A VERY Extended [a] Wave

As I have outlined many times before, when we track a b-wave retracement, it subdivides into an [a]-[b]-[c] structure.  The [a] wave of that b-wave retracement most often targets the .382 retracement of the prior decline, whereas the [c] wave of that retracement, which completes the b-wave, often targets the .618 retracement of the prior decline.

However, in our case, I have always expected that the market will likely retrace to at least the 2800SPX region, and potentially even higher before this b-wave completes – which I outlined even before we dropped from 2800 to 2350, and even reiterated it many times as we were dropping below 2400SPX.

While I did not want to “expect” that the [a] wave would extend much beyond the .382-.500 retracement, it seems we have clearly done so in the SPX, as we are approaching the .618 retracement of the prior rally, whereas the IWM is now within spitting distance of the .500 retracement.

But, that does not change my overall expectation of the market.  I still expect this rally will take us to at least the 2800SPX region, and potentially even higher.  And, I still expect that the rally will take shape as an [a][b][c] structure, even though this initial [a] wave has rallied beyond standard targets. 

Moreover, as I noted last week, the higher this [a] wave rallies, the higher the [c] wave of the b-wave will take us.  But, it also means that we should still see a [b] wave retrace.  And, after today’s action, I think many in the market have been dispelled of that potential.  FOMO has clearly taken over, especially if we continue up towards the 2700SPX region.  And, maybe that is what we need to happen to allow the market to finally see an appropriate pullback.

Again, nothing in the bigger perspective has changed, despite the [a] wave taking us higher than standard expectations.  Should I see signs that something else is playing out, I will certainly advise you of that potential.  But, as Garrett noted today, the great majority of the stocks we track still suggest this is simply the [a] wave within a bigger b-wave rally.  So, that means we should still see a retracement and the market likely has higher to go in the coming months later this year.  But, I don’t think we reach those much higher levels in a direct fashion.