Yes, the market has been moving up, and every dip has so far proven to be a buying opportunity. But sooner or later, fear of losing profits eventually rears its ugly head. So one day, one big guy decides: 'forget this, man... I'm hitting market orders to sell, and I'm keeping my friggin' profits!!!' In response, the market begins to pull back, hoodwinking the small guy into believing that this dip is yet another 'buying opportunity.' But it's not. It's profit taking by the big guys. 

Yesterday's high in the S&P coincided with the overhead resistance shown on the market auction profile below (chart 1). Should it prove to be the high for the month of January, the wave structure depicted on chart 2 should guide our trading for the next few days and beyond.

(place the mouse cursor over the chart to enlarge) 

Chart 1. The S&P 500's market auction chart. 1316 is the bottom of a stiff resistance zone.

(place the mouse cursor over the chart to enlarge)

Chart 2. The S&P 500's wave structure.

Should this wave representation prove accurate, green wave (3) must have ended at Thursday's high. This means that green wave 4, a multi-day profit-taking phase, has already begun. A couple of characteristics to expect about waves 2 and 4 are the following:

First, the sum of their retracement levels must at least equal 80%, not to exceed 120%. Since wave 2's retracement relative to wave 1 was Fibonacci 33.3%, we should expect wave 4 to retrace about 50% of green wave 3, forcing the S&P 500 back down to the low 1270's. Another retracement ratio is 58.6%, which is derived from the square root of 2 (i.e., Pythagoras's constant), not Fibonacci numbers. Should green wave 4's pullback be this deep, 1265 becomes the landing zone. Interestingly, this 1265 price level posed a stiff resistance hurdle back in December. All in all, we're looking for a downside potential of 1265 to 1272.

Second, waves 2 and 4 must alternate in complexity. Since wave 2 was a sharp, one-day pullback, expect wave 4 to be more time-consuming and complex (i.e, choppy). The way to trade this wave 4 pullback is by selling every pop along the way.

Trade Well,

Peter