Another Market Drop?

As expected, the market continued to rally today after yesterday’s low of 1340.03. This still appears to be only a pause in the down move that started last week, a pause that may soon come to an end.

The market rallied from the opening bell, and completed a 5 wave sequence when it hit 1348.12. After a small drop, the SPX broke through that high, signaling a continuation of the rally. That rally continued into the afternoon, and completed another 5 wave sequence at 1353.08. Once again the market moved to a new high, indicating this rally still had further to go. The market continued to make new highs into the last hour before dropping a few points into the close to finish the day at 1352.63, up 9.27 points for the session.

As stated, the SPX completed two separate 5 wave sequences today, then moved higher both times to signal a further continuation of this very short term up trend. The next point we are watching is the 1355 level. Should the 1352.63 closing level hold, and the SPX moves to that level, another 5 wave sequence will be completed, at which point we may see the market turn lower once again. Only a move back above the high of that sequence would mean that the rally would continue. If we break through that 1352.63 low before hitting the 1355 level, our targets will need to be revised.

When the down move does continue, we are likely to see more sharp moves to the downside as we did on Tuesday. We would either be in a wave 3 to the downside, or in a wave 2 of an inverted corrective wave, which would be even more bearish for the market.

Very short term the correction from Tuesday’s lows has not been completed. We do not expect this to last much longer. Therefore we are short term bearish.

Medium term, we believe last week’s highs were the completion of a 5 wave sequence from the March 2009 lows. This would mean we are in the beginning stages of what could be a very significant correction.

Long term we believe the market is in an uptrend from those 2009 lows.

The End of the Correction? Or a Pause?

If anyone had any doubts that 1378.04 marked an important top, today’s market action should have dispelled those beliefs. The market gapped down at the open and never looked back. Mustering only a few feeble attempts at moving higher, the markets worked lower throughout the day.

Yesterday we said we expected the market to still work its way lower, and we were right. However we do believe we misread the wave counts. We thought we were in a nested wave sequence, and Monday’s moved seemed to back that up. Considering the action today, we now believe the move from the highs have been a more classic five wave sequence. This was confirmed when the market dropped to its low of 1340.03. This met our threshold for a five wave sequence as shown in the chart below.

Since we have completed a five wave sequence, a correction would be expected, moving the market higher. We would remain extremely cautious at this time, despite the call of a correction. This would be wave 2, which is the most likely to invert. An inversion would see the market move slightly higher, and then make more sharp moves to the downside. This should be considered a pause in the downturn. A move below today’s low would be considered a continuation of the move.

Monday's Market

Today’s market continued the corrective wave from the 1378.04 top. After an initial move lower from that top last week, the market spent the remainder of the week consolidating into a nested wave structure. Today’s action was the result of the unraveling of that nested wave structure.

The market moved lower right from the opening bell, finding some support around the 1365 level. After a quick move to the 1368 level, the market moved lower once again to 1360.71. These moves constituted Waves 3, 4, and 5 of Wave 2.  From there, the market made a small move to 1363.40 (Wave 3), and then down again, finding support at 1359.13 (Wave 4). The ensuing move to 1362.07 completed Wave 5 of Wave 2. The market then bounced around while it quickly traced out Waves 3, 4, and 5 of Wave 2.

After completing Wave 2, the market staged a rally into the close. After hitting 1362.36 (Wave 3), the market lost ground to 1360.42 (Wave 4), before resuming the rally. This rally topped out at 1365.96, completing Wave 5 of Wave 2. After this point, the market drifted lower into the close.

Nested waves can be quite complex, but watching them unfold can be fascinating. The many gyrations of today were driven by the unraveling of this complex nested wave sequence. This sequence has only Waves 3, 4, and 5 to complete. With this in mind we expect the market to move lower once again. Once the market completes Wave 5, a correction from the 1378.04 top would be expected.

Without knowing points 3, and 4, we cannot make a projection for the Wave 5 endpoint. We will have to watch the market action to determine that.

From a longer term perspective, this is but the beginning of this corrective sequence. This is a correction for the major move from the March 2009 lows of 666.79 to the recent high of 1378.04 on the SPX. We could in store for a move down to levels we haven’t seen in quite awhile.