Another week gone by and prices continued to climb with the same pattern of small corrections and strong breakouts. It has been a long time since the market managed a make a decent correction (bigger than 5%) and it seems that fear of an impeding big correction feeds the rally. All declining patterns thus far have been corrective (overlapping wave moves or 3 clear waves down) and followed by an upward break out to new highs. The most recent decline was a 3 wave downward move as can be seen in the following chart. S&P made a low at 1650.88(wave A), then made an upward move at 1660.51 (wave B) and wave C followed to new lows at 1648.60. This pattern was classified as corrective as soon as the intermediate high (wave B) was broken. At that point the scenario of a further decline lost most of its chances relative to the bullish alternate of new highs. All this time we’ve been commenting on the fact that no important support has been broken to put the intermediate trend in danger. Only short term supports were broken but again prices were support by the Keltner channel boundaries. All these are signs of an intact bullish trend that if not followed, could prove very costly to bet against.
Short term support is found at 1656 and at 1648. The trend remains up and even on the daily chart below, there is no worrying signal that could foretell the end of this move from 1343. Having broken the previous all time high, I favor the bullish scenario that implies we currently are in a new impulsive move that started in 2009.
This scenario of course is favored only just because we made a new all time high. Current overlapping pattern from 2009 needs to unfold to a clear impulsive wave in order for this wave count to hold. Now we zoom in the recent price developements and check how the recent price pattern can be counted. In the chart below I just make a note of the waves I notice just by counting them. This could help us determine not only the wave count but if this entire move is or corrective. As by textbook rules, 9 waves in internal structure is an impulse. Therefore if prices pull back and give a new high, our bullish scenario will become stronger and in turn make our longer term wave count stronger as well.
If we try to choose the 2 most possible wave counts for the upward move from 1343, the chart below depicts our two favorite and most probable wave counts. The red count which is our first option implies that we currently trade within an extension of wave 5. The blue wave count implies an even bigger upward potential for the move that started at 1343. For the blue wave count we are still inside wave 3 and its extensions.
We have to note two things regarding these two wave counts and the market behaviour in general. First, everything in life makes cycles. The market as well makes cycles. It cannot move towards one direction all the time. It will make a correction but not when WE want to. That been said, the only thing that could put this wave counts in danger is if prices break below the 1600 level. Secondly, these wave counts are supposed to be a supportive tool in our analysis. Trading with respect to those wave counts needs a lot of expertise and a risk management strategy that should be balanced relative to our risk profile.
As always, thank you for taking the time to catch up on my thinking.