The Week Ahead

Our current view is that we are currently in wave 3 of a corrective 5 wave sequence from 1422.38. Wave 1 completed at 1357.38, and wave 2 at 1415.32. From 1415.32 we have completed at least 3, and quite possibly 4, waves. Wave 1 terminated at 1393.92, wave 2 at 1403.39, wave 3 at 1367.96, and possibly wave 4 at 1373.91. We expect wave 5 of this sequence to drop the market below 1325, and possibly as low as 1260. The wide range suggests that this wave will culminate in a rather sharp spike down. The shorter term wave count is also quite negative in our view, with the decline most likely to come soon, and be quite volatile.

This move down would only complete wave 3 from 1422, meaning we should see a bounce off the low, and then make one more move to the downside. We anticipate a quite substantial bounce, and if one fails to materialize, it could be quite bearish.

Should the market fail to move lower at this point, and rise above 1365.88, we would assume that 1343.13 was the completion of the 5 wave sequence from 1415, and we would most likely move higher.

Last Week's Market

This week was marked by increased volatility, with strong moves in both directions, but yet after a sizable drop on Tuesday, the SPX actually traded within a fairly narrow range.

Before we talk specifics about this week, we’ll first discuss our views as to where we believe the market Is at longer term. Starting from the March 2009 low on the SPX at 666.79, the market completed a 5 wave sequence, which terminated at 1422.38. We label the 5 waves as 1219.80-1010.91-1370.58-1074.77-1422.38. In our model the termination points of waves 1, 3, and 5 are correlated to specific parameters we derive from the wave structure itself. As wave 5 of a sequence completes, this correlation approaches 1.

After completing wave 5 at 1422, the market entered a corrective mode, which initially carried the SPX down to 1357.38. We expect this sequence to take on one of three basic patterns. The first would be a simple 5 wave sequence down. This would be the most bearish scenario. Second, the wave could become a semi-inverted corrective wave. This would consist of a first wave down, followed by wave 2 which would carry us above the previous 1422 high. Waves 3, 4, and 5 would then take the market below the termination point of wave 1. At the moment we view this as the most likely scenario. The third form this wave could take is an inverted corrective wave. This would be the most bullish scenario, with a small wave 1 down, an impulsive looking wave 2 carrying to new highs, a small corrective wave 3, another impulsive wave 4, and finally another short corrective wave 5.

We believe we are in wave 1 of this corrective sequence, having completed waves 1, and 2 up to this point. From 1422, the market completed a 5 wave sequence to 1378.24. 1404.62-1413.38-1392.92-1401.60-1378.24 is how we would label this. This in turn became wave 1 of a larger sequence from 1422, with 1378.24-1387.34-1365.99-1367.57-1357.38 being the termination points of the sub-waves.

Wave 2 then ensued, with wave 1 taking the market to 1388.13. A semi-inverted corrective wave 2 was next, bringing the market back down to 1358.79. Wave 3 brought the market to 1390.81, and after a short wave 4, wave 5 found the SPX at 1415.32.

1415.32 ended wave 2, and at the moment we have completed 3, and perhaps 4, waves of wave 3 from that point. Wave 1 was fairly straight forward, with stopping points at 1410.38-1412.31-1405.25-1405.81-1393.92.

After a short corrective wave 2, terminating at 1403.39, the market then began wave 3. This wave turned out to be quite complex. First, a 5 wave sequence was completed at 1388.71. Wave 2 was an inverted corrective wave, dropping the market to 1369.95, before terminating at 1372.35. Waves 3, 4, and 5 were relatively small, and wave 3 from 1415 was completed at 1367.96.

This week started with what we believe to be the completion of wave 4 from 1415. This was a semi-inverted corrective wave, playing out as 1372.41-1363.94-1371.82-1370.33-1373.91.

After completing wave 4 on Monday, the market turned lower, first tracing out a 5 wave sequence, which terminated early Tuesday at 1358.48.

in turn became wave 1 of a larger degree sequence from wave 4, with 1362.91, 1351.65, 1353.26, and 1347.75 completing that sequence.

The rest of Tuesday was spent completing a 5 wave sequence higher, in what we interpret as wave 1 of a semi-inverted corrective sequence. This brought the market back up to 1365.74.

Wednesday opened with a gap down, part of an inverted corrective wave 2 from the 1365.74 high. Once that inverted wave completed, several smaller waves completed the sequence from 1366, and wave 2 of the inverted corrective wave from 1347.75.

From that point the market rallied in a 5 wave sequence that took the market to 1363.73, and completed wave 3 of the semi-inverted wave. The market then turned lower until the close, dropping to 1354.32, to complete wave 4. The market moved sharply higher at the open on Thursday, rising to 1365.88, which completed the 5 wave semi-inverted corrective wave 2 from 1347.75. The  semi-inverted corrective wave took the form 1365.74-1343.13-1363.73-1354.32-1365.88 from 1347.75.

Having completed the corrective wave 2, the market once again turned lower, dropping quickly to 1356.94, and then recovering to 1364.64. The drop to 1357 we see as wave 1 of wave 3 of wave 5 from 1415. The recovery to 1365 turned out to be wave 1 of another semi-inverted corrective wave from 1357. From 1365, the market turned sharply lower into Thursday’s close, culminating in a gap down opening on Friday, bringing the SPX to 1348.49. This sequence, 1363.01-1363.55-1358.90-1360.52-1348.89, completed wave 2 from 1357.

After the gap down on Friday, the market staged a pretty impressive rally, moving up to first 1361, and then after a slight pause, up to 1365.66. This completed the semi-inverted corrective wave sequence from 1356.94.

Upon completing wave 2, the market immediately turned lower, and continued to move steadily lower throughout the day. 1361.49-1362.73-1358.49-1360.93-1356.97 completed a 5 wave sequence from the high.

After a short move higher, the market completed one more 5 wave sequence near the close at 1352.82.

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.