Weekend Outlook 05/05/2013

It has been quite a ride for the last several weeks, with the market making both sharp moves higher, and lower. These moves were difficult to decipher at first, having followed the more straight forward trends that had been in place since the 1074.77 low back in October 2011. A couple of weeks ago I identified the sub-wave structure from that low as a series of nested inverted corrective waves. These are denoted on the Daily chart as a series of 1’s, followed by A’s. In a normal wave sequence, you would have a 5 wave impulse sequence, numbered 1 through 5, followed by a 5 wave corrective sequence, which I letter with A through E. In a sequence with an inverted corrective wave, you have a 5 wave impulse sequence to form Wave 1, followed by a counter-trend Wave A. Wave B then forms a 5 wave sequence that exceeds Wave 1. Waves C, D, and E then complete in either a “zig-zag” fashion from Wave B, or with Wave D exceeding Wave B. Wave E will not exceed Wave A.

From 1074.77 you can see Wave 1 completes at 1292.66, and is followed by Wave A at 1158.66. Wave B then forms a 5 wave sequence that does not complete until 1597.35. Wave 1 of that sequence, which is the move from 1158.66 to 1422.38, also contains an inverted corrective wave. As you can see on the Daily chart, several of these waves formed from 1074.77 to 1426.19. The SPX has been in the process of completing these inverted corrective waves since it hit 1530.94 back in February. This explains the series of three waves up, followed by three waves down that have occurred since that point. On Wednesday the SPX completed Wave 2 of the largest degree sequence which began with the 1074.77 low. Once this sequence completes, we could finally see a meaningful correction.

It felt like a roller-coaster ride this week. The SPX spiked up 14 points on Monday, completing a 20 point rally that started the previous Friday. That spike was promptly followed by a 10 point sell-off Monday afternoon into Tuesday. By Tuesday’s close, however, the index had gained back that entire loss, and then some. Wednesday saw another sell-off, with the SPX dropping 16 points. Once again, the loss did not last long, as the SPX recovered on Thursday, hitting another all-time high. On Friday the market was sharply higher again, with the SPX making still another all-time high, smashing through the 1600 barrier, and hitting 1618.46.

Wednesday’s 1581.28 completed Wave 2 from 1074.77, and Wave 3 of that sequence may have ended on Friday. From here I would expect a drop to 1599, followed by a move to 1630 to complete the sequence. Once that sequence is completed, there are several scenarios that may play out. None of these involve this being the end of this bull market.

I am continuing to count the move from 666.79 to 1370.58 as a complete 5 wave sequence. If that count holds true, 1074.77 would remain Wave A of an inverted corrective wave, and 1630 Wave B.  The inverted corrective wave should then complete for Wave 2 from 666.79. We would then see Waves 3, 4, and 5 to complete the entire sequence from 666.79 before this bull market ends. There are variations of this theme that are possible, but elucidating on them is best left as they arise. Should the current wave end at 1630, support for this correction should be near 1545.

Most of the scenarios that I foresee would keep that 1545 level as support. There is one scenario, however, that does point to sharply lower prices. My original count had the rise from 666.79 to 1219.80 as a complete 5 Wave sequence, and I have been leaning back to that count as of late. I then had the move from 1010.91 to 1370.58 as a separate 5 Wave sequence. With this count 1219.80 would be Wave 1, with the correction to 1010.91 as Wave A of an inverted corrective wave. 1370.58 would then be Wave B, 1074.77 Wave C, and 1630, or the upcoming top, to be Wave D. This would mean that Wave E would need to complete below 1245. This would complete Wave 2 from 666.79, with Waves 3, 4, and 5 left to the upside. Admittedly this seems like a low probability, but after the run-up we have seen, and with sentiment so high, I think it is worth keeping in mind.

For now I will continue to take this market one step at a time, and not try to get too far ahead of it. I think we see a correction to around 1599, followed by one mare rally to 1630. After that I would expect some sort of correction, with support at 1545.

Thank you.

