Weekend Outlook 03/23/2013

In Friday’s post I touched on the possibility that the market completed a 5 Wave sequence from the 1074.77 low, followed by the completion of an inverted corrective wave from 1370.58. Today I will also suggest that the market may have also completed a 5 Wave sequence from 666.79. This does not mean that I am suggesting the market will undergo a severe correction, but it is possible that we will see a significant correction.

I will start with the wave from 1074.77. Wave 1 carried the market to 1292.66, with Wave 2 ending at 1158.66. Wave 3 proved a little more complex, featuring an inverted corrective wave, and terminating at 1422.38. Following that high, the market dropped to 1266.74, completing Wave 4. Wave 5 has been the most complex of all. Wave 1 of 5 formed as a nested inverted corrective wave. Notice the cluster of Wave 1’s near the beginning, and the cluster of 3, 4, 5 Waves near the top at 1470.96, as the wave unwound. Wave 2 of 5 was an inverted corrective wave that ended at 1485.01. Normally wave 4 is the high (or low) point of an inverted corrective wave. Notice that here, Wave 2 proved to be the high. With Wave 2 of 5 completed, Waves 3, 4, and 5 completed shortly thereafter.

 

 

Since September I have been calling for this wave to terminate above 1560. The high of this wave turned out to be 1563.62.

 

 If you look at the Weekly chart, you will see a 5 Wave sequence from 666.79 completed at 1370.58, followed by a correction to 1074.77. With another 5 Wave sequence now completed from 1074.77, the market either completed Wave 3 from 666.79, or Wave 2 of an inverted corrective wave from 1370.58. What occurred from 1563.62 was a 5 Wave sequence down to 1555.74, followed by a 5 Wave sequence up to 1562.86, and then another 5 Wave sequence down to 1538.57. My model is based on mathematical relationships between waves, and the sequence 1370.58-1074.77-1563.62-1555.74-1562.86-1538.57 satisfies my model requirements for an inverted corrective wave. Recall earlier when I cited an example of an inverted corrective wave in which Wave 2 was the high point.

So now my model has been satisfied for Wave 1 from 666.79 at 1370.58, and Wave 2 at 1538.57. What would be expected now are Waves 3, 4, and 5 to complete the sequence. From the 1538.57 low the market completed a 5 Wave sequence at 1561.56. A 5 Wave sequence then formed to the downside at 1543.55. A third 5 Wave sequence then completed at 1557.74. Based on the previous wave structure 666.79-1370.58-1538.57-1561.56-1543.55-1557.74 again satisfies my model for a 5 Wave sequence. This count remains intact as long as the market does not exceed 1587. Put another way, this market has topped unless it can clear 1587.

If we compare several waves, I think I can demonstrate that this is a real possibility. First look at the wave from 1266 to 1563. The waves in red are the largest degree waves. Notice red Wave 1 is comparatively large, with blue Wave 1 (Wave 1 of the inverted corrective wave) proportional to red Wave 1. Wave 2 of that inverted corrective wave was nearly the same length as red Wave 1. After that the remaining waves completed within a much shorter time frame.

 

Compare the previous wave to this one. As you can see the structure is very similar, with the wave culminating with a series of waves completing in quick succession.

 

Now look at the wave from 666.79. I am sorry the waves at the end are a bit hard to decipher, but hopefully you get the idea.

 

If the market can move above 1587 while staying above 1545.90, it would be most likely that Wave 2 from 666.79 has completed, and the market should move significantly higher as it completes Waves 3, 4, and 5.

If the market falls below 1545.90, before moving above 1587, it is most likely that the market has completed a 5 Wave sequence from 666.79. While the wave configuration makes it difficult to be too precise about the severity of the ensuing correction, the lower limit of the first support area would be around 1440.

Even if a 5 Wave sequence has completed from 666.79, the outlook is not entirely bleak. Waves can take many forms, and I will be watching this one closely. Thank you for your interest.

