Wednesday, February 3, 2016

SPX, OEX, INDU Update: Near-term Inflection Point

The market continues to whip and saw in its ongoing base-building attempt, and yesterday saw the test of some important support lines.  If bulls can hold the area around yesterday's low, then they can maintain valid hopes for a trip markedly higher from this zone.  If yesterday's low fails significantly, then there will still be options for a move above this week's high, but odds would then favor it as part of a ongoing complex corrective wave, ultimately destined to flame out.

My first instinct after Tuesday's high was that 1947 marked the top of a B-wave, with a C-wave decline on deck -- and shortly after Tuesday's close, I published a chart in our forum showing that I thought the market would head directly lower by roughly 30 points.  It exceeded that expectation.  I labeled the forum chart as "speculative," and despite the market following the path I outlined on Tuesday, I hesitate to make a strong call here, because this market is ugly... however, my first instinct is right more often than not, and if the 1947 high was indeed a B-wave, then SPX would be expected to exceed that level after the C-wave decline completes (see INDU chart for two versions of the C-wave).

But there are no guarantees this is a C-wave decline; it could be the start of MB: (5).  The trickiest part of deciphering this wave is the fact that there are technically enough waves for a complete ABC rally fourth wave -- and, although the C-wave would be a little shorter than usual, we have seen some C-wave truncations in the course of 2016, so it's not out of the question.  A complete ABC rally would mean that the corrective rally is entirely over.

Today and tomorrow could thus be important, and will probably be revealing.  I've outlined why on the S&P 100 (OEX) chart below:

SPX's chart is a bit more detailed, but reveals a nearly-identical pattern:

If we do keep dropping, then it's still possible for yesterday's drop to be part of a C-wave (just a larger C-wave than originally hypothesized) and we could be tracking the black "or A/B/C" count.  Of course, in the event of a continued decline, we'd also have to consider the possibility that ALL OF (4) was complete, as discussed earlier:

In conclusion, the market has reached a near-term inflection point, so we will likely be able to begin eliminating some of the options in the next session or two.  Trade safe.

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