S&P 500 Elliott Wave Count Warns of Correction as Breadth Divergence Deepens

Downside and Upside Target Zones Reached

In our update from May 18, when the S&P500 (SPX) was trading at around $7,385, we showed using the Elliott Wave Principle that a small pullback (a 4^th wave) to ideally $7,310-7,420 would precede a rally (a 5^th wave) to the 376.4-400.0% Fibonacci extensions at $7,650-7,720.

Figure 1. Short-term Elliott Wave count with technical indicators for the SP500

Fast-forward to today: the index bottomed out at $7,333 on May 19 for the gray Wave-iv. It staged a rally, which peaked yesterday, June 2, at $7,620 for the gray W-v. 0.4% shy of the ideal target zone set forth two-and-a-half weeks ago. The index has most likely begun its decline today, as negative divergences (red dotted arrows on the technical indicators) continued to build.

Building Divergences Foretell a Correction

In our previous update, we shared the index’s cumulative advancing/declining line, which continued to show fewer participants even as the S&P 500 rallied. Two-and-a-half weeks later, the divergence has only worsened. See the black box in Figure 2 below.

Figure 2. Cumulative A/D line for the SP500

While prices have been moving toward new highs, the cumulative A/D has rolled over and failed to confirm — a classic warning sign of weakening market breadth. This isn’t just noise. When the broad market (advancers vs. decliners) no longer supports the index rally, it often signals a pullback or trend reversal.

Key observations from the chart:

• Multiple failed attempts by the A/D line to make new highs
• Price is making higher highs while the A/D makes lower highs
• Recent breakdown in the A/D line as price stalls

Breadth divergences don’t always trigger immediate crashes, but they’ve historically signaled many important tops. See, for example, the red box in Figure 2 above.

Since our last update, there has been a smaller 4th-wave pullback to $7,310-7,420 (gray W-iv at $7,333), followed by a rally to $7,650-7,720 (gray W-v to $7,620), exactly as forecast by the EWP. Though another rally to ~$7,740 after a ~5% drop can’t be ruled out just yet (not shown), the weight of the evidence points toward a large-degree decline that could last several months.