Friday's Market 05/25/2012

Thursday’s late afternoon once again turned out to be another one of the market’s head fakes. After opening slightly higher and completing wave 5 from 1311. This turned into wave 1 of a larger sequence, and after a small pullback the SPX completed waves 3, 4, and 5 rather quickly, taking the market to 1324.20. The rest of the day was spent working lower, with a series of moves up and down; looking again like a double inverted corrective wave is forming. A clear 5 wave sequence was formed from 1323-1314, right near the 1315 support we pointed to yesterday. From there the market staged a small rally into the close.

We feel this morning’s move to 1324.20 may have great significance. Although very odd looking, it comes within .01 points of completing a 5 wave sequence from 1292. Given the bearish formation we see forming from 1324, it has become a distinct possibility. At the moment this only means that we are in a corrective wave, and doesn’t necessarily mean we will break below 1292. As we have already identified 1292 as a wave 5, the move to 1324 could have been wave 1 of a move higher, with the market now in wave 2.

We still feel this market could eventually break out in either direction, but we see at least one more move to the downside on Tuesday. A move above the 1324-1328 level would signal a breakout to the upside.

Thursday's Market

The market opened higher today, moving above 1322, and completing wave 3 from yesterday, before pulling back. This took the market below 1316, where it reversed course, and moved higher to 1324.14. This completed the 5 wave sequence which began yesterday at 1300. Once again this kept the market below 1325, which we think is a critical level.

Much of the rest of the day was spent moving lower, which at its lowest point, 1310.50, was right at the 1310-1307 resistance level we mentioned yesterday. This wave turned out to be quite complex, whose main feature was an inverted corrective wave from 1319.95. The 5 wave termination point from 1324 turned out to be not the lowest point of the wave, but 1311.64.

From there things became more interesting. The market moved sharply higher, rising over 8 points in fifteen minutes. After a small pullback, this latest rally continued into the close, lifting the market over 1320.

This completed a 5 wave sequence from 1312. From the 1291 low, we have completed five sequences of 5 waves. 1291 to 1328, 1328 to 1296, 1296 to 1324, 1324 to 1311, and 1311 to 1320. With each successive wave terminating within the other, this is setting up to be a powerful move in whichever direction it breaks out. This is taking on the appearance of another double inverted corrective wave, such as the one we have been discussing for the past several days. This should be of a larger degree than the one we saw on Tuesday into Wednesday, and will move the market to greater extent. With the wave structure such as it is, the market could move in either direction, and exhibit the double inverted corrective wave characteristics.

With today’s late move higher, it would appear that this formation will eventually resolve itself with a move to the upside. We are not totally on board with the bullish argument. With the market having been severely oversold recently, it has thus far failed to create the “buying mania” many have envisioned. Some of that oversold pressure has now been alleviated, and the question becomes whether those technical measures can still propel the market higher.

Whichever way the market wants to move, it should happen soon, as the waves are becoming increasingly smaller. We believe the market closed today by completing a 5 wave sequence higher, so we would expect a move lower at the open. We see support near 1315. If that level breaks, a move below 1311.64 would mean we have begun another move lower. From there, 1300, 1296, and 1292 are the levels to watch.

 If the market moves higher, a break above 1325 would signal a breakout to the upside.

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.