Thursday's Market

We were expecting a slightly lower open today, in order to complete a 5 wave sequence from 1363.73, before possibly moving higher. Instead, it appears that 5 wave sequence terminated yesterday at 1354.32, and this morning we gapped to the upside. The market rose to 1365.88, taking out the 1365.74 high we mentioned in yesterday’s post. After shooting up to 1366, the market quickly fell back, dropping to 1357. From there the market moved higher to 1362, before falling back to 1357. The market rallied off that low, hitting 1365 before falling back. This drop continued into the close, with the SPX falling to 1355, before moving slightly higher at the close.

With the SPX moving above 1365.74, that point could no longer be wave 2 from the 1374 wave 4 high. The move from 1348 to 1366 now appears to be a semi-inverted corrective wave, a possibility we discussed in our earlier post. We expected to see a high of 1368-1369 for that wave, but that no longer seems to be the case. From 1366 it looks like the market completed a 5 wave sequence at 1357, followed by a 5 wave corrective sequence to 1365. We count another 5 wave sequence terminating at 1359, and a subsequent break of that level. This seems to point to lower prices immediately ahead, with 1365.88 the wave 2 high from 1374.

In our view the market is entering a critical juncture, and we will dispense with any speculation for the moment, and stick to what we know, or at least what we think we know.

By our count we are in wave 5 from the 1415 high. Wave 3 of this sequence was significantly longer than wave 1, and thus we expect wave 5 to be longer than wave 3.With waves 1-4 identified, we can project a low for wave 5. The minimum level for that low is 1325. The range we see for this low is quite large, which normally suggests wave 5 will terminate in a spike that could carry well below 1325.

From the wave 4 high of 1373.91, we identified wave 1 of 5 at 1347.75. From there a semi-inverted corrective wave developed, taking the market back up to 1365.88. Semi-inverted corrective waves are generally indicative of strength in the underlying trend, which in this case is to the downside. On our 60 minute chart you can see that following the semi-inverted corrective wave from 1388 to 1359, the market rose sharply to 1415.

From this afternoon’s 1365 high, we identified a 5 wave sequence to the downside, with a breach of that level after a very short bounce. This could mean an inverted corrective wave is underway, which usually manifests itself in very sharp moves, with very small intervening corrections.

All this leads us to a very bearish short-term outlook, with our target below 1325. From there we would expect a fairly significant bounce. At the moment we’ll leave it at that.

Always leaving open the possibility that we are wrong, the level to watch is 1373.91 wave 4 high. If the market moves above this level, our current counts would be incorrect, and we would be looking for a move higher. The market does seem like it wants to move higher, but in our view is just not ready. There is also the slight possibility that the semi-inverted corrective wave from 1348 has not yet completed, and will move up to our 1368-1369 target. We see this as a low probability, but possible, which is why the 1373.91 level is much more significant.

Looks Like a Semi-Inverted Corrective Wave

With the move above 1365.74, it would appear the market is forming a semi-inverted corrective wave from 1347.75. We would label 1365.74 as wave 1, 1343.13 as wave 2, 1363.73 as wave 3, and 1354.32 as wave 4. This would project wave 5 to top out at 1368-1369. This would keep the rest of the wave structures intact, and set up a final move to 1325-1331.

This would make 1373.91 the next level to watch on the upside, with a move above that requiring a different interpretation. We still believe this would be some sort of corrective wave, with another move down the most likely scenario.

Wednesday's Market

Once again the market gapped down at the open, rallied into the afternoon, then faded into the close. Today’s opening move down took the SPX to 1348, part of an inverted corrective wave 2, which terminated with the rebound to 1353. From there the market completed waves 3, 4, and 5, taking the SPX to the low of the day at 1343. This completed a 5 wave sequence from 1366, and the market quickly rebounded in what would become a quite extended 5 wave corrective sequence. Initially this brought the market back to 1351 before a slight pullback. The next leg of this wave brought the SPX back near 1360, nearly erasing the earlier losses. After pulling back to 1352, the market moved ahead for wave 5, reaching 1363.73, and completing what we believe was the corrective sequence from the day’s 1343 low. The market then turned lower, dropping first to 1358, and then 1355. After climbing back near 1360 towards the close, the market fell back once again to 1354.

Earlier today we posted an update identifying 1343 as the termination of a 5 wave sequence from 1366, and said we would look for a bounce from here. At 10:45AM on StockTwits, (http://stocktwits.com/5wavemodel), we said we were looking the bounce to terminate between 1362 and 1364. The wave completed at 1363.73. So far this market has behaved pretty much as anticipated, and we have been able to identify each turning point as they have occurred. I point this out not to pat myself on the back, or toot my own horn, but simply to demonstrate the robustness of the model. The market makes a fool of everyone eventually, and I am sure it will make a fool of me soon. But that, too, will be due to interpretation, and not the model.

With that said, although the market completed a 5 wave sequence from 1366, it has not yet satisfied our model for a 5 wave sequence from 1374, nor from 1415. Today’s move to 1343, then, should be wave 1 of a 5 wave sequence itself. We continue to target the 1331-1325 level as the eventual low from 1415.

It would be nice if the market simply plummeted to 1331, and then 1325, but the reality is that the wave structures can become quite complicated. For that reason, at this point, we will keep an eye on certain levels for clarity.

Today’s action should be waves 1 and 2 of the sequence from 1266. We see the market going lower from here, but a move above 1364 would mean this count is wrong, and we could be headed higher.

We also believe we are in wave 5 from the 1415 high. While this wave structure seems pretty clear, there is a possibility of some alternate counts. None of these counts would satisfy the parameters of our model, but they come close. Should the market surpass 1374, one of these counts may be in play, and we could see a rally.

We continue to think our current count is the best, but markets such as these can see sharp moves, and we think it best to proceed cautiously. We still see lower prices ahead, as the sequences from 1415, and 1422, have yet to be completed.