 1, with the drop to 1340 wave 1 of an inverted corrective wave. The move to 1414 and the subsequent drop to 1387 would be waves 2 and three of that corrective wave sequence, putting us now in wave 4. If that scenario plays out we would see another small correction after wave 5, followed by waves 3, 4, and 5 from the 666 low. This would be a very bullish scenario.

For now we will let this wave play out, keeping a close on 1421. The market should let us know where it’s heading from there. In the short term, we would expect the market to move above the current 1416 level.