Is Trouble Brewing for the S&P500?

S&P 500 Elliot Wave Analysis

In my last update, see here, I started with, “My preferred method of analyzing the S&P500 (SPX) and other indexes is the Elliott Wave Principle (EWP).” Unfortunately, my last update was wrong as the index did not advance like in November last year, despite a plethora of similar setups between then and now. Yes, I am not afraid to acknowledge when I am wrong because nobody always gets it right in the markets. That is impossible. And one can only become better by realizing the mistake, learning from it, and moving on.

Thus, it is back to the trusted EWP, as I last shared in late March. See here.

Figure 1. S&P500 daily candlestick charts with several technical indicators and moving averages

After three come four and five, but if there is no five the Bulls are in trouble.

In a standard, Fibonacci-based impulse wave-3 typically tops at around the 1.618x extension of wave-1, measured from the wave-2 low and wave-4, then bottoms ideally at the 100% extension, followed by wave-5 to typically the 200.0% Fib-extension. See Figure 1 above. The S&P500 topped last week a little higher, close to the 176.40% extension, and then started to decline.

On April 1^st, I shared with my premium major market members that I expected a multi-day decline in three waves: grey waves a, b, and c in Figure 1A. Since then, the price action has not disappointed, and so far, there are three waves lower from the (green) minor-3/c top. See Figure 1B.

Besides, today the index reached deeper into the ideal (black and green) target zones for a possible wave-4, with a classic c=a relationship at today’s low. The grey target zone shows how low the (grey) minute-c wave can go, but I do not want to see the index go below SPX4390 as this possible 4^th wave becomes too deep, increasing the odds there will be no 5^th wave. Consequently, the recent high was then based on only three waves up: wave-3/c. That means the index most likely experienced a counter-trend rally, which always comprises at least three waves: a, b, c.

US Stock Market Technical Forecast

It is essentially “do-or-die time” for the Bulls. Stem the bleeding at ideally around SPX4430+/-30, or suffer the consequences if the SPX breaks below this range. That will mean the rally into the late-March high was most likely only three waves, and a retest of the February lows is then a real possibility. But, if the index bottoms in this range and rallies back above this week’s bounce high, we can look towards a top around SPX4705+/-15.

The if/then scenarios are the beauty of the EWP: we know in an impulse wave 4 and 5 follow up after the 3^rd wave completes. But if the anticipated wave-4 decline is too deep, the market will most likely not end a last 5^th wave. Simple as that, and why I advocate for my members to sell into strength/3^rd wave upside Fibonacci-target zones and then take a wait-and-see approach. Aggressive traders can then initiate new long positions in the lower target zones of the 4^th with well-defined stop losses. Simple as that.