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SPX Update: The Rally Has Now Completed Minimum Expectations


We can now count five advancing waves on the short-term charts, so we should stay alert for a potential turn.

The short-term wave counts have performed about as well as they can for the past five weeks. Thursday's update noted that the market may be approaching an intermediate chop zone, but also expected that S&P 500 (INDEXSP:.INX) was likely forming a very small fourth wave, so the short-term was still anticipated to resolve higher. In that session, the SPX tested the 1500 +/- support zone; then on Friday the market gapped up and came within roughly 5 points of the intermediate target zone of 1520-1530.

There is a chance that's all she wrote for this leg of the rally, and I would urge caution here (note this is much different than urging front-running a turn). As I discussed on Thursday, the market is now well within the "margin of error" for the intermediate projections. While the market has not yet formed an impulse wave down -- and thus has not given solid indication of a looming correction -- it pays to be aware that if we are indeed about to enter a higher degree fourth wave, then we're in for some chop. Fourth waves can be very hard on accounts, since they love to knock players out of both sides of the trade. They're fantastic at stop grabs, and often reverse at the exact moment when you become convinced that they're breaking out or breaking down "for real." On many a night while trading Forex or Globex, I've given back profits trying to scalp a fourth wave. Fourth waves are my arch-nemesis.

We can see on the 3-minute SPX chart that the rally has now completed the minimum expectations of a five-wave structure, but the trend lines and bearish overlap levels on the 3-minute chart will help provide early warnings. It is also still possible that the market will form an extended fifth wave here, in which case we're only in wave i of (5) (not shown); I simply can't predict that in advance, so we'll have to see how things unfold in the next couple sessions.

Click to enlarge

The hourly chart remains largely unchanged from previous updates, and also depicts a rally leg that now features enough squiggles to count it as a complete structure. Note that while the market always reserves the right to do something I've failed to foresee, this is currently not anticipated to mark "the final end of the rally," only a consolidation/retrace phase.

Click to enlarge

In conclusion, the market has completed the minimum expectations for this leg, and we can count five clear advancing waves on the short-term charts. This tells us to start watching for a potential turn, and when we see our first small five-wave form in the downward direction, we'll have early confirmation of a larger correction. In the next update, we're going to discuss the long-term outlook in detail, and take examine some multi-year charts of SPX and other indices. Trade safe.

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