S&P500 Update: Correction Continues?!

S&P 500 Elliot Wave Analysis

In my last update, see here, I found using the Elliott Wave Principle (EWP) “I do not want to see the index go below SPX4390 as this possible [smaller] 4th wave becomes too deep, increasing the odds there will be no 5th 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. … and a retest of the February lows is then a real possibility.”

Today the S&P500 (SPX) dropped to SPX4381, increasing the odds of a continued correction, and the rally to SPX5500+ will be postponed by many more weeks. Allow me to explain using Figure 1 below.

Figure 1. S&P500 daily candlestick chart with detailed EWP count and several technical indicators

How the Correction Could Continue?

With the index going below SPX4390, the possible 4^th wave I was tracking became too deep and the price overlapped with the possible wave-1, bullish cut/off level in blue, which is not allowed in EWP standard impulse pattern. Hence, the 1/a, 2/b, 3/c paths I was tracking turned into an a, b, c. Please remember, albeit the stock market trends higher longer-term and therefore five-wave impulses to the upside are preferred; when a rally starts, one does not know if it will be five waves up or only three.

Consequently, one has to label the rally as both until the market disproves one or the other. Due to the overlap, the 1, 2, 3, 4, 5 potential is disproven, and the a, b, c rally is more likely. This, in turn, means a more significant B-wave bounce most likely ended in late March, and the next C-wave lower should be underway.

Since C-waves often comprise five waves, I have plotted the anticipated path for the next few weeks. Given the decline to today’s low counts best as a five-wave leading diagonal, with maybe a few marginal scribbles left, I expect a bounce to materialize soon to around SPX4500+/-25, from where the next leg lower, (green) wave-3/c, can occur, etc. See figure 1, dotted arrows.

Bottom Line and Forecast

The Bulls fumbled the ball and allowed for critical price-overlap to happen, which strongly suggests the correction that started on the first trading day of this year will continue and last for several more weeks. Therefore, I expect a bounce to SPX4500+/-25 soon from where the subsequent decline to ideally SPX4150+/-25 can start.

Once that target zone is reached, the index should bounce again to SPX4315+/-25, followed by a final decrease to SPX4050+/-25. Now we can let the market do its thing, see how it will fill in this anticipated path, and make minor changes if necessary. Or, as I always say, “All we can do is anticipate, monitor, and adjust.”