Monday's Market

It was more of the same for the market today. We opened with a gap to the downside, rallied into the afternoon, then faded into the close, giving back most of what was gained during the day.

We moved what we had labeled as wave 5 from Friday’s low slightly lower. That wave we believe to have completed wave 3 from the 1365.88 high. After a very short corrective wave 4, wave 1 of 5 completed near the close on Friday. From that point an inverted corrective wave 2 ensued, which carried over into Monday’s open, and resulted in the gap down. In just over an hour, the market completed that wave 2, and also waves 3, 4, and 5, which terminated at 1336.61.

The rally from that point, featured another inverted corrective wave 2, and the sequence brought the market back to 1347. This would appear to be the completion of wave 4 from 1373.91. It’s interesting to note that what we have labeled as wave 1 of the sequence turned out to be the resistance level, and not the actual near term low of 1343, which we have as wave 2 of the semi-inverted corrective wave 2. We think 1347 is a likely level for wave 4, because the projected wave 5 termination point of wave 5 from 1373.91 would be 1319-1295. This fits in nicely with our projected low of 1325-1260 for wave 5 from 1415. For now it looks like wave 5 from 1415 should now land in the 1319-1295 range. That would be the point from which we could expect a more extended rally.

This afternoon’s fade into the close was interesting, with a 5 wave sequence seemingly completed right at the close. The set-up was similar to what the market has experienced during this downtrend. It has been completing a 5 wave sequence late in the afternoon, which has then set-up inverted corrective wave 2’s, which usually generate the types of moves we have seen lately. Lust minutes before the close the SPX came within fractions of satisfying our model from wave 5, and then moved slightly higher. After that the market put in a new low that did satisfy our model. This action could mean we could see a higher opening on Tuesday; however we believe any move higher would be short lived, as we still see 1347 as wave 4, as we discussed earlier. It is possible that the first bottom was wave 5, and a corrective sequence will follow, put our model is generally pretty exact.

The Week Ahead

Our current view is that we are currently in wave 3 of a corrective 5 wave sequence from 1422.38. Wave 1 completed at 1357.38, and wave 2 at 1415.32. From 1415.32 we have completed at least 3, and quite possibly 4, waves. Wave 1 terminated at 1393.92, wave 2 at 1403.39, wave 3 at 1367.96, and possibly wave 4 at 1373.91. We expect wave 5 of this sequence to drop the market below 1325, and possibly as low as 1260. The wide range suggests that this wave will culminate in a rather sharp spike down. The shorter term wave count is also quite negative in our view, with the decline most likely to come soon, and be quite volatile.

This move down would only complete wave 3 from 1422, meaning we should see a bounce off the low, and then make one more move to the downside. We anticipate a quite substantial bounce, and if one fails to materialize, it could be quite bearish.

Should the market fail to move lower at this point, and rise above 1365.88, we would assume that 1343.13 was the completion of the 5 wave sequence from 1415, and we would most likely move higher.

Last Week's Market

This week was marked by increased volatility, with strong moves in both directions, but yet after a sizable drop on Tuesday, the SPX actually traded within a fairly narrow range.

Before we talk specifics about this week, we’ll first discuss our views as to where we believe the market Is at longer term. Starting from the March 2009 low on the SPX at 666.79, the market completed a 5 wave sequence, which terminated at 1422.38. We label the 5 waves as 1219.80-1010.91-1370.58-1074.77-1422.38. In our model the termination points of waves 1, 3, and 5 are correlated to specific parameters we derive from the wave structure itself. As wave 5 of a sequence completes, this correlation approaches 1.

After completing wave 5 at 1422, the market entered a corrective mode, which initially carried the SPX down to 1357.38. We expect this sequence to take on one of three basic patterns. The first would be a simple 5 wave sequence down. This would be the most bearish scenario. Second, the wave could become a semi-inverted corrective wave. This would consist of a first wave down, followed by wave 2 which would carry us above the previous 1422 high. Waves 3, 4, and 5 would then take the market below the termination point of wave 1. At the moment we view this as the most likely scenario. The third form this wave could take is an inverted corrective wave. This would be the most bullish scenario, with a small wave 1 down, an impulsive looking wave 2 carrying to new highs, a small corrective wave 3, another impulsive wave 4, and finally another short corrective wave 5.

