Tuesday's Market

Yesterday we said we thought we were at, or near a 5 wave sequence high from 1292, and we would expect a lower opening. Instead, the rally from Monday carried over into today’s open, and the market moved higher, to 1319, still within our target range. At that point we did see our pullback, and when the market moved above 1319, another 5 wave sequence to the upside was confirmed. The rally appeared as strong today as it did yesterday, as the market quickly moved up to 1328, which completed the 5 wave sequence.

Things went south from there, with the SPX dropping to 1320, and then bounced around between 1320, and 1325. However, 1320 couldn’t hold, and the market fell to 1310, before staging an almost seven point rally into the close.

In yesterday’s recap we said we expected 1323 to prove a resistance level. The range for that level was 1320-1328, exactly where the market stopped, both at the top, and on its way down.

We see 1328 as the termination point of a 5 wave sequence from 1392. The move down to 1319.82 was a 5 wave sequence, as were the moves from 1319.82 to 1324.94, 1324.94 to 1319.92, and1319.92 to 1324.89. From there the market formed a 5 wave sequence at 1317, which then became wave 1 of a sequence that terminated at 1310.04. As of now we do not see the completion of a 5 wave sequence from 1328, to 1310. In fact, we see something quite different than a mere corrective wave from 1328. We see 1328-1320 as wave 1 down, followed by wave 1 of an inverted corrective wave 2, which terminated at 1324.94. The move to 1319.92 was another wave 1 of lesser degree, again followed by wave 1 of an inverted corrective wave 2, which terminated at 1324.89. These wave structures do not end well, usually indicating a sharp move in the direction of the underlying trend, which is down.

The wave from 1370 to 1077 had a very similar structure, and we’ve included a chart for comparison. This is normally how these waves play out, with a sharp move, followed by increased volatility as the waves resolve themselves. I am not comparing the magnitude of the move, only the structure of the wave.

At the moment, if this plays out as we’ve lain out; we would expect the lower limit of this move to be 1280. Over the weekend I posted a possibility of the market rallying to 1322 from current levels, then move down in wave 3 from 1422 into the 1276-1238 range, followed to a move to 1238-1164 after wave 4. Right now that appears to be the track we are on.

Of course, we have been wrong before, and we will be wrong again, but we see this as the most probable scenario given the current wave structure. 1328 now becomes a critical level. If we can surpass that, this scenario would be eliminated, with higher prices expected as the market completes another 5 wave sequence to the upside.

There is some hope for this scenario. After wave 1 from 1328 terminated, the market trade between 1320, and 1325. There were three moves to the upside, and this 5 wave sequence which almost, but did not quite, meet our criteria. Had it met our criteria, it would have qualified as an inverted corrective wave itself. From that termination point, there is a count from 1328 that almost, but again, just doesn’t quite, meet our criteria. That’s why, for the moment, we prefer the first scenario. A move above 1328 would make this second scenario valid.

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.