Friday's Market

A very interesting day for the market, gapping down at the open and falling to 1348, then a strong rally up to 1366, and a drop back to 1353 at the close. As of yesterday, we had identified a wave 2 high at 1365.88, a completed 5 wave sequence to 1356.94, a completed 5 wave sequence back up to 1364.64, and an incomplete 5 wave sequence back down. The gap open, and move to the downside completed that 5 wave sequence. We count from 1364.64, 1363.01 as wave 1, 1363.55 as wave 2, 1358.9 as wave 3, 1360.52 as wave 4, and 1348.89 as wave 5. This yields a model value of .9992.

From that low of 1348.89, the market experienced a fairly sharp rally, which unfolded as a 5 wave sequence to 1360.98, and after a very minor pullback, another 5 wave sequence which took the market up to 1365.66.

Yesterday we said we thought the market was beginning to form an inverted corrective wave from 1364.64, with a 5 wave sequence having formed, and a subsequent move below that. As we noted above, we now think the move from 1364.64 to 1348.89 unfolded in a 5 wave manner. What was forming was a semi-inverted corrective wave from 1356.94. We see 1364.64 as wave 1 of this sequence, with the fall to 1348.89 as wave 2. The sequence we described above were waves 3, 4, and 5 of the sequence. These waves yield a model value of .9982.

So as we stand now, we continue to see 1373.91 as wave 4 from 1415. This puts us in wave 5. Wave 1 of 5 bottomed at 1347.75. Wave 2 was a semi-inverted corrective wave that terminated at 1365.88. Wave 1, of 3, of 5, completed yesterday at 1356.94, and another semi-inverted corrective wave 2 ended today at 1365.66.

From 1365.66 the market completed a 5 wave sequence at 1356.97, with 1361.49, 1362.73, 1358.49, and 1360.93 being the stops in between. This gives a model value of .9975. After a brief rise, another 5 wave sequence was completed, finishing at 1352.82, with a model value of .9999.

This indicates to us that the move from 1365.66 has not yet completed, and we should see lower prices from here.

I tried to become bullish today. The reaction from this morning’s sell-off was pretty impressive. The market has failed to tank despite bad news, and it appears that an ascending triangle is forming. I even have a count that would 1343.13 the termination point of a 5 wave sequence from 1415. Despite all that, the counts still look bearish in the near term. The alternate count does not break down into sub-waves very well, and the market failed to take out our 1365.88 wave 2 high. Because of this we’ll keep our outlook the same. 1374 still is the point that we would turn short term bullish, although the 1366.88 level seems to be the important one.

We’ll try to expand on this a bit over the weekend. The market has been very difficult lately, but so far our counts have held, and we see no reason to change them.

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.