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 13th
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.
