Semi-Inverted Corrective Wave Completed

It looks like the 1337 low hit this morning was the termination point of wave 5 from 1347 as we discussed yesterday. We did then see the expected bounce, which looks like a semi-inverted corrective wave.  We believe this wave has now ended, and we should be on our way back down from here.

Monday's Market

It was more of the same for the market today. We opened with a gap to the downside, rallied into the afternoon, then faded into the close, giving back most of what was gained during the day.

We moved what we had labeled as wave 5 from Friday’s low slightly lower. That wave we believe to have completed wave 3 from the 1365.88 high. After a very short corrective wave 4, wave 1 of 5 completed near the close on Friday. From that point an inverted corrective wave 2 ensued, which carried over into Monday’s open, and resulted in the gap down. In just over an hour, the market completed that wave 2, and also waves 3, 4, and 5, which terminated at 1336.61.

The rally from that point, featured another inverted corrective wave 2, and the sequence brought the market back to 1347. This would appear to be the completion of wave 4 from 1373.91. It’s interesting to note that what we have labeled as wave 1 of the sequence turned out to be the resistance level, and not the actual near term low of 1343, which we have as wave 2 of the semi-inverted corrective wave 2. We think 1347 is a likely level for wave 4, because the projected wave 5 termination point of wave 5 from 1373.91 would be 1319-1295. This fits in nicely with our projected low of 1325-1260 for wave 5 from 1415. For now it looks like wave 5 from 1415 should now land in the 1319-1295 range. That would be the point from which we could expect a more extended rally.

This afternoon’s fade into the close was interesting, with a 5 wave sequence seemingly completed right at the close. The set-up was similar to what the market has experienced during this downtrend. It has been completing a 5 wave sequence late in the afternoon, which has then set-up inverted corrective wave 2’s, which usually generate the types of moves we have seen lately. Lust minutes before the close the SPX came within fractions of satisfying our model from wave 5, and then moved slightly higher. After that the market put in a new low that did satisfy our model. This action could mean we could see a higher opening on Tuesday; however we believe any move higher would be short lived, as we still see 1347 as wave 4, as we discussed earlier. It is possible that the first bottom was wave 5, and a corrective sequence will follow, put our model is generally pretty exact.

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.