Waves 3, 4 and 5?

Friday's Market

The market gapped lower this morning, confirming that an inverted corrective wave was in progress. The SPX dropped to 1380 before trying to move up. This was only a brief pause, however, as the market headed lower again, 1374. The market it made it back to 1377 before once again moving lower. It fell to 1370, rose to 1372, and then dropped again to 1368. From there the SPX tried a more sustained comeback, moving back to 1372 before making one last drop for the day to 1368. Once again 1372 was the extent of the move back up, as the market faded into the close to 1369.

Today’s move was an inverted corrective wave from 1388.71. This wave terminated at 1372, and completed a 5 wave sequence from 1403.39 when it hit the low today of 1367.96. Yesterday we indicated it was not yet clear which wave was inverting, but we now believe it was wave 2 of the 5 wave sequence from 1403.39 to 1367.96. This would appear to be wave 3 of the sequence from 1415.

Having completed a 5 wave sequence we think the market could rebound on Monday, and we are looking for a move up between 1378 and 1391. This would be wave 4, and we believe wave 5 of the sequence will bring the SPX down to the 1331 level. A move above 1393 would indicate that the 5 wave sequence from 1415 was completed, and perhaps a more extending correction, or more, was underway. A move below 1368 would probably mean wave 4 was over, and wave 5 was underway.

We continue to believe that the correction from the 1422 level is not over, and we expect to see lower prices from here. We continue to see indications that the 1331 level will be the next stopping point.

Thursday's Market

After opening slightly higher today, the market dropped to 1400, and then quickly rebounded to 1403. That would prove to be the high for the day, as the market turned lower and fell to 1395. The market tried to recover from there, moving once again above 1400 to 1401. The SPX spent much of the rest of the day working lower, with only a few small bounces higher along the way. Just before 3:00PM the market hit its low for the day at 1389. From here the market tried to move higher, making it to 1393 before fading once again into the close, dropping back to 1391, before rising slightly into the close.

The action today looks like the completion of a 5 wave sequence from yesterday’s 1403 afternoon high. Wave 1 and a semi-inverted corrective wave 2 completed yesterday, with the drop to 1395 wave 3 of that sequence. The rise to 1401 completed wave 4 and the final drop to 1389 wave 5.

This completes three 5 wave sequences from 1415, those terminating at 1394, 1403, and today’s 1389. From this point, a rise back to 1400, and a drop back to 1387 would complete the 5 wave sequence. These are idealized values of course, and a drop to 1385 from today’s late afternoon high of 1393 would satisfy our model.

The short term outlook at this point is a little muddled, perhaps reflecting the uncertainty surrounding the market. Outlook number one has the market completing wave 3 from 1415 today, moving higher, and completing wave 5 around 1385. From 1385 we would expect the market to move to 1404 short term. This scenario seems to have flaw in our mind, with future market projections using these values turning into an endless loop of sorts, the market bouncing between 1404 and 1385.

The second outlook has wave 5 from 1415 terminating today at 1389. This value falls within our target range for wave 5. This would mean that the market will move higher, to 1404, from that 1389 low. This has some of the same issues as outlook number one, bouncing the market between 1404 and 1385. Both of these are possible, with 1404 and 1385 being the breakout values to watch.

The third outlook, and the one we currently favor, is that wave 1 terminated at 1394, and waves 2 and 3 are actually waves 1 and 2 of an inverted corrective wave, or wave 3 terminated today at 1389, and the move up from there is wave 1 of an inverted corrective wave. If 1385 fails to hold, or more likely, if we gap through it, this outlook would be confirmed. This would signal lower prices ahead, and fits more closely with our longer term viewpoint of another move down from 1422, most likely to the low 1300’s.