Tuesday's Market 04/02/2013

After dropping to 1558.47 on Monday, I was looking for the market to subsequently rally to the 1578 level. The market built on the small rally into yesterday’s close this morning, moving markedly higher at the open. Although it is most likely that the SPX formed Waves 1, and 2 of a 5 Wave sequence that will ultimately bring the index to 1578.24, the failure to reach that level today has opened up several interesting possibilities.

 

 

The market opened higher today, and kept running higher for the first hour and a half of trading until reaching the day’s high of 1573.66. This turned out to be a complex nested inverted wave structure.  You will see a series of 1’s from the 1558.47 low, and then the unwinding of the series moving into the high of 1573.66. The main sequence was 1558.47-1559.46-1569.86-1571.65-1571.03-1573.66. This gave a model value of .9978. This sequence can be seen in blue on the 3 Minute Chart.

 

After reaching that high the market struggled. A small pullback turned into a substantial drop from the highs, eventually reaching 1565.55. This was a more characteristic wave structure, a simple 5 Wave structure containing an inverted corrective Wave 2. This series was 1573.66-1572.43-1572.53-1570.16-1570.41-1565.55. The model value for this series was .9996.

 

The most reasonable interpretation is that these are Waves 1, and 2 of a 5 Wave sequence that will result in the SPX rising to 1578.24, my target for the sequence from 1546.22. If these indeed are Waves1, and 2, I would expect the market to move higher on Wednesday, or at a minimum, hold the 1565.55 low seen today. The market action today also opens up at least two other scenarios worth noting.

If the SPX fails to take out the 1570.11 high seen after the 1565.55 low, a drop to 1557 would complete a semi-inverted corrective Wave 4 from 1570.57, and I would then expect to see the market rally, with the 1576-1578 area remaining my target. A move above 1570.57 while holding the 1565.55 low would take this scenario out of play.

The second scenario would be slightly more bearish. If the market moves slightly lower, between 1560.40, and 1562.90, it is possible that an inverted corrective Wave 2 from 1563.95 has completed. From there, a rise to 1564.70-1565.40 could complete a 5 Wave sequence from 1538.57, and Wave 3 from 666.79. I would then expect a correction, which will hold above 1538.57, followed by one more wave moving above 1565. That would complete a 5 Wave sequence from 666.79 and portend a more severe correction.

In summary, I would still expect the SPX to move to 1578 unless the index falls to 1560-1563, rises to 1565, and then falls below 1560.

Thank you.

 

 

 

 

Monday's Market 04/01/2013

In my Weekend Outlook I said I expected the market to decline today, and gave 1563.50, and 1557.40 as likely termination points for the decline. After a slight move higher at the open, the SPX declined to 1563.77, and after a failed rally attempt wound its way down to 1558.47.

 

The market did open slightly lower, dropping below 1568 before rising just above Thursday’s high of 1570.28 to 1570.57. This then completed a 5 Wave sequence from 1551.90, with that sequence being 1551.90-1564.07-1561.08-1568.30-1564.42-1570.57. This yields a correlation coefficient of .997 for the points (1551.90, 1564.07), (1561.08, 1568.30), and (1564.42, 1570.57).

From that high, the market fell fairly swiftly, first completing a minor sequence with 1570.57-1569.88-1569.79-1568.02-1568.62-1564.89. This gave a model value of .999. That wave then grew into a larger sequence with 1570.57-1564.89-1565.48-1563.84-1564.53-1563.77, and a model value of .992. This low of 1563.77 was very close to my estimate of 1563.50 as a support level. The market did rally, rising to 1566.87, before falling again.

Once again, the previous low turned into Wave 1 of a larger sequence, and the market formed a wave of 1570.57-1563.77-1566.87-1561.87-1562.50-1559.46, which had a model value of .999.

After reaching the 1559 low, the market underwent a more sustained rally attempt. This 5 Wave sequence went 1559.46-1561.10-1559.61-1562.39-1559.87-1564.07 with a model value of .994.

The SPX then went on to complete one more 5 Wave sequence from the morning’s high of 1570.57. With the drop to 1559.46 as Wave 1, and the rise to 1564.07 as Wave 2, the market completed Wave 3 of this sequence at 1558.73. This wave broke down as 1564.07-1562.22-1561.85-1560.24-1560.44-1558.73, and a model value of .997. A rise to 1560.43 completed Wave 4, and a final drop to 1558.47 completed Wave 5.