 

 

Friday's Market 03/22/2013

To say that the market is at an inflection point may prove to be an immense understatement in the coming days. While most, including myself, have been focusing on whether the market will move up or down a few points to signal the short-term direction, a move of much greater magnitude may be forthcoming. It is possible, indeed probable, that the market completed a 5 Wave sequence from 1074.77 last Friday at 1562.63, AND a 5 Wave inverted corrective Wave 2 from 1370.58 on Tuesday at 1538.57. Perhaps the equilibrium the market has experienced recently has been the result of these two large magnitude waves completing within a short time period, and within a tight point range. At the very least the market has put in a 5 Wave sequence top from 1074.77, with the implication of a fairly large move in whichever direction this market breaks out.

 

The market continued the rally from yesterday afternoon right from the open. The market reached 1552.88 near the open before the first slight pullback. This was right at the 1553 resistance level I mentioned yesterday. The resistance proved short-lived, as the market quickly broke through and rose to 1557.74 by early afternoon. After pulling back to 1553, the market rose again into the close.

The pullback from 1561.56 was a 5 Wave sequence that included an inverted corrective wave. The termination point of that 5 Wave sequence turned out to be 1545.90, higher than the actual low of the wave possible because of that inverted corrective wave. The failure for the wave to complete at the low may give an indication that this market wants to move higher.

 

 

I am still looking for a break above 1563.62 to confirm a breakout to the upside, and a move below 1538.57 to signal a break to the downside. I will elaborate more fully over the weekend.

 

Thursday's Market 03/21/2013

With the action of today’s market, I was quite prepared to throw in the towel on my “1538.57 will prove to be the low of this correction” statement. However, after reviewing my charts this evening, I will hold onto my towel for at least one more day. Although there is a very real possibility that the SPX will fall below that low, it is also a very real possibility that it will not. The rub is that in the medium term, taking out that low would be the more bullish scenario.

 

The market dropped at the open, falling below 1551, and remained lower throughout the day. After attempting to rally following the opening drop, the market fell further to 1548.41. A more sustained rally ensued, but after briefing rising above 1555, the market started another leg lower. It finally found a bottom at 1543.55, and rose above 1550 before falling into the close.

After yesterday’s high of 1561.56, the SPX formed a 5 Wave sequence into the 1548.41 low. The SPX then formed 3 additional 5 Wave sequences, one into the 1555.31 high, another into the low of the day at 1543.55, and then one more into 1550.79 high shortly before the close. With only 4 sequences discernible from the 1561.56 high, I do not believe that a full wave has completed from that point.

Several options are possible at this point, and I will start with the one that keeps intact Tuesday’s 1538.57 low. This is also the simplest resolution, and assumes that an inverted corrective wave completed at the aforementioned low, and that 4 Waves have completed from the 1561.56 high. The target for Wave 5 would be 1538-1540, and allows for the low to remain intact. If that low holds, we should see one more rally that probably will not exceed 1572. As I mentioned above, this would also be a medium term bearish scenario, as it would likely mean a 5 Wave sequence from 1074.77 has completed and Wave 3 from 666.79. A rather steep correction would be anticipated.

The alternate scenario assumes that 4 waves have unfolded from the 1563.62 high, with Wave 5 underway.  The target for Wave 5 would be 1495-1518. This could play out in several ways. If the market opens higher, I would expect resistance at 1553. This would complete an inverted corrective wave from the 1548.41 low, and would indicate waves 3, 4, and 5 to the downside are yet to come. It is also possible that the market completes a 5 Wave sequence from 1561.56 at 1538-1540, and then starts a larger degree sequence into the 1495-1518 target area. This scenario would allow for a much higher upside target.

 

 

If the market opens lower, look for support at 1538-1540. If the previous low of 1538.57 holds, look for one more rally up to 1572. If that low does not hold, look for a move to 1495-1518. If the market opens higher, look for resistance at 1553, and then a move down to 1495-1518.