Tuesday's Market 05/06/2014

Although yesterday’s market action was similar to the previous Monday’s, with both featuring an early sell-off followed by a strong recovery, the next day’s reaction was the exact opposite. Whereas last week the strong Monday afternoon recovery carried over into Tuesday, and set the stage for a week- long rally, yesterday afternoon’s rally was met by a sharp opening sell-off.

The SPX dropped to 1875.91 within the first fifteen minutes of trading, and after a short period of choppiness, rallied back to 1881.27. That rally was short-lived, as the index dropped to 1874.88, bounced back to 1878.78, and then fell throughout the day until it reached 1868.19. A small bounce took the SPX to 1872.37, but again was followed by a drop into the close to 1867.77.

Today’s action would seem to confirm yesterday’s count of an inverted corrective wave completing at 1885.51. Rather than continuing on to complete the last three waves from the 1891.33 high, the SPX appears to be setting itself up for a further decline. If my count for this decline is correct, the index has now formed a series nested waves from that high. The highest degree first wave completed at 1880.58, which was followed by the inverted corrective wave to 1885.51. The next degree first wave completed today at 1876.03 and the third degree first wave at 1874.88. This set-up would indicate a sharp decline to follow. I am still looking for support at 1849, and then 1775.

If my short term count is wrong, there may be support from just below current levels down to 1864. A small pullback into that range, followed by a bounce above 1872.37 could lead to a strong rally, but for now it appears that this decline will continue.

Monday's Market 05/05/2014

Today was in some respects similar to last Monday. Last Monday the SPX opened lower at the open, and then found a bottom from which it staged a strong rally. Today was similar, although the selling did not last quite as long before finding a bottom. After a gap down opening, the SPX fell sharply in the opening minutes, dropping to 1866.77. From there the index rallied, reaching 1881.86, and closing the opening gap in slightly more than an hour. A period of choppy trading ensued through the middle of the day, with the SPX putting in a low at 1879.46. The rally continued from there, as the index hit 1885.51, before fading slightly into the close.

Counting from Friday’s 1891.33 top, the SPX completed a 5 wave sequence at 1880.58. Another sequence higher completed at 1885.98, and was followed by a sequence lower which ended with today’s weak opening. The rally so far has formed three waves, 1881.86-1879.46-1885.51. The first 1880.58 low can be counted as a wave 1, and the move from that point, 1885.98-1866.77-1881.86-1879.46-1885.51 counts as an inverted corrective wave, or a wave 2. This implies another move lower for the SPX, at least in the very near term.

For this short term count to remain valid the SPX would need to remain below 1886. Support would be at 1849, and then 1775. If the SPX does continue higher, there will be a small band of resistance between 1893 and 1896. A move above this resistance would likely mean one of the more bullish scenarios I outlined yesterday is in play. As of now all three scenarios remain valid.

Weekend Outlook 05/04/2014

The SPX entered Monday trying to halt the sell-off from the previous week.  At the outset it looked as if it was going to do just that, staging an early morning rally to 1877. The rally ended there, with the SPX moving to a new short term low at 1850.61. That also marked the low for the week, as the index rallied sharply from that point, making it all the way back to 1873 near Monday’s close. The rally continued into Tuesday, with the SPX moving up to 1880.60. After a small pullback to 1872.69, the index drifted mostly higher through the week, topping out at 1891.33 on Friday.

From Monday’s 1850.61 low, it appears the SPX completed a simple 5 wave sequence as 1880.60-1872.69-1888.59-1879.96-1891.33. The completion of this sequence at 1891.33 opens the possibility for several longer term counts, which I will try to expand upon one by one.

I will start with the count I have been carrying for some time. This count has the SPX completing the first three waves of a 5 wave sequence from the October 2011 1074.77 low as 1292.66-1158.66-1422.38. The fourth wave of this sequence was an inverted corrective wave that completed as 1266.74-1474.51-1343.35-1687.18-1560.33. Since 1560.33 I have been waiting for a 5 wave sequence to complete, which would complete the entire sequence from 1074.77

From 1560.33, the SPX completed the first wave at 1709.36. Wave 2 was an inverted corrective wave that played out as 1639.43-1669.51-1627.47-1729.86-1646.47. A sequence then completed at 1850.84, and was followed by a sequence down to 1737.92. These may have been waves 3, and 4 from 1560.33, and would project a minimum target for Wave 5 of 1957, with an optimal target of 2001. In this scenario Wave 1 of 5 completed at 1882.35, and was followed by three waves down, which would likely be Waves A, B, and C of an inverted corrective wave. If the SPX holds above the recent 1850.61 low, this would be the most likely scenario, but cannot be ruled out unless the index falls below 1814.36. This count has held up pretty reliably for some time, and given the nature of this market I would be reluctant to discard it unless there is more confirmation to the contrary.

The second count is the same as the above until the SPX reaches 1850.84. The move from 1850.84 to 1814.36, 1737.92-1882.35-1837.49-1872.53-1814.36, can be counted as an inverted corrective wave. This would make 1850.84 only Wave 1 of 3 of 5 from 1560.33, and the move to 1814.36 Wave 2 of 3. It is then possible that Wave 3 from 1560.33 completed this week as 1850.84-1814.36-1884.89-1850.61-1891.33. This would mean the index would need to complete Wave 4 to the downside and Wave 5 to the upside before completing the sequence from 1560.33, and from 1074.77. The target for Wave 4 would be first 1849, and then 1775. Wave 5 would then be longer than Wave 3, which was about 245 points.  Whereas the first scenario I outlined would indicate higher prices from current levels, the second would indicate a further pullback before prices advance again.

The third scenario requires a slightly different count from the 1074.77. In this count 1292.66 as Wave 1, but then has 1158.66 as Wave A of an inverted corrective wave. 1422.38 would then be Wave 1 of B, which was followed by the same inverted corrective wave as discussed previously as 1266.74-1474.51-1343.35-1687.18-1560.33 to complete Wave 2 of B. Waves 3, 4, and 5 then completed as 1709.67-1627.47-1729.86. This would have completed Wave B from 1292.66, with Waves C, D, and E completing as 1646.47-1850.84-1814.36, and thus completing Wave 2 from 1074.77. Waves 3, 4, and 5 would then have completed as 1884.89-1850.61-1891.33. This would mean that the sequence from 1074.77 completed on Friday at 1891.33. Again, I would be looking for some confirmation before becoming convinced of this scenario.

Given these three scenarios, it is likely that the SPX will continue higher, possibly to at least 1957, although this pullback may continue a little longer. 1850 seems like an important level to watch.