Weekend Outlook 08/05/12

The market opened the week by moving to a new uptrend high of 1391.74. This completed a 5 wave sequence from the 1329.24 wave 4 low, meaning the market was due for a pullback. From the 1392 high, the market traded in a narrow range for the rest of Monday, and that range bound trading continued through Tuesday, and for most of the day on Wednesday. On Wednesday afternoon the SPX broke down below that narrow range, dropping to 1373 before moving back into the 1387-1379 range. The market then broke decisively to the downside on Thursday, dropping to 1361 near the open, and then after recovering to 1374, fell to 1354.65. This completed a 5 wave sequence from the 1392 high, and Thursday afternoon found the market climbing steadily back to 1366 near the close. That rally sparked a gap up opening on Friday, with the market hitting 1384, and then climbing to a new uptrend high at 1394.16.

Coming into this week, my count from the 1266.74 low had wave 1 completing at 1335.52, followed by a semi-inverted corrective wave 2 that took the market up to 1363.46, before terminating at 1309.27.  Wave 3 has been an extended wave, with wave 1 of 3 lifting the market to 1320.29. Just as with the larger degree wave, wave 2 of this sequence was a semi-inverted wave, with a high of 1374.81, and then ending at 1325.41. Wave 3 took the market up to 1380.39, before a wave 4 low of 1329.24. With four waves completed, the projection for wave 5 was between 1387, and 1404, which fit nicely with my 1393 projection generated by the sub-waves of the 1267-1335 wave. The sub-waves of wave 3 of this sequence also projected to 1387-1395. Monday’s move to 1391.74 satisfies all the criteria for the completion of wave 5 of 3.

If the move to 1392 completed wave 3 from 1267, wave 4 most likely terminated at 1354.65, and this would put us in wave 5. My targets for this wave have been either 1426, or 1497. The projection using the four waves completed so far would yield a range of 1335-1375 for the wave 5 high.

I view this current 1387-1397 support/resistance level as very significant. Until the market can clear this level, there are several possibilities. The current pullback from 1394 could end at this point, or extend down near 1378. A move slightly above 1394 would complete another 5 wave sequence from 1329, which would then be the termination point of wave 3 from 1267. Wave 4 could then terminate at a point that would more precisely target either 1426, or 1497. There is also an outside possibility that the market will complete a 5 wave sequence from 1267 at these levels, meaning the market could undergo a significant pullback, or even re-test the 1267 low. I see this as a low possibility because it would mean the move from 1267 to 1363.46 was a 5 wave sequence, which is not my current count.

Short term, the market is within the 1387-1397 support/resistance cluster. Support then would be at 1367, and then 1356-1358. Resistance is at 1406, and then 1426.

Friday's Market 08/03/12

With the market completing a 5 wave sequence from 1392 to 1355 yesterday, it appeared the correction was from that point was over, and that was confirmed at this morning’s opening. The market surged to 1385 in the opening minutes, and then continued higher, peaking above the previous 1392 uptrend high at 1394. From that point the market worked its way slightly lower, dipping below 1389, before recovering into the close.

With the confirmation of 1355 as the end of a corrective wave, it would be easy to say that the market is now headed to my next target of 1426, or 1497. However, nothing about this market over the past couple of months has been easy, or obvious. The market has continually done the opposite of what seems apparent. When the market peaked at 1392, I said the depth of this correction would determine the next target level. A correction that terminated above 1368 would point towards the 1497 target, while a move to 1350-1330 would target the 1426 level. The correction ended at 1355, which once again leaves the target somewhat in flux. The target using that 1355 bottom would be between 1435, and 1475. While a top somewhere between these levels would land within the margin of error for either1426, or 1497, it is also possible that something else is going on. It almost seems as if the market has not yet made up its mind on where it wants to go, and is perhaps buying time before making that decision.

The level at which today’s move ended is also interesting, coming as it did between the 1387-1397 resistance level. With the wave structure as it is, there is a possibility for a pullback ending above 1378, and then a high slightly above today’s high of 1394. This would complete another 5 wave sequence from the 1329 low, which then would be wave 3 from 1267. This would still terminate within my target for that wave, and would allow the market to then make a decision on the next move. That would be determined by the depth of the correction.

If the market can clear this 1387-1397 resistance zone, the market would most likely be in wave 5 from 1267. I will discuss this in more detail over the weekend.

Thursday's Market 08/02/12

The market opened sharply lower this morning, falling to 1361 in the first minutes of trading. The SPX staged a pretty strong rally off that low, almost making it back to 1374, but the rally ended there. Another steep drop followed, this time taking the market down to the low of the day at 1354.65. Unlike the earlier rally, this one started slowly, but then gained momentum throughout the afternoon, closing just off the rally high of 1365.86.

On Tuesday I mentioned that if the market broke below the that day’s low by more than a couple of points, the market was probably forming a complex corrective wave 2, that would eventually carry the market significantly lower. On Wednesday the market did fall below that level, and today the market moved significantly lower.

The market did end up forming a complex inverted corrective wave 2. After a dip at the open on Wednesday, the rally to 1385 formed wave 1, while Wednesday afternoon’s late rally from 1373 to 1381 was wave 3. Wave 4 took the market down to 1361 Thursday morning, with wave 5 being the rally off that low to 1374. That completed wave 2 from 1392, with waves 3, 4, and 5 forming on the way down to the 1354.65 low.

With a 5 wave sequence from 1392 now completed, this could be the end of the correction. The market then completed a 5 wave sequence off the 1355 low into the day’s close. I would expect the market to now continue higher. It is possible for the market to move lower, but I would expect only slightly lower lows than we saw today.

Support is at 1356, and then 1346. Resistance is at 1367, 1384, and then the cluster between 1387, and 1397.