S&P 500 May Need to Dip First Before It Can Rally Again

November Rally Looks Complete

After two weeks of sideways consolidation, the S&P500 (SPX) broke higher on Powell’s speech on Wednesday and reached $4100 yesterday, only to drop lower on better than expected jobs report today. This price action makes for a complete five-wave Elliot Wave Principle (EWP) impulse pattern up from the November 3 low at $3698. See green waves 1, 2, 3, 4, and 5 in Figure 1 below. So the question is, “where does all this whipsawing lead us?” or, as the saying goes, “The market giveth, the market taketh away. ”

My primary expectation is that the index topped yesterday for black W-a at $4100 for a picture-perfect (green) W-5 = W-1 relationship. It should now be working on the more prominent black W-b to ideally $3795+/-70 before the next rally (black W-c of blue W-B) to ideally $4340-4470 starts. A break below this week’s low at $3937 will confirm this thesis. The technical indicators look slightly tired, with negative divergences (dotted red lines), and ready to move lower. But that is a condition, not a signal.

But, the Market Can Decide to Subdivide Higher

Namely and however, if the Bears cannot muster a breakdown, then the alternative option I am tracking becomes operable. In that case, a more immediate five-wave rally to ideally $4350-4400 will become the primary path. See figure 2 below.

Just as a reminder, while some misunderstand the EWP and my work, claiming that I’m saying the market will either go up or down, I only look at it from the perspective of probabilities because there are no certainties. Therefore, everything has to be approached with “if/then” views.

I provide those perspectives by ranking probabilistic movements based on the structure of the price action. I offer a primary EWP perspective, and if that pattern breaks due to the price breaking above or below a certain level, it tells us that the assessment was wrong. The alternative EWP option is then operable.

In a probabilistic environment, there’s never one option. If there were, then it would not be a probabilistic environment but a certainty. This approach is like an army general preparing a primary battle plan and, simultaneously, a contingency plan if the initial battle plans do not work. We prepare for battling the markets in the same manner.

Bottom Line

After two weeks of go-nowhere price action, the SPX reached the ideal W-5 =W-1 target at SPX4100 yesterday. Today’s decline should be the initiation of the final decline to that W-b target zone before W-c starts. That is the primary battle plan. Our contingency plan is that on a more immediate breakout above yesterday’s high, we will look for the index to reach $4350-4400 without a more significant pullback.