The End of the Correction?

After the run-up on Wednesday, we were looking for a pullback today, calling for possibly a move below 1385. This was based on our analysis of the move up being part of an inverted corrective wave which terminated on Wednesday at 1385. We have been keeping an eye on a slightly different count that would make Wednesday’s 1391 opening high a wave 5 termination point. We will discuss this count further in a moment, but for now we’ll take a look at Thursday’s action.

The market opened slightly lower, but very quickly reversed course, rising to 1393, and moving above the high from Wednesday. We now believe this completed a 5 wave sequence from Wednesday’s 1385 low. After correcting slightly to 1390, the market turned higher once again, hitting 1393.52, pulled back to 1392, and then turned markedly higher. Closing in on 1398, the SPX completed another sequence from 1385, but barely paused as it continued higher, eventually topping at 1402.09. This completed yet another sequence from 1385. The market pulled back towards the close, falling just below 1400, and closing at 1399.98.

Yesterday we said we saw a 5 wave sequence from 1358.79 being completed at 1391.37. However we were keeping an eye on a concurrent count that pointed to 1390.81 being the 5 wave termination point from. These two counts seemed to be converging on the same point, but today’s action makes it clear that 1390.81 is the correct termination point. The waves for this count would be 1358.79-1365.79, 1365.79-1361.91, 1361.91-1375.57, 1375.57-1367.86, and 1367.86-1390.81.

So now, if we look at the wave structure from the 1357.38 low, we count a five wave sequence back up to 1388.13. From there the SPX formed a semi-inverted corrective wave, bringing the Index back down to 1358.79. Up to this point, we continually stated that we did not count a 5 wave sequence from 1358 -1393, and we did not see the correction as being over. We remarked at the time that holding above the 1357 level may prove to be important, and first suggested a semi-inverted corrective wave having formed. We called for a move slightly above the 1388 high for wave 3 of this sequence. As we stated earlier we now consider 1390.81 the termination point of wave 3. The slight pullback to 1385 was wave 4, and today’s action to 1402.09 should complete wave 5. We now have a 5 wave sequence having been completed, and would now expect the down trend from 1422 to continue.

Should we move back down below 1385, and then break into higher ground, it would appear that the move from 1357 to 1402 was only wave 1 of a move much higher. We expect the market to continue lower from this point, but we will keep an eye on those levels for indications that the correction is over.

Wednesday's Market

Yesterday we said we had completed waves 1 and 2 from the 1359 low, and that we should see a move higher. With the earnings news from Apple, that was a no-brainer. The market opened much higher, hitting 1390.81 in the first half hour. From there the market consolidated, moving lower to 1385 just before 1:00pm. From there the market moved to 1390, pulled back, hit a new intra-day high at 1391.01, pulled back again, and then hit the high of the day at 1391.37. The market spent the last hour trading in a narrow range from that high, down to 1388.

By our count, the action from Tuesday’s 1375.57 high was an inverted corrective wave 2 which terminated Wednesday at 1384.78. From there the market completed waves, 3, 4, and 5 at 1391.01, 1386.30, and 1391.37 respectively. This completed the 5 wave sequence from 1359 slightly above 1388.13 as we discussed might be the case in yesterday’s update. This leaves intact our count from the 1357.38 low as wave 1 terminating at 1388, a semi-inverted corrective wave 2 ending at 1358.79, and now wave 3 terminating at 1391.37.

If this count is correct, we can expect a move lower from here, with the market most likely moving below 1385, and then moving back above, 1391.37. This would complete the 5 wave sequence from 1357, and pave the way for the move down from 1422 to finally continue. Should the market fail to move below 1385, the projected wave 5 high would be above 1422, perhaps signaling the correction is over. At the moment we would expect wave 4 to bottom back near the 1360 level, which would project a high slightly above today’s 1391.37. This would keep the action nicely within the current trading range, and satisfy our model.

The current move could possibly extend slightly higher, so we would need a move back above 1422 to invalidate this count.

Tuesday's Market

From Monday’s 1359 low, we identified a 5 wave sequence terminating at 1368, and stated a move above that level would signal another sequence to the upside. Within the first few minutes of trading we were through that level, initialing hitting 1370, and after a small pullback, the market moved to 1371.

That level marked the end of another 5 wave sequence from the 1359 low, but the market was not done yet. After correcting to 1369, the SPX gathered steam and surged to 1375. The ensuing corrective wave was choppy, but the market eventually continued higher, hitting 1375.57, and completing another 5 wave sequence from 1359.

From that high, the market turned lower, spending most of the afternoon giving back almost all of the day’s gains. By the time the 5 wave sequence from 1375 was over, the market had fallen back to 1368.

The market moved higher towards the close, completing a 5 wave sequence at 1373, before dropping to 1371 into the close.

From here we looking at first the 1372.65 level to signal a move higher, and if we move above 1375.57, we could be looking at another run back towards 1400. We mentioned yesterday that it was interesting that the market held above the 1357 low, and that could mean that the corrective wave from that level was not yet over. The wave structure of this correction has been puzzling, with the market forming three identifiable waves from that level, but we could not identify a 5 wave structure. It now appears that the drop to 1359 may have been wave 5 of a semi inverted corrective wave from 1388. Should this turn out to be the case, we could expect first a 5 wave sequence carrying above 1388 for wave 3, a corrective wave 4, and then one more sequence higher to complete wave 5 of the corrective sequence from 1357. Should we break through 1357, we would assume the corrective sequence was over, and the move down from 1422 would continue.

We still believe that 1422 will hold for awhile, and that we still have a ways to go to the downside, but that may have to wait for the moment.