S&P 500 Outlook: Using Elliott Wave Analysis to Spot Key Market Turning Points

Another Move Lower Is Anticipated

In the June 3 update, when the S&P 500 (SPX) was trading at around $7,570, it was shown, using the Elliott Wave Principle combined with market breadth, that “the weight of the evidence points toward a large-degree decline that could last several months.”

Fast-forward to today: the index fell to $7,237 on Tuesday and has since rallied to $7,456. So far, so good. We now expect the next leg lower to around $6900, depending on the Fibonacci relationship: (gray) c/iii = 1.618x a/i to c/iii = a/I, and where the current rally ends. This assumes the index holds below $7,598. See Figure 1 below.

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

Elliott Wave Analysis Accurately Anticipated the Current Three-step Rally

With three waves lower by June 5, it remained uncertain whether a 4th wave up and a 5th wave lower would develop. Regardless, “After three waves lower, always expect at least three waves back up.” The index gave us three waves up, with an up day on June 8 and a reversal on June 9, thereby completing what counts best as five (orange) waves lower: see Figure 1.

With these five (orange) waves lower on the books, our lives were made easier again, as we know from the EWP that a three-wave bounce – gray W-b/ii – must be expected, followed by another leg lower: gray W-c/iii. So, in our June 9 Newsletter, see Figure 2 below, a multi-day a-b-c corrective bounce was expected with these precise targets:

→ (Orange) W-a to $7,380-7,430 (reached $7,396 on Wednesday)

→ (Orange) W-b to $7,300 +/-25 (reached $7,257 on Thursday)

→ (Orange) W-c targeting $7,465-7,530 (reached $7,456 so far; Friday’s high)

So far, the textbook three-wave corrective bounce unfolded right into the zones we outlined. Again, that’s three for three.

Figure 2. June 9 Newsletter Forecast vs Actual Market Performance by June 12

The point is that, when used correctly, the EWP allows us to look around several corners at once, providing remarkable foresight and a clear advantage. In addition, the EWP shows that financial markets exhibit predictable patterns, allowing us to participate with greater confidence. While there will always be periods of uncertainty, such as the “would a 4th wave up and a 5th wave lower develop?” question, once we do get five waves lower, the next several moves are highly predictable with uncanny precision.

Of course, there will be times when an analyst is wrong, but expecting perfection in an imperfect world is a recipe for (portfolio) disaster. However, one simply course-corrects by reassessing price action. When the index follows well-defined EWP patterns, as it does now, the next big-to-small moves are relatively straightforward, giving market participants an edge and a plethora of low-risk/high-reward entry and exit levels, i.e., the target zones.