When You're Wrong You're Wrong

Over the weekend we said we believed 1399 marked the high of wave 2 of a larger correction from the 1414 high, and that a move above 1399 would invalidate that count. We didn’t have to wait long for us to be proven wrong, as the market opened above that level, and continued to move higher throughout the day.

It would now appear that 1399 was a wave 1 of a larger move to the upside. The slight pullback on Friday turned out to be wave 1 of an inverted corrective wave, with wave 2 occurring at the opening today. That wave carried the market to 1412 before pulling back slightly for wave 3. Wave 4 is in progress now, with another small pullback of three to five points expected for Wave 5. That would complete wave 2 of the move from 1386, and waves 3, 4, and 5 should follow.

So now that we have made new highs for this move, it would be easy to jump into the bullish camp. In our analysis we see one more hurdle for the market to clear before we turn bullish. If we reconsider 1378 as the completion of a 5 wave sequence from the 666 low, there is a possibility of completing another 5 wave sequence slightly above where the market is today.

Using 1378 as the termination point of wave 1, the 1340 low could conceivably be wave 2. 1414 becomes wave 3, 1387 wave 4, giving us a projection for wave 5 around 1421. If the market complete a 5 wave sequence from 1387 in the neighborhood of 1421, that would complete a 5 wave sequence from the 666 low. From there we could expect another move to the downside.

Should the market move above that level, the next most likely scenario would be 1378 as the termination point of wave 1, with the drop to 1340 wave 1 of an inverted corrective wave. The move to 1414 and the subsequent drop to 1387 would be waves 2 and three of that corrective wave sequence, putting us now in wave 4. If that scenario plays out we would see another small correction after wave 5, followed by waves 3, 4, and 5 from the 666 low. This would be a very bullish scenario.

For now we will let this wave play out, keeping a close on 1421. The market should let us know where it’s heading from there. In the short term, we would expect the market to move above the current 1416 level.

The Week Ahead

The week started out on a positive note, with the SPX hitting a new high from the 1340 low, hitting 1414.This completed a 5 wave sequence from that low, with a model value of .988. From there the index moved lower towards Monday’s close, forming Wave 1 of the down move, before edging up slightly into the close to form Wave 2. We were looking for a weaker market on Tuesday, and the SPX moved sharply lower at the open, hitting the Wave 3 low at 1397. The rest of the day was spent gaining back lost ground, with the higher opening on Wednesday; Wave 4 was completed, with expectations of the market moving lower from there. After hitting 1408 in the opening minutes, the market lost ground again, nearing 1400 before turning higher. After rising to 1407, it appeared the market had completed Wave 2 of 4, indicating another move lower. That move lower came at the opening, the SPX falling to 1389 before halting the slide. The move from the 1400 Wave 1 low, to 1389, turned out to be an inverted corrective Wave 2, followed by Wave 3. After rising to 1395, the market lost ground again to 1388.73, completing the 5 wave sequence with a model value of .982. Having finished that wave, the next move was expected to be up. After a higher opening on Friday, the market dipped below the 1388.73 low, and then rallied. This wave sequence turned out to be a semi-inverted corrective wave, with the end being 1399.18 near the close trading. From there the market lost ground to 1396, before turning slightly higher at the close to finish the week at 1397.11.

We believe the 1399 high represents the top of a correction from 1388, and we should now begin a wave 3 from the 1414 high. Semi-inverted corrective waves usually indicate substantial strength in the underlying trend, which in this case is to the downside. We anticipate the market moving lower beginning on Monday, taking out the 1388 low, and continuing to the downside as it completes waves 3, 4, and 5 from the 1414 high. Only after completing the upcoming wave sequence can the market think about moving higher once again. The first point to watch will be the 1399.18 high. Our model does not allow for a move above that level after a semi-inverted corrective wave. If that level is breached, our thesis will be wrong. If that level holds, a move below 1387 will result in a sizable move to the downside.

Reversal at 1397?

Between 1397 and 1400 the SPX will complete a 5 wave sequence from the 1392 low. That will complete a 5 wave inverted corrective sequence from yesterday’s 1389 low. Inverted corrective waves are indicative of strength in the underlying trend, which in this case is to the downside. We may now be heading back in that direction.