Is Trouble Brewing For The S&P 500 Futures?
2022.04.07 07:26
In my last update, see here, I started with, “My preferred method of analyzing the S&P 500 (SPX) and other indexes is the Elliott Wave Principle (EWP).” Unfortunately, my last update was wrong as the index did not advance like in November last year, despite a plethora of similar setups between then and now.
Yes, I am not afraid to acknowledge when I am wrong because nobody always gets it right in the markets. That is impossible. And one can only become better by realizing the mistake, learning from it, and moving on. Thus, it is back to the trusted EWP, as I last shared in late March for the SPX.
In this update, I would like to focus on the index’s futures market (ES_F)
Figure 1. S&P 500 futures candlestick charts with detailed EWP count.
S&P500 Futures Candlestick Charts With Detailed EWP Count
After three come four and five, but if there is no five the Bulls are in trouble.
In a standard, Fibonacci-based impulse wave-3 typically tops at around the 1.382 to 1.618x Fibonacci extension of wave-1, measured from the wave-2 low. Wave-4 then bottoms ideally at the 100-123.6% extension, followed by wave-5 to typically the 1.764-2.00 Fib-extension. See Figure 1 above. The ES-F topped last week almost exactly at the (green) minor-wave-degree 1.618x extension, which coincides nicely with the one wave-degree lower (grey) minute-wave-degree 176.40% Fib-extension. Thus wave-v of “3?” had topped. Picture perfect Fibonacci-ping-pong if you ask me.
Since that high, the index has so far declined in three waves (grey a/i, b/ii) into the ideal blue and green target zones for a possible wave-4, with an almost classic c=a relationship at today’s low. The blue target zone shows how low the (grey) minute-c wave can go, with an ideal at ES_F4430+/-5 but I do not want to see the index go below ES_F4378 as then the possible 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. That means the index most likely experienced a counter-trend rally off the February low, which always comprises at least three waves: a, b, c.
Bottom line: It is essentially “do-or-die time” for the Bulls. Stem the bleeding at ideally around ES_F4430+/-5, or suffer the consequences if the futures breaks below this range.
That will mean the rally into the late-March high was most likely only three waves, and a retest of the February lows is then a real possibility. But, if the index bottoms in this range and rallies back above this week’s bounce high (ES_4589), we can look towards a top around ES_F4660-4730.
The if/then scenarios are the beauty of the EWP: we know in an impulse wave 4 and 5 follow up after the 3rd wave completes. But if the anticipated wave-4 decline is too deep, the market will most likely not end a last 5th wave. Simple as that, and why I advocate for my members to sell into strength/3rd wave upside Fibonacci-target zones and then take a wait-and-see approach. Aggressive traders can then initiate new long positions in the lower target zones of the 4th with well-defined stop losses. Simple as that.