We believe we are in wave 1 of this corrective sequence, having completed waves 1, and 2 up to this point. From 1422, the market completed a 5 wave sequence to 1378.24. 1404.62-1413.38-1392.92-1401.60-1378.24 is how we would label this. This in turn became wave 1 of a larger sequence from 1422, with 1378.24-1387.34-1365.99-1367.57-1357.38 being the termination points of the sub-waves.

Wave 2 then ensued, with wave 1 taking the market to 1388.13. A semi-inverted corrective wave 2 was next, bringing the market back down to 1358.79. Wave 3 brought the market to 1390.81, and after a short wave 4, wave 5 found the SPX at 1415.32.

1415.32 ended wave 2, and at the moment we have completed 3, and perhaps 4, waves of wave 3 from that point. Wave 1 was fairly straight forward, with stopping points at 1410.38-1412.31-1405.25-1405.81-1393.92.

After a short corrective wave 2, terminating at 1403.39, the market then began wave 3. This wave turned out to be quite complex. First, a 5 wave sequence was completed at 1388.71. Wave 2 was an inverted corrective wave, dropping the market to 1369.95, before terminating at 1372.35. Waves 3, 4, and 5 were relatively small, and wave 3 from 1415 was completed at 1367.96.

This week started with what we believe to be the completion of wave 4 from 1415. This was a semi-inverted corrective wave, playing out as 1372.41-1363.94-1371.82-1370.33-1373.91.

After completing wave 4 on Monday, the market turned lower, first tracing out a 5 wave sequence, which terminated early Tuesday at 1358.48.

in turn became wave 1 of a larger degree sequence from wave 4, with 1362.91, 1351.65, 1353.26, and 1347.75 completing that sequence.

The rest of Tuesday was spent completing a 5 wave sequence higher, in what we interpret as wave 1 of a semi-inverted corrective sequence. This brought the market back up to 1365.74.

Wednesday opened with a gap down, part of an inverted corrective wave 2 from the 1365.74 high. Once that inverted wave completed, several smaller waves completed the sequence from 1366, and wave 2 of the inverted corrective wave from 1347.75.

From that point the market rallied in a 5 wave sequence that took the market to 1363.73, and completed wave 3 of the semi-inverted wave. The market then turned lower until the close, dropping to 1354.32, to complete wave 4. The market moved sharply higher at the open on Thursday, rising to 1365.88, which completed the 5 wave semi-inverted corrective wave 2 from 1347.75. The  semi-inverted corrective wave took the form 1365.74-1343.13-1363.73-1354.32-1365.88 from 1347.75.

Having completed the corrective wave 2, the market once again turned lower, dropping quickly to 1356.94, and then recovering to 1364.64. The drop to 1357 we see as wave 1 of wave 3 of wave 5 from 1415. The recovery to 1365 turned out to be wave 1 of another semi-inverted corrective wave from 1357. From 1365, the market turned sharply lower into Thursday’s close, culminating in a gap down opening on Friday, bringing the SPX to 1348.49. This sequence, 1363.01-1363.55-1358.90-1360.52-1348.89, completed wave 2 from 1357.

After the gap down on Friday, the market staged a pretty impressive rally, moving up to first 1361, and then after a slight pause, up to 1365.66. This completed the semi-inverted corrective wave sequence from 1356.94.

Upon completing wave 2, the market immediately turned lower, and continued to move steadily lower throughout the day. 1361.49-1362.73-1358.49-1360.93-1356.97 completed a 5 wave sequence from the high.

After a short move higher, the market completed one more 5 wave sequence near the close at 1352.82.