Weekend Outlook 08/11/2013

After the SPX hit a low of 1560.33 on June 24^th, the index advanced in a relatively easy to follow manner until it reached 1684.51 on July 15^th. The SPX completed a 5 wave sequence higher to 1626.61, which was followed by a corrective sequence, and then another sequence higher to 1684.51. Since that point, the index has traded in a fairly narrow range, bounded by 1672 on the lower end, and 1709 on the higher end. The price action during that span has been quite choppy, and difficult to track on a short term basis. During each sequence, the market tends to reach a point of indecision that tests the resolve of participants. It seems we are at that point now. At times like these, it is best to consider all possibilities, determine the most probable course of action, but be prepared for other potentialities.

After reaching an all time high last Friday of 1709.36, the SPX opened lower on Monday, rallied to challenge that high at 1709.24, and then traded flat for the remainder of the day. On Tuesday and Wednesday the index opened markedly lower, and then drifted higher onto the close. On Tuesday the SPX hit a low of 1693, and 1685 on Wednesday. Thursday saw a gap up open, followed by a drop to close the gap, and then a rally to just below the opening highs. The SPX opened lower again on Friday, tested the 1685 low, but held above it, and then moved higher.

When considering the possible short term direction of the market, it is important to also understand where the market is on a larger scale. Starting with the weekly chart, the SPX has completed 4 sequences from the 666.79 low. These completed at 1219.80-1010.91-1370.58-1074.77. It is not possible, given the sequences already completed, for a larger sequence to terminate with this uptrend. The SPX is forming a complex corrective wave, with the implication being that this bull market has further to run after this uptrend completes. Using the sub-waves of the move from 1010.91 to 1370.58, the minimum projection for the current uptrend would be 1708, which we have surpassed. The range for this sequence is admittedly somewhat large, but it gives an initial target. My current target of 1776 also falls within this range. One technical point of note on this chart is the RSI(14). Notice at the 1010.91 low, this indicator bottomed at 38.05, while it reached a lower low of 29.67 when the market corrected to 1074.77. This lower low on the RSI(14), coupled with a higher price low, is seen often during the formation of complex corrective waves.

The Daily chart clearly shows the SPX in the ninth wave from the 1074.77 low. This is supported by not only the sub-wave counts within each individual wave, but by technical indicators such as the RSI(14), and the MACD. My current count has waves 1, 2, and 3 completing at 1292.66-1158.66-1422.38. This was followed by an inverted corrective wave 4 at 1266.74-1470.96-1343.35-1687.18-1560.33. The three declines during this period were 156, 128, and 127 points. Notice the proportionality of those declines, and the fact that the declines decrease as the starting points increase. Given this count, Wave 5 projects to a minimum of 1776.

Cutting through all the noise, and looking strictly at the 60 Minute chart from the 1560.33 low, it certainly appears as if the SPX completed a wave 1 at 1626.61, and has been followed by an inverted corrective wave 2 at 1604.57-1698.38-1676.03-1709.24-1684.91. These declines have been 22.04, 22.35, and 24.33 points. Again the lengths of the declines have been similar, and have increased slightly as the starting point has increased. Also notice the lower RSI(14) readings at points A, C, and E. Lower readings on the indicator, coupled with higher lows on the index. This count would suggest that 1684.91 was the low, and the SPX should now continue higher from here.

Given my target of 1776, the likely course of action would be a move to around 1748, followed by a pullback, and then another move higher to 1776. Shorter term, I have an initial upside target of 1711.

That is my case for the bullish scenario. It is possible, given the action of the market lately that this will not play out as I suggest. If the SPX breaks below 1685, the next likely target is 1668. Even if 1685 does not hold, I expect to see 1776 before 1560. 

Thursday's Market 08/08/2013

It was an encouraging opening for the bulls this morning, as the SPX gapped higher, and quickly surpassed the 1700 level once again, settling at 1700.18. That bullish spirit did not last long however, as the index sold off sharply, dropping into negative territory, and falling to 1688.38. The bulls took control again at that point, moving the SPX back near the day’s high to 1699.75. After a small pullback, the index moved back above 1700 for the second time, hit 1700.14, and then turned choppy as it moved lower into the close.

This morning’s move higher seems to have completed a 5 wave sequence from yesterday’s 1684.91 low. After a corrective sequence lower to 1688.38, the SPX completed another sequence to 1699.75, which was followed by a semi-inverted corrective wave that completed at 1697.50. If this count is correct, I would expect the SPX to move higher from this point.

My target for the current move remains at 1776. It is still best to be cautious at this stage. If the SPX can clear 1709, the probabilities of reaching that target increase. If the index moves below 1685, I am looking for support at 1676. Resistance is at 1710, and then 1736.

Thursday Count Update 08/08/2013

I apologize for not having been able to update for the past several days, but while I have the chance, I thought it a good time to update my counts.

Looking at the hourly chart, I had a 5 wave sequence completed at 1626.61, and then a corrective sequence to 1604.57. I then counted a sequence to 1684.51 as essentially the same degree as the first two. It now appears that sequence was two degrees lower than I thought. That high was followed by an inverted corrective wave that ended at 1676.03. Up to that point the waves had been fairly easy to follow, but after that the waves became quite difficult to track. The pullback of the last several days seems to have clarified those waves. The waves became quite choppy, but the first two moves higher can be counted as completing a sequence from the 1604.57. That can be counted as a Wave 1, which was followed by Waves 2 and 3. Wave 4 was then another inverted corrective wave, and finally Wave 5 to 1709.24. This is a bit clearer on the 15 minute chart.

Yesterday the SPX completed a 5 wave sequence to the downside at 1684.91. The action today seems to confirm that.

My target of 1776 has not changed up to this point. It still seems like the most probable course of action for the market. With the move from 1604.57 to 1709.24 being one sequence, there is a chance of a further correction, so I will remain cautious, until the SPX moves above 1709.24.