Tuesday's Market 05/29/2012

We missed very badly on our call from Friday, completing misinterpreting the wave from 1324 to 1314. The wave was complicated, but the 5 wave sequence was there, we just missed it. For that we apologize.

We were right in saying that a move above the 1324-1328 level would signal a new 5 wave sequence to the upside, as the SPX hit 1334.93 after clearing that level. Once hitting that level, the market pulled back, quite sharply and deeply in our opinion, before moving back up to 1333. While we were expecting that if we cleared 1324-1328, we would make a quick move to much higher levels, the sell-off from 1333 seemed a bit more than one would expect, with the subsequent rally back up rather subdued and choppy in comparison. Earlier it looked like an inverted corrective wave was forming, which would fit with the expectation of much higher levels being reached. It now appears something completely different took place, which may not foretell higher prices, at least not at the moment.

Last week we said we saw a 5 wave sequences from 1291 to 1328, 1328 to 1300, 1300 to 1324, 1324 to 1310, and 1310 to 1324. We further stated that these 5 waves came within .01 of a point of meeting our threshold for a complete 5 wave sequence from 1291. With the move from 1324 back to 1314 unfolding in what we now say is a 5 wave sequence, this would be wave 2 of a sequence from 1291. The spike today, as we see it, unfolded in three waves, 1314 to 1330, 1330 to 1327, and 1327 to 1335. This completed another 5 wave sequence from 1291.

The pullback today unfolded in 5 waves, as did the rally back to 1333. This could turn into another series of slightly higher waves, similar to what happened today. The danger, as we see it, is that we experienced a false breakout today, and the market will soon revert to moving to the downside.

On the bullish side, we have completed a 5 wave sequence down from 1335, which did hit a corrective support level at 1323-1324. So we could still be headed higher.

 A break above 1335 would signal another move to upside, with the next resistance level around 1340. If we clear that, the rally everyone has been expecting will be underway. If we start off to the downside, 1327 looks like the support zone for a correction from 1333. If that doesn’t hold, a move below 1323 would most likely signal the market is headed back down, possibly to test the recent lows.

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.