Weekend Update 05/20/2012

Our model is based on the relationship exhibited between waves. We mainly use the relationship between the 5 waves in a trending sequence. There also seem to be other relationships among waves; one is the relationship between waves in a counter-trend, and the waves in the previous trend. With the termination point of wave 5 from 1422 pretty open ended at the moment, we have analyzed this secondary relationship in order to get a better picture of what’ s happening in the market.

Since we believe this is a corrective sequence of the 5 wave sequence from 667-1422, we started with that wave. This secondary relationship does not project all waves in a series, but seems to project either waves 1 OR 3, wave 2, and wave 5. Using the aforementioned trend sequence, we get a projection of 1238-1276, with 1258 being the optimum, for the termination point of either 1 or3. Wave 2 should carry the market back to between 1277 and 1322, with 1299 being the optimum. Wave 5 should then take the market back down, somewhere between 1238 and 1164.

Since this would also be a corrective sequence from the 1075-1422 trend wave, we also analyzed the waves using that sequence. The first projection was near 1332, this being for wave 1 or 3. We have wave 3 from 1422 terminating at 1348. Wave 2 projected at 1412, with our wave 2 being 1415. Wave 5 should terminate between 1297, and 1266, pretty much where we are now.

With our projection of 1276-1238 for wave 1 or 3, we could continue lower from this point, until we enter that target range. This would terminate wave 1, we would see a rally into the 1277-1322 target range, and then a 3-4-5 sequence into the 1238-1164 target range.

We could also rally from this point, or somewhere near this point, keeping the market below the 1322 maximum wave 2 target, and then have wave 3 carry into the 1276-1238 target zone. Wave 4 would fall short of the wave 2 peak, and wave 5 would bring the market into the 1238-1164 range.

In our mind this method is slightly less accurate than our primary relationship, but it does add value to our analysis. We continue to be in wave 5 of the downtrend from 1422, and so could see a rally at any point. As we have shown above, we still believe there is risk to the downside. With the market being as oversold as it currently is, it would not be surprising to see a rally from here, or after another move to the downside, but we do not believe the correction from 1422 is quite over.

Friday's Market 05/18/2012

Today was not a whole lot different than what we have seen recently. After opening slightly to the downside, the market made a quick run, stopping shy of 1311. After falling back near break-even, the market staged another rally, making it above 1312. This would prove to be the high of the day, however, as the market quickly reversed course, and dropped below 1300. After rallying back to 1307, the SPX moved steadily lower through the afternoon, falling to 1295. After moving back up to 1300, another down move took the market to 1292 shortly before the close, before rising slightly into the close.

As we discussed yesterday, the market has been unfolding in a series of 5 wave sequences from 1365.88, where wave 5 becomes wave 1 of the next sequence, then completes waves 2-5, with that becoming wave 1 of the next sequence, and so on. The first completed sequence occurred at 1326, and a second one completed Friday morning at 1305. The action today completed yet another sequence at 1292.

The market is now within the target range for completing the 5 wave sequence from 1422, so the bottom could be the termination point of any one of these sequences. However, we still see significant downside potential, as this target range is rather large.  

At this point all we can say is we are in a continuation of the downtrend from 1422. A rally could ensue at the completion of this sequence, or any future sequence, but a drop below the wave 5 level will mean that the downtrend is continuing.

We’ll have more to say at some point this weekend.

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.