Wednesday's Market 05/23/2012

Yesterday we outlined a double inverted corrective scenario from 1328.49, which we felt had the potential to move the market below its previous low of 1292, and possibly down to 1280. The market did open lower today, dropping below 1306 before rallying back to near 1312. This completed waves 2, and 3 of the first inverted corrective wave, which terminated with a drop to 1298, and a final rise to 1303. This also marked the end of wave 2 from 1324.94.

With this wave completed, the market moved lower once again, this time forming waves 3, 4, and 5 of that sequence in quick succession, finishing wave 2 from 1319.82 at 1296.53.

Up to this point things were going pretty much as expected. Although these types of waves can unfold in many different waves, we would normally have expected a small move higher for wave 3, followed by a larger wave 4 down, and another small move up for wave 5. Following that would be a 3-4-5 move to the downside to complete the entire sequence from 1328.49. Waves 2, and 4, are less predictive than waves 1, 3, and 5, and act like impulse waves in an inverted correction.

We did get a small move higher at this point for wave 3, but wave 4 was quite short. Wave 5 of this sequence carried the market to 1306.11. We did then see a 3-4-5 wave move down to 1300.33 to complete the 5 wave sequence from 1328. After wave 5 the market staged a strong rally, which unfolded in a neat 5 wave sequence which lifted the market to 1320.73. The SPX then faded slightly into the close, without completing a 5 wave sequence.

Although today’s move did not carry as far as we thought it might, it did play out as expected. The resultant wave structure is rather odd looking, but satisfies all the criteria of our model. There are several, make that many, counts that come close to satisfying our model, but fall short in one aspect or another. For that reason we will stick with this count unless the market says different.

The action today was interesting in several respects. First, it failed to take out its previous low. Secondly, despite an extremely strong rally into the close, it failed to move to a new high, or even make it past 1325, a point we think may be significant. One of the counts we were looking at is wave 1 from1328-1320, wave 2 from 1320-1325, and wave 3 from 1325 to 1297. The rally failing to move above 1325 keeps this count as a viable alternative, with wave 4 terminating at 1320.73. Of course the projection for that scenario is 1280, a number that seems to keep popping up.

For the moment, we see the market opening lower, having not yet completed a 5 wave sequence from 1321. From there we will be waiting t see if the market can break first 1325, and then 1328. A move above the latter would signal another sequence to the upside. We see support between 1310 and 1307, and should we break that we will watch 1300. If we also break through that we will probably be entering another sequence to the downside, with a move to new lows confirming the new downtrend. We maintain the view that 1292 completed a 5 wave sequence from 1422. From there we formed a 5 wave sequence to 1328, and what appears to be a 5 wave sequence down to 1297. From here it is a bit of a waiting game to see which way the market will break.

I do not follow the DJIA as closely as the SPX, but with the previous thought in mind, that index appears to have completed an important sequence that could offer clues as to which way the market will go. From the April high of 13297.03, that index seems to have just completed a semi-inverted corrective wave. From there the market moved lower to 12711, and then made a new high, rising to 13389. A 5 wave sequence took the index to 12792, holding above the previous low, and then rose to 12932. The index then completed a 5 wave sequence to 12312. This also is within the range for completing the semi-inverted corrective wave from 13297. These waves cannot be followed by another sequence in the same direction, and therefore signal trend changes. If the DJIA can move above 12576, we would most likely have seen the bottom. A move above 12932 would confirm this. There is still room within the range to move slightly lower, but a move higher at this point would give us reason to believe we are on our way back up.

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.