As we have been watching the IWM complete what seems to be its wave 4 pullback off the August lows, we may have struck a bottom today right at the .382 retracement of the wave 3. Since striking that level this morning, we seem to have what we can count as a micro 5 waves off that low, and the initial indications that wave 5 may well have begun. While there is still some potential for one more lower low down towards the 145 region before this pullback completes, I think we should be looking for the set-up of the next rally in the IWM, which should take up the next week or two.
As we turn to the SPX, I cannot say that we saw much of a 4th wave pullback in its ending diagonal. Typically, I would have expected a bit more weakness to test the diagonal support box on our 5-minute chart. So far, we have come up a bit short of that support, assuming we do not see any further weakness tomorrow. So, tomorrow may provide us with a c-wave down towards that support region.
Let’s begin to focus on the next rally phase.
If you will look at my SPX daily chart, you will see I have maintained a target box on that chart, starting at 2611SPX, the ideal target we have had for this run up, and it extends all the way through 2640SPX. While I am surprised no one has asked yet, I am going to explain why I have left that door open to a move to the upper end of the box. If the move off the October 25th low is a leading diagonal for a larger degree wave (i) of v (as presented in yellow), it would project up towards the 2635-45SPX region, which may even slightly exceed the top of the target box.
At this time, I am going to maintain my expectation that we will complete wave v in the ending diagonal pattern in green, or even a bit more extended in blue. However, if the market sees a strong move through 2611SPX on the next rally phase, that will open the upside target to the 2635--45SPX region before we complete wave v.
As you can see, when we analyze the market, I am always looking for clues as to what potential the market has before us. I will never remain static in my expectations in the market, especially since the market always provides further clues the more it fills in its patterns. But, we have to always listen to what the market is saying within these clues, which means we always have to be flexible within a non-linear environment.
And, since the potential still remains that we may have topped, albeit it is a lower probability at this time, we would need to see a strong break of 2570SPX to increase that probability. So, as long as any weakness into tomorrow is contained over 2570SPX, my expectation still remains that we have one more rally to be seen before we can consider this market as having struck a larger degree top.