The Trend is Down

Today's price action on the $SPX hourly chart confirmed that:

(1) wave-2 of "c" did in fact completed yesterday as suggested, and 

(2) an impulsive wave-3 of "c" is in progress. To this end, the recent $SPX floor of 1,635-1,640 was broken during the last hour of trading today.

The target of this wave-3 of "c" is 1,600 on the $SPX, which served as resistance during April. 

The trend is down

$SPX chose option "(1)" from yesterday, to move higher today, reaching 1,662 or 65% retracement, as part of wave-2 of "c".

Price action during the last hour of trading and into the close suggests that wave-2 of "c" is now complete and wave-3 of "c" appears to have begun, but without confirmation yet.

If our prediction is correct, we should see impulsive moves down going forward, with the previous resistance level possible target of this leg down.

As the trend unfolds, we will be able to define the target with more accuracy.

The trend is down

What we experienced in the last few trading days is a wave "a" down, a wave "b" up that retraced 75% of wave "a", and today the completion of wave-1 of "c" down during the morning floor trading hours.

We also experienced wave-2 of "c" (upwards direction), which is not clear if it has completed.

Therefore tomorrow Thursday, we may (1) see the market higher than today's high (suggesting that wave-2 up is still unfolding), or (2) we may move impulsively down (suggesting that wave-2 finished today and wave-3 started already and was unfolding into the close).

Retracement of a down-trend versus new up-trend

As we mentioned in the previous blog, we expected $SPX to "go higher".

What we just had today was a 75% retracement of the 1,687 - 1,653 leg down from last week.

The question is whether today's move (up) is the beginning of a new leg up (that could go for another 60 points), or was this the "b" (retracement) of an a-b-c down? In this case, "a' would be an irregular-flat.

To answer our question, we looked at the $SPX daily and hourly charts:

- Daily: Indicators (MACD+stochastics) on this chart suggest that we are in a down-trend and hence today's "bounce up"is part of a larger wave down (a-b-c).

-Hourly: We do not have yet confirmation for exhaustion of this leg up that started last Thursday at 1,535, not the beginning of a new leg down ("c" wave).

Overall, we favor reading direction on daily charts and confirming signals on the hourly

Trend is down

What we experienced in just 2 days is a leg down of 52 points on the $SPX (1,687 - 1,635). This leg subdivides in 5 smaller waves in the hourly.

At 10:00 am today, $SPX hit oversold on the hourly and the shorts covered - this down leg was over!

The market spent the rest of the day recovering from the drop, as expected. The retracement today was 38% (20 points), which means that the market may retrace even higher tomorrow. 

When the market turns downwards again (second leg down not confirmed at this point), it will hit as low as ~1,600's, finding support at a level that previously acted as resistance (April high). 

On our way to support

We expect that $SPX will reach as deep as the previous April high, where it should find temporary support.

Extension under way

First of all, I apologize for being unable to keep up daily with the blog.

We are in an extension wave that started on April 19, 2013.

Extensions usually subdivide into 5 waves.

This is what has occurred so far:

1st leg up : April 19 - April 25 (1,536 - 1,592)

small pullback: April 26 (1,592 - 1,577)

2nd leg up : started April 26 and has been on going.

Quantitative analysis suggests that this 2nd leg up will end around current $SPX levels and another pullback will occur, perhaps as deep as 1,617 (backtesting the recent breakout area of May 3).

After this pullback, the market will attempt to resume the uptrend. This 3rd leg up may fail at any time and has the potential of reaching 1,725!

We believe that the upcoming FED meeting and the chatter about tapering the bond buying program is what will trigger market behavior in the coming weeks. Also fear of an upcoming tapering of bond buying may cause participants to sell (causing the anticipated pullback mentioned above).