S&P 500 Signals Short-Term Correction as Breadth Divergence Deepens, but Final Upside Wave Still in Play

Extended Rally Experiencing a Corrective Pullback

In our update from May 7, when the S&P500 (SPX) was trading at around $7,340, we showed that there was late-stage rally risk for the index, as it was wrapping up its final waves for a smaller 3^rd wave (gray W-iii in Figure 1 below), or alternatively a final 5^th wave.

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

Fast forward to today, the index traded as low as $7,356, erasing the gains since our update. It subdivided into nine (blue) waves to last Thursday’s high at $7,517, in the very extended 323.6-361.8% Fib-extension zone, as the 123 to 161.8% region is often a more typical 3^rd wave target. Besides, the 323.6-361.8% is more common for extended 3rd waves than it is for 5th waves, which typically reach multiples of the 176.4-200% level. Thus, this supports our thesis that (gray) W-iii of (green) W-5 topped, not all of the black W-3.

Market Breadth and Elliott Wave Alignment

In addition, the index’s cumulative advancing/declining line (see Figure 2 below) continued to show fewer participants as the S&P 500 rallied. Thus, it took almost 4 weeks for the index to respond to the divergence, underscoring that it is a condition, not a trade trigger.

Figure 2. Cumulative A/D line for the SP500

The last time the index experienced a 4-week divergence was between the weeks ending May 13 and June 10, 2024 (not shown). The index continued to rally by another ~4.5% before an approximately 10% top-to-bottom correction erased all gains. Although the sample size is only one, it exemplifies the Elliott Wave pattern we’re tracking in Figure 1. A small 4th wave pullback (gray W-iv) to ideally $7,310-7,420, which has already been reached, should precede a rally (gray W-v) to 376.4-400.0%: $7,650-7,720. From there, we still expect a >1000p bear market.