Tuesday's Market 10/22/2013

Well that was a big miss. I had been looking at yesterday’s 1747.79 high as the completion of a 5 wave sequence from the 1646.47 low. That certainly was not the case. While today’s move above that high would normally point to the continuation of the current trend, I will remain cautiously neutral at the moment, as there is a chance that a sequence from 1646.47 concluded today.

The suspense did not last long this morning, as the SPX gapped higher at the open and surpassed yesterday’s high within the first minute of trading. From there the index rose above 1751 before a very small pullback. After that the SPX shot up to 1759.33. It appeared this spike higher would be short lived, as the index quickly reversed course and dropped back near the opening levels to 1747.58. The SPX then chopped higher through the afternoon, making it above 1758 before falling back to 1754 near the close.

Looking at the waves from yesterday’s 1747.79 high, the SPX completed 3 waves to the downside at 1740.67 as I mentioned yesterday. This was followed by a single sequence to today’s high of 1759.33. The index then completed a sequence lower with the ensuing drop to 1747.58. After that low was put in, it appears the index completed 3 waves to the upside.

Re-evaluating my count from 1695.93, I still see wave 1 completing at 1704.01. This was followed by an inverted corrective wave 2 that completed at 1714.12, with wave 3 then completing at 1729.64. I had been counting wave 4 at 1725.93, with wave 5 completing at 1747.79. If that count is correct, the 3 waves down yesterday from that high, and the drop today from 1759.33 would complete an inverted corrective wave, meaning another move to the upside would be in order.

It is also possible that from wave 3 mentioned above, an inverted corrective wave 4 followed. This would have ended at yesterday’s low of 1740.67. Today’s high of 1759.33 would then be wave 5. This would be unusual since normally there is only one complex corrective wave in a sequence, but with wave 2 being a complex wave also, this would make two. But this has been a strange market, so it cannot be ruled out.

A move above today’s high would mean the first scenario is correct, a drop below today’s low of 1748 the second. My next resistance level would be 1776. This is a level at which the sequence from 1074.77 could possibly complete. At the moment I see this as a low probability, but it is worth noting.

Support is at 1723, and then 1703.

Monday's Market 10/21/2013

The SPX started off to the upside this morning, hitting another all time high of 1745.88. After a small pullback that closed the gap up open, the index hit another all time high, and the high of the day at 1747.79. This means my short term count from last Tuesday’s 1695.93 low was wrong. My original count from that low, which I changed on Friday, actually turned out to be correct. The high of 1747.79 then completed the sequence from that low, and a sequence from the 1646.47 low. From today’s high, the market completed a sequence down at 1741.71, a sequence up at 1745.41, another sequence down at 1740.82, and what appears to be another sequence up at 1744.52.

With a 5 wave sequence seemingly completed from the 1646.47 low, the SPX is at a decision point. A breakout to the downside here will likely signal a change in the short term trend, while a break above today’s high will most likely mean a continuation of this short term upward move. I have been looking for a top from 1646 to occur near 1745, and then be followed by a move lower to possibly 1680. This would fit my longer term outlook as I outlined over the weekend. A move above these levels would not alter that long term count, but would change some of the target levels. If the SPX does move higher, I will update my targets.

Support is at 1723, 1703, and then 1680.

Weekend Outlook 10/20/2013

This week the SPX continued its seemingly relentless march to new highs. The index now stands nearly 700 points above the October 2011 low of 1074.77, and almost 1100 points higher than the 666.79 low of March 2009. The range of opinions as to where the market goes from here varies widely; some believe the run from 666.79 has been a corrective wave, with the market soon headed towards zero. Perhaps these are followers of Terence McKenna’s Time Wave Zero (http://www.levity.com/eschaton/waveexplain.html).  Others believe this rally will continue ad infinitum due to FED intervention. I believe the reality lies somewhere in between, with a medium term top near, but not imminent.

My analysis is based on a model I have developed, which I call the 5 Wave Model. Although there are similarities to Elliott Wave Theory, this is not EW. My model postulates that all movements of the market can be broken down into 5 waves, with a specific relationship developing between waves 1, 3, and 5 that indicate the termination of a “wave”, or trend. A specific proportionality manifests itself between these waves at the termination point of a 5 wave sequence.

Last week I mentioned a similarity between the current wave structure from the 1074.77 low, and that of the uptrend from October 2002 until October 2007, so I will start there. In addition to my wave counts, I have also numbered each wave of the uptrend consecutively for discussion purposes. The first thing to notice is that the uptrend consisted of 17 individual waves. The first 5 waves of the structure were 954.28-788.90-1015.33-960.84-1163.23. Since these 5 waves only had a correlation value of .96, it did not signal the end of a sequence. In fact, the first 5 waves that complete a sequence are waves 6-10. This sequence goes 1163.23-1060.72-1217.90-1136.15-1245.86-1168.20, and has a correlation value of .998. Since the impulse waves of this sequence, waves 1, 3, and 5 were to the downside, with the larger trend being up, this considered a corrective wave. With the end point of the fifth wave completing above the end point of the first, I call this an inverted corrective wave. After the completion of this sequence, the SPX rallied to 1326.70. Evaluating waves 2-3, 4-5, and 10-11, my model gives a correlation value of .999, once again signaling the completion of a 5 wave sequence. Then looking at waves 1-2, 11-12, and 13-14, the correlation is .9998, meaning the termination of another sequence, this time an inverted corrective wave. Finally then, from the October 2002 low of 768.63 to 1, 14-15, and 16-17, which takes us to the October 2007 high of 1576.09, my model shows a correlation of .9996, once again giving the end point of a 5 wave sequence.

In my 5 Wave Model vernacular this counts as 1-A-1-2-3-A-B-C-D-E(4)-5(B)-C-D-E(2)-3-4-5. This gives a total of 17 waves in which the first, third, and fifth wave of each sequence show a specific relationship.

Next, I will look at the current wave structure from the October 2011 1074.77 low. Again I have overlaid a consecutive numbering system for discussion purposes. In the last wave, the structure started with a 1-A, followed by a 1-2-3 of one lesser degree. In this case wave 4 was the inverted corrective wave. This wave began with a 1-A, and was followed by a 1-A of one lesser degree. Wave 2 in this example proved to be the inverted corrective wave. In both examples, at the eleventh wave of the sequence, each wave had completed Wave B of an inverted corrective Wave 2 from the starting low. From that point, the current wave has gone on to complete Wave C at 1646.47, and now is at a level that would complete Wave D, or the 13^th wave of what should be a total of 17 waves. As I have previously indicated, I would expect this wave to complete near 1680, and should hold above 1646.47. This would complete Wave2 from the 1074.77 low, and I would expect Waves 3, 4, and 5 to the upside to complete the entire sequence.

Finally, I also suggested last week that the Dow was on the same count as the SPX, but that while I expected the SPX to hold above its previous low, I do not expect the Dow to do the same. Both the SPX and the Dow have so far completed Waves 1-A-1-A-B-C-D-E(2)-3-4-5(B)-C, and possibly Wave D. Both indices are in inverted corrective waves, and these waves can complete in different fashions. For these indices to maintain the needed relationship between Waves A, C, and E of this sequence, the SPX would need to hold above its previous low, while the Dow would have to move below it.

This could all change of course if the current rally from SPX 1646.47 continues. At the moment I would say that this wave will most likely end around current levels, setting up this diverging scenario.

Support is at 1723, 1703, and then 1680.