There are times when the Market seems to be immune from downside corrections and stocks just keep advancing. These instances most often occur on the SECOND upswing in a typical 5-part advance.

I speculated last week that the major indexes were more than DUE for a correction. I look to have been premature on thinking a correction might hit this week, although upside momentum seemed to falter some today and Friday remains to finish off the week. My thought was that given the overbought extremes seen in momentum models like RSI and given such high levels of bullishness, there was the risk, if not high risk of a pullback.

So far, the bulls have yet to stop buying and the bears have thrown in the towel it seems. When the laws of gravity seem to have been repealed it is usually in the second upswing of a 5-part advance that has the following segments: (1) an advance; (2) a pullback of at least 3-4 days; (3) an even stronger advance that may seem like it will never end as any technical resistances get pierced; (4) a correction (finally); and (5) a final upswing that is not typically as strong as the middle up segment or 'wave' 3.

Bearish declines within a larger advancing trend have usually just THREE parts, not five; i.e., a decline ('a'); a rebound ('b'); followed by a second downswing ('c'). These segments are labeled a, b and c at the conclusion of each move. An a-b-c correction is relevant to the first highlight on my first chart, that of the daily S&P 500 (SPX).

The current advance labeled 1 to 5 below with the green trendlines. Only parts 1 and 2 are completed; part (wave) 3 is in process; and parts/waves 4 and 5 are yet to develop (a speculation on the shape of things to come).

A typical 5-part advance comes often only after a 3-part or 'a-b-c' bearish correction, as highlighted below with red trendlines. Just as the second decline in an a-b-c pattern is typically more prolonged (although not here!), the second advance of 3 upswings (interspaced with 2 pullbacks) is typically the longer stronger move. So called wave 3 advances (in Elliott Wave terms) are the ones that may easily cut through prior highs, as happened on the recent SPX move above 1150.

SPX being at an overbought RSI extreme and also 'overbought' in terms of a HIGH bullish sentiment (seen above), may not mean a thing in a wave 3 price swing. Still, overbought/oversold conditions tend to, sooner or later, have an effect. A correction is going to come when the bears have the bulls just where they want them: overconfident! By the way, a next correction isn't likely to be overly deep if it follows the typical bullish wave structure or pattern.

When prior resistance is pieced, it tends to 'become' support on subsequent pullbacks, suggesting 1150 as an area of future SPX support. Breakouts above previously penetrated up trendlines also will tend to become subsequent support. This is best seen on the SPX hourly chart below. The previously 'broken' up trendline, which was pierced on the late-Jan (1/21) sell off, seemed to offer resistance on the recent rally. However, after the decisive upside penetration of this trendline, the first hourly price dip rebounded from this same trendline, suggesting that was resistance had become support. (A break back below the up trendline would be a near-term bearish development.)

Just as 'overbought' indicator extremes (RSI and 'sentiment') led me to a view that the current rally might falter sometime soon (e.g., at the SPX prior high), the same thinking led me to anticipate that the Nasdaq Composite (COMP) rally could have trouble piercing its previously broken up trendline. I noted anticipated resistance at the red down arrow on the trendline below. At first, COMP stumbled a bit on hitting this trendline, but then prices got above this line yesterday. COMP support then seemed to develop in the area of this up trendline.

The strength we are seeing in this market is fairly typical of wave 3 advances. It will be interesting to see next if the Dow 30 (INDU) can ALSO penetrate resistance AT the lower up trendline highlighted below. The very high RSI reading may finally also act as a resistance weight on INDU, along with the trendline. If INDU can't keep a rally going, this in turn could act as a drag on the rest of the market. The ability to continue on above INDU's high today around 10784 is a key watch in the next 1-3 days.


Bob Prechter, probably the most well-known of Elliott Wave 'technicians' in recent decades, spoke of wave personalities in his book ("Elliott Wave Principle") and some of his main points regarding 'wave 3' advances ring true in this current advance:

A strong and broad advance

Increasingly favorable fundamental trends, even if just emerging

Often the most extended move relative to prior advances

Generates breakouts, upside gaps, volume and breadth expansions

Good participation among many to most sectors of the market

The market seems immune to selling pressures