Thursday's Market

It was another rather dismal day for the market. After opening higher, the market quickly gave back its gains, falling to 1311 before any attempt at a rally. After moving up to 1319, the SPX moved steadily to the downside for the rest of the day closing at the low of 1305.37.

Earlier today, we thought the wave structure was playing out in such a way that we should see a low if the market held above 1303. From there we thought the market was set for a rebound, and possibly the end of the correction.

We have been operating with the idea that we have been in wave 3 of a 5 wave sequence from 1415. Recently we posted that there was a possible 5 wave count from 1415 to 1348. We’ve spent most of today reviewing our charts, with the market not behaving as we thought it would. By using that 5 wave count from 1415 to 1348, it would out us now in wave 5 from 1422. The target ranges are similar to what we have been projecting, and this was accomplished without changing any of our 5 wave counts, but only how they are put together.

From 1422 we have 1357.38-1415.32-1347.75-1365.88, with a target for wave 5 under 1314, which we have met. Wave 5 of the sequence then began at 1365.88. A 5 wave sequence from there was completed at 1325.95. That then became wave 1 of a larger degree sequence which should terminate between 1307, and 1302, right where the market is now. Since we have wave 5 of wave 5 from 1422 terminating at current levels, one would expect the completion of the 5 wave sequence to be imminent.

There are some disturbing features to this wave however, which is why we are not calling this the end. The downside limit of wave 5 from 1422, under the current count, leaves a lot of room to the downside. Additionally, the way the 5 wave sequences are playing out from the beginning of wave 5, 1365.88, could result in a succession of 5 wave sequences to the downside. In this type of set-up it is difficult to call a bottom. With all waves from 1422 within their target termination zones, we could also be at a bottom. 1302 is the lower limit of our target zone from 1366. If we can hold that at the open, we could see a pretty good rally. A break of that would mean another sequence to the downside would need to be completed.

Thursday Update 05/17/2012

It now looks like from the wave 3 low of 1326 from1347, the market is forming an inverted corrective wave 4. At some point we should see a rally of something greater than 7 points on the SPX, and then one final move down. Our lower limit for the wave from 1374 is 1295, so we expect the bottom to be above that.

When this wave terminates, all waves from 1415 will have been resolved, and we could expect a rally.

Wednesday's Market 05/16/2012

Yesterday we discussed a possible count that would make 1328 the completion of a 5 wave sequence from 1347, and wave 1 of a larger sequence from that point. We suggested that if the bounce off that low to 1334 were wave 2, we could expect the ensuing waves 3, 4, and 5 to play out something like 1317.40-1325.20-1311, with 1311 being our optimal target from the 1415 high.

1334 turned out not to be the end of wave 2, with the market rallying at the open to 1341.78, and in the process moving above 1340.54, confirming the possible count from yesterday. Despite what looked again like a pretty impressive rally, the market quickly reversed course, and headed to the downside. A drop to 1331was followed by a small bounce, and the another move down to 1327. Once again the market bounced, then fell once again until it hit 1326. This completed a 5 wave sequence from the morning’s 1342 high, and wave 5 from 1347. Interestingly, had this drop started at yesterday’s 1334, it would have taken the market to 1317.80, very close to the price we discussed yesterday.

The market attempted to rally from there, but made it only to 1331 before moving lower still. The SPX continued down into the close, reaching 1324.79. This number is significant in that the SPX is now below 1325, and within the range we have been targeting as the termination point from the 1415 high.

While the market has reached the target level from that high, it has not yet reached the target range from 1347, nor 1342, which for both are at the 1319-1320 range. Ideally we would like to see the market hit those levels, reaching the target from 1415 would be sufficient to call this the bottom. We have noticed that when the market closes very close to a target level, but not quite within it, it turns out to be a termination point. That may well be the case here.

The move from 1342 appears as some sort of triangle, with a move to the lower trend line of that triangle bringing the market within both of the above target ranges. These triangle formations can turn into rather extended formations, completing one 5 wave sequence, which turns into wave 1 of another sequence, which forms in ever smaller ranges. Until we break through those trend lines, we can assume that scenario is in play. By our current count, a move above 1331 would mean that all the waves from 1415 have been completed.

We do, however, continue to believe that this is only wave 3 from the 1422 high. We do expect a substantial rally from this point, but it would only be wave 4, and should not surpass the 1422 high. This rally should be followed by another move to new lows. Again, with our current wave counts, the less pronounce the rally, the lower wave 5 will carry. The best case scenario is a move back near 1400, which would be followed by a low only slightly below the current one. Should we see a short-lived rally, wave 5 will project much lower.