Friday's Market 05/03/2013

It was another record day for the markets. This seemingly endless uptrend will end eventually, I think, but today was not the day.

As I had mentioned yesterday, there was considerable resistance at 1598-1602, and the only way through that level would be through an inverted corrective wave, which I said could be forming, and would result in a gap above that level. Gap it did, as the SPX reached 1616 in the opening minutes of trading, and then continued on to 1618.42. The SPX drifted lower for most of the day after that, falling to 1613 before rebounding to 1616. The SPX then moved lower into the close.

It appears that Waves A, B, and C of the inverted corrective wave formed yesterday after the late afternoon 1598.60 high. Wave D was the gap opening to 1616.16, and the dip to 1613.06 that followed was Wave E, and completed the wave.  This completed Wave 2 from 1581.28, and Waves 3, 4, and 5 quickly followed, at completed the sequence at 1618.42.

The consolidation that occurred through the rest of the day appears to be a wave 1, and then an inverted corrective wave 2. This would suggest that the SPX will continue to move lower to complete the 5 wave sequence. The next support level would be 1599, and that seems like a likely spot for this move lower to end. I would then put a price target for the next advance at 1630.

1630 would then mark the end of a complete sequence from the 1074.77 low. To complete the entire sequence from 666.79 therefore, I would expect to see a corrective wave from 1630, followed by a move higher, another corrective sequence, and one final move higher. Sp although 1630 would complete a sequence from 1074.77; it would not necessarily mean more than a modest correction. There are several ways the rest of this sequence could play out, however, with the wild card being the depth of this correction from the possible 1630 level. I will try to cover this in more detail over the weekend.

Thank you.

Thursday's Market 05/02/2013

It was another day, another record high for the SPX.

The market opened higher today, rising to 1589.64. After a small pullback the market continued higher, first hitting 1592.82, and then 1597.07. The SPX then traded in a narrow range, less than four points, and hit a new all-time high along the way.

Yesterday I said it was possible that Wave E completed at 1581.28, and that a move above 1590.79 would confirm this.  It looks like yesterday afternoon we saw Wave 1, followed by Wave A of an inverted corrective wave near the end of the trading day. The opening move to 1589.64 then completed Wave B, with Waves C, D, and E ending in a zig-zag pattern. With this Wave 2 from the 1581.28 low was completed, and the next move to 1592.82 completed Wave 3. After a small pullback from Wave 4, the SPX then moved to 1597.07 to complete Wave 5.

This became Wave 1 of the next sequence, with Wave 2 being a semi-inverted corrective wave. As you can see, after a small pullback from the 1597.07 high, the SPX moved above that level, and then pulled back below the initial move lower from 1597. This formed Wave 2. Waves 3, 4, and 5 then completed within the narrow range trading that followed, with Wave 5 completing at 1598.60.

The SPX has now, once again, completed a 5 Wave sequence right at the 1598-1602 resistance level I have been mentioning. With 1581.28 marking the end of Wave 2 from 1074.77, the sequence today may have formed Wave 3, a small pullback could form Wave 4, and one more try at the 1598-1602 level could complete Wave 5. Unless the SPX can break through that resistance level, that would seem to be the likely outcome for this move. The SPX ended the day right at the first support level, with the next support at 1591-1592. I would expect a drop into this support level if this scenario plays out.

The waves at this point are difficult to discern, and if the SPX should fall below the 1581.28 low, I would say a further correction to 1530 is likely.

If the SPX is going to break through this resistance level, tomorrow may be the day. After reaching 1598.60, the market pulled back. Very short term; the SPX completed a 5 Wave sequence within the first support zone. This sequence contained an overlapping wave structure, when I would have expected non-overlapping waves if the pullback were to continue. This is the setup for a wave A of an inverted corrective wave. This would result in a powerful move above the resistance level, and lead to higher prices. This would be the mechanism to finally break through this level.

A lot of maybe’s and could be’s , I know, but until the SPX either moves above 1598-1602, or below 1581, there is a lot of uncertainty.

Thank you.