 

This low again was close to my 1557.40 projection, which I stated was my preferred target over the weekend. There is a possible count that would accommodate one more move lower, actually to the 1557 level, but it appears that 1558.47 will be the low for this wave. Any drop significantly below 1557 would most likely mean my count is incorrect.

With what appears to be Wave 4 from 1546.22 now completed, it is possible to project a target for Wave 5. The sequence 1546.22-1563.95-1551.90-1557.70-1558.47-1578.24 would give a model correlation of 1, and therefore 1578.24 is my target for Wave 5. Another correction can be expected from that point.

 

 

 

 

Weekend Outlook 03/30/2013

Last weekend I updated my count indicating that the market had now completed Wave 2 from 666.79 at 1538.57, which turned out to be an inverted corrective wave, and leaving open the possibility that the market had also completed Waves 3, 4, and 5 from the 666.79 low. This week the Wave 2 low was confirmed, and the fact that we are still in Wave 3 became clear.

Although my model is based on wave counts, I will once again point out that it is not Elliot Wave Theory. If you are looking at my counts from an EW perspective they will look odd, but they are based on mathematical relationships between waves. There have been a lot questions concerning my model, and up to this point I have been reluctant to go into specifics. There are several reasons for this, some obvious, some not so obvious. However, I feel the time has come to share at least the basics of my model. Some of this is for the sake of credibility; some is based on the fact that in order to advance my theory I need a certain amount of feedback, both positive and negative. The scientific method if you will.

 

The 5 Wave Model is based on a surprisingly simple principle. That is, in a given 5 Wave sequence, waves 1, 3, and 5 share a certain proportionality. The endpoints of these waves are highly dependent on their starting points. Throughout this post, I will point out this relationship through examples.

I will start today with my long term count from 666.79. As I have stated previously, the market is now in my Wave 3 from that point. Wave 1 terminated at 1370.58, with the 5 waves breaking down as 666.79-956.23-869.32-1219.80-1010.91-1370.58. If you plot these waves as points, (666.79, 956.23), (869.32, 1219.80), (1010.91, 1370.58), you will find they have a correlation coefficient of .997. I use certain threshold correlation values to determine wave end points.

Wave 2 began at 1370.58, and terminated at 1538.57. It was an extremely complex wave, and what I call an “inverted corrective wave”. This wave broke down as 1370.58-1074.77-1555.74-1562.86-1538.57. These points have a correlation coefficient of .994.

 

With Wave 2 ending at 1538.57, the market is now in Wave 3. This wave appears to be forming a rather complex wave. Several 5 Wave sequences have completed, but those 5 Wave sequences have not yet completed a subsequent 5 Wave sequence. I have identified 5 Wave sequences from 1538.57-1561.56, 1561.56-1545.90, 1545.90-1564.91, 1564.91-1546.22, 1546.22-1563.95, 1563.95-1551.90, and 1551.90-1570.28. My interpretation is that the first four sequences identified can be Waves 1, 2, 3, and Wave 1 of an inverted corrective wave, or a series of 1’s followed by Wave 1 of an inverted corrective wave. This is what I call a nested inverted corrective wave. Both of these interpretations imply higher prices. One other possibility is a Wave 1, followed by Waves 1, 2, and 3 of an inverted corrective wave The next three sequences appear to be Waves 1, 2, and 3 of a lesser degree wave. I have identified the first four sequences with an “X” on the 15 Minute chart.

In order for the wave from 1538.57 to complete, we must first see Waves 4 and 5 from 1546.22, followed by a minimum of one more move higher, depending on how the other waves resolve. Wave 4 should terminate at 1563.50, or 1557.40, which then gives a Wave 5 projection of 1576.40, or 1583.20. Using several other relationships, 1557 for Wave 4, and 1576 for Wave 5 seem to be the best fit.

Once Wave 5 is completed, the market should move lower. I would expect this correction to terminate at either 1554, or 1547. Those prices would fit the possible patterns I alluded to previously. This move lower should give us a better idea of the Wave degree of the first four sequences from 1538.57.