SP500 filled the middle gap (1965.14) this past week as expected (see Tracking the Rebound (8/15/14)) and delivered more, a new all time high. At the moment, the new high in SP500 has been confirmed by Nasdaq indexes, but not by other benchmark indexes such as the Dow, Transports and Russell2000.
At this juncture, we ponder the following three relevant questions. What is the upside potential for this upswing? What may triger its early demise? How do recent price actions fit into the longer term picture?
Tracking the upswing
Our near term tracking counts suggest that SPX is wrapping up wave [iii] of 3 or wave 3 of this upswing, with an outside chance of wrapping up wave 5 itself. See the corresponding green, blue and red counts in Chart 1.
Several developments could thwart the upside potential of this upswing.
First, The red count in Chart 1 suggests that the end of an impulse wave is in sight. While the internal waves in SPX and NDX are out of sync, this may be the way SPX "catches up" to NDX via accelerated waves so that they start and end at the same time. This scenario introduces the possibility that some indexes make new highs and some fail to do so.
Second, the current upswing also presents three unfilled gaps as of Friday's close (Chart 1). As gaps tend to attract prices, the upwing could be at risk if these gaps get filled sooner.
Third, while the German DAX did rebound further as anticipated (see Tracking the Rebound (8/15/14)) , the wave structure of the rebound appears to be an overlapping 7 waves so far (Chart 2). A corrective rebound anticipates renewed selling as the red and pink counts in Chart 2 illustrate.
Tracking the big picture
Readers will recall that for some time in the past, we had been tracking the post-2011-low advance in stocks with a triple three wave structure and had made an unsuccessful attempt at timing the top of that advance based on time equality of each of the triple threes.
Chart 3 refreshes our memory where the red [c] represents the timed top. SPX did pullback initially but then rebounded smartly to make successive new all time highs. Price actions since then suggest that this triple three count may still have its merit.
The final wave [c] of Wave E, instead of terminating at the time-equality point, decided to extend into five waves ! (See Chart 4 for a close up view.) And the current upswing is wave (v) of this extended wave [c] under this scenario.
If this scenario tracks, the subsequent sell-off is likely targeting 1550-1750, perhaps 1300-1400 or even more.
It should be noted that this triple three structure is not the only valid tracking count of the post-2011-low advance, ex ante, but certainly one of the more interesting ones.