Monday's Market 05/21/2012

Last week we said we were within the target range for the termination of a 5 wave sequence from 1422. On Friday we said it looked like we had completed another 5 wave sequence at 1291.98, and we could see a rally from that point. Over the weekend we said we could see a rally, possibly to the 1323 area. This morning, on Stocktwits, we said a move above 1300 could trigger a rally.

1300 was the termination point of the last wave 4. A move above that level would signal a termination of the current wave, and the 5 wave sequence from 1422. The market opened higher today, initially reaching 1301.02, before pulling back slightly. From there the market moved sharply higher, completing the first 5 wave sequence from 1292 at 1308. After another small pullback the market turned higher again, completing another sequence from 1292 at 1312, and what appears to be another at the close, at 1316.39.

It now appears that the 5 wave sequence from 1422 is over, and the question now becomes what next? Short term we believe a 5 wave sequence has completed from 1292. We would expect a pullback at this point, with a move below 1314 confirming the completion of the wave. If the market moves higher from there, another 5 wave sequence to the upside would be unfolding. We still look at the 1323 level as resistance, and a move above that could mean this is more than a short correction, and we could move significantly higher. A move below1292 at this point would make this wave 2 of another sequence down from 1422.

With the completion of the 5 wave sequence from 1422 at hand, there are several possibilities to consider. The first possibility would be that the correction from 1422 is over, and we are entering a new bullish trend. Since we still view 1422 as a 5 wave high from 667, this wave still seems rather small comparatively, making this unlikely, but possible. The second possibility is that the drop to 1292 was merely wave 1 of a 5 wave corrective sequence, and this is wave 2. If the market moves below1292, this would be the most likely scenario. The next possibility is that the move was wave 1 of a more complex corrective sequence, either an inverted, or semi-inverted corrective wave.  If this is a semi inverted corrective wave, wave 2 should take us above 1422, and wave 3 back below 1422, but terminating above 1292. Wave 4 would end below 1422, and wave 5 would take us below 1292. An inverted corrective wave would see waves 2 and 4 as impulsive looking waves higher, with waves 3, and 5 being short corrective sequences. Normally this would take the market to much higher levels.

At the moment we cannot determine which of these outcomes will actually transpire; we can only keep these in mind as the wave unfolds.

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.