S&P500 Update – Has The Rally to $4300+ Started?

The “five waves lower” Materialized

In last week’s update, see here, we found for the S&P500 (SPX) using the Elliott Wave Principle (EWP)

“The anticipated move lower, red W-c, is underway and subdividing into five smaller (green) waves: 1, 2, 3, 4, 5. … Now that we know where the anticipated W-b exactly topped …, we can narrow down the ideal target zone for all of the anticipated black W-b from last week’s “$3730-3870” to ideally $3760-3820.”

Fast forward, the index reached $3764 yesterday and has since staged an 80p rally. Thus the primary expectation for a continued move lower to around $3750 was validated. Besides, there are now enough waves to consider the decline from the December 13 red W-b high complete: the five green waves of red W-c into yesterday’s low. See Figure 1 below.

For Now Our Primary Focus Is $4375-4500

In the daily chart below, we can see the anticipated path better. The index most likely completed yesterday’s correction of an expanded flat black W-b (red W-b = red W-a, and red W-c is longer). Thus the anticipated black W-c rally to the upper black target zone should now be underway. This target zone represents the most common range relationship between (black) c- and a-waves.

Namely, W-c = W-a to W-c = 1.618x W-a. We cannot know which Fibonacci extension the market will ultimately choose at this stage. However, further clues are found by assessing the typical retrace relationship between (blue) A- and B-waves. The blue target zone represents the 61.80-76.40% retrace of all of blue W-A, the decline from the January all-time high to the October 13 low. There’s a confluence between the black and blue target zone at $4375-4500. Thus that is, for now, our primary focus.

For our primary focus to play out, the index will have to

1. Hold yesterday’s low and not break below the 76.40% retrace at $3635.
2. Break back above the green W-4 high made this week ($3890).
3. Break above $3930, followed by the December 13 high.

If the index fails to follow these steps, stalls out at around $3930 +/- 40, and then drops below yesterday’s low, our primary expectation will be invalidated. The stock market will be heading for the low- to mid-3200s instead.

Bottom Line

Over the last few weeks, we have been tracking our primary expectation, “Once the $3800 +/- 70 zone is reached, …, we must entertain the notion all of black W-b has bottomed. The index will have to move below $3635 (the 76.40% retrace of the October 13 – December 1 rally), with the first warning below $3725, to start to suggest there will not be a more significant C-wave rally to $4300+.”

Based on the current price action, our primary expectation remains on track, and the final decline (W-5) to around $3760-3820 was achieved yesterday with a low at $3764. Yesterday’s low needs to hold to allow the C-wave rally to ideally $4375-4500 to unfold.