The Beginning of Wave 3 Down?

The market spent most of last week to the upside after putting in a low at 1359 last Monday. Hitting the 1406 level on Friday put us within range of completing of a 5 wave sequence from that low, with a possibility of moving slightly higher before heading once again to the downside.

On Monday the direction was decidedly down, moving quickly to 1395. At that point the market attempted to rally, moving back near the 1400 level, before turning down once more, this time dropping to 1394. From there the market found some support, moving higher, back to 1398, as it neared the close. In the last few minutes of trading the market dipped to 1396.59, then rose to 1397.80 into the close.

It would seem today’s action confirms 1406 as the termination of the 5 wave sequence from the 1359 low. Last Friday’s drop to 1403 we consider to be wave 1 from that high, with the rise to 1405 wave 1 of an inverted corrective wave. Monday’s opening drop was part of wave 2, with the inverted corrective wave terminating at 1398.13. We expect the market to continue to the downside on Tuesday, with waves 3, 4, and 5 yet to be completed. This should be the continuation of the correction from 1422, and we will consider it as such. At this point a move back above 1406 would indicate another move higher. Levels to watch on the downside are 1385, 1359, and 1357. Breaks of these levels would be short term bearish.

Once again, we believe 1422 marks the high from 667, with a correction to 1388 being wave 1 of wave 2. From 1388 the SPX created an inverted corrective wave that terminated at 1359. The moves to 1391, 1385, and finally 1406 completed waves 3, 4, and 5, and wave 2 from 1422. We should now be moving back down for wave 3.

Friday's Market

On Friday, the market opened higher, and quickly rose to 1405. That rise was followed by a sell-off, pushing the market down to 1397. We believe this was the termination of a semi-inverted corrective wave from Thursday’s 1402 high. After falling to 1397, the market recovered, steadily rising to 1403, falling back a point, and then resuming the move higher to 1407. The market faded once again into the close, falling to 1402.43.

Friday’s action continued the rise from the 1385 low, completing wave 4, and waves 1, 2, 3, and 4 of 5 from that point. We think the market can make one more move slightly higher, to 1308-1311, before completing wave 5 of 5. That should complete the 5 wave sequence from 1357, and perhaps resuming the move from 1422.

We still believe we can move lower, continuing to target the low 1300 level from the 1422 high. Should we move above 1422, we think the market could move higher, with our target the 1460 level.

The End of the Correction?

After the run-up on Wednesday, we were looking for a pullback today, calling for possibly a move below 1385. This was based on our analysis of the move up being part of an inverted corrective wave which terminated on Wednesday at 1385. We have been keeping an eye on a slightly different count that would make Wednesday’s 1391 opening high a wave 5 termination point. We will discuss this count further in a moment, but for now we’ll take a look at Thursday’s action.

The market opened slightly lower, but very quickly reversed course, rising to 1393, and moving above the high from Wednesday. We now believe this completed a 5 wave sequence from Wednesday’s 1385 low. After correcting slightly to 1390, the market turned higher once again, hitting 1393.52, pulled back to 1392, and then turned markedly higher. Closing in on 1398, the SPX completed another sequence from 1385, but barely paused as it continued higher, eventually topping at 1402.09. This completed yet another sequence from 1385. The market pulled back towards the close, falling just below 1400, and closing at 1399.98.

Yesterday we said we saw a 5 wave sequence from 1358.79 being completed at 1391.37. However we were keeping an eye on a concurrent count that pointed to 1390.81 being the 5 wave termination point from. These two counts seemed to be converging on the same point, but today’s action makes it clear that 1390.81 is the correct termination point. The waves for this count would be 1358.79-1365.79, 1365.79-1361.91, 1361.91-1375.57, 1375.57-1367.86, and 1367.86-1390.81.

So now, if we look at the wave structure from the 1357.38 low, we count a five wave sequence back up to 1388.13. From there the SPX formed a semi-inverted corrective wave, bringing the Index back down to 1358.79. Up to this point, we continually stated that we did not count a 5 wave sequence from 1358 -1393, and we did not see the correction as being over. We remarked at the time that holding above the 1357 level may prove to be important, and first suggested a semi-inverted corrective wave having formed. We called for a move slightly above the 1388 high for wave 3 of this sequence. As we stated earlier we now consider 1390.81 the termination point of wave 3. The slight pullback to 1385 was wave 4, and today’s action to 1402.09 should complete wave 5. We now have a 5 wave sequence having been completed, and would now expect the down trend from 1422 to continue.

Should we move back down below 1385, and then break into higher ground, it would appear that the move from 1357 to 1402 was only wave 1 of a move much higher. We expect the market to continue lower from this point, but we will keep an eye on those levels for indications that the correction is over.