S&P 500 Update: With Third Wave Complete, It’s Decision Time
2022.10.05 15:59
Before we get started, let’s see how things have fared to asses if we are still on the right track.
- A , I had warned using the Elliott Wave Principle (EWP) that “if the bulls can [not] push the back above $4,120, and the bears manage an impulse lower from the August high, the path shown in Figure 2 becomes the preferred option.”
That path, by the way, pointed to the low-3000s. The bulls failed to break SPX 4120, and the bears managed an impulse lower. Now, the index is trading in the mid-3000s. So far, so good.
- , I then shared: “A break below the early September low of SPX 3886 opens the door for the impulse pattern as shown with an ideal target zone of SPX 3515-3400 for (green) W-3/c, then a potential W-4 rally back to ideally SPX 3675-3785 followed by the last drop to ideally SPX 3230-3330 to complete W-v od W-c of W-A.”
The index broke below SPX 3886 on Sept. 16, and last Friday it bottomed at SPX 3584. It rallied 200p since, to SPX 3792 yesterday. Thus, the S&P 500 came within less than 2% of the ideal target zones set forth weeks ago for this important low, showing the remarkable accuracy of the EWP.
- , I showed “the preferred view thus remains that of an impulse lower, but the bears do not want to see the index move back above SPX 3900, as that would start to suggest only three waves lower and a more complex pattern that can still allow for [as low as] SPX 3680+/-20, where W-c = W-a … before the [rally to 4375-4545] kicks in.”
The futures reached as low as 3560 on Sunday evening, whereas the cash market stalled at SPX 3584, and yesterday’s high came within 94p (2.4%) of the SPX 3886 cut-off. Thus, there are now three (green) waves down from the mid-August high (see Figure 1 below), and it is now decision time. Allow me to explain.
Figure 1. S&P 500 daily chart with detailed EWP count and several technical indicators:
Figure 1 above shows the stock market has done three (green) waves lower from the mid-August high: W-1, 2, 3. Thus, the index can now decide if it wants to complete five (5) waves or only three (3) waves. Hence, the question mark “W-4?.” The dividing line in the sand remains at the SPX 3886 level (bearish cut-off). Why? Because the fourth wave in an impulse cannot move into the price territory of the first wave. In this case, W-1 is the Sept. 6 low at SPX 3886.75. Thus, if the index’s price moves above that level as we advance without going below last Friday’s low, the path to SPX 4250-4700 opens (see Figure 2 below).
Conversely, if the S&P 500 stays below SPX 3886 and breaks below last Friday’s low (bullish cut-off), then SPX 3230-3335 can be expected.
Figure 2. S&P 500 daily chart with detailed EWP count and several technical indicators:
Please know I provide my perspective of the markets based upon the structure of the price action. Because financial markets are probabilistic, which the EWP recognizes, I must maintain a primary and alternative perspective on how the market will move. If the market breaks that primary pattern by moving above or below key price levels, in this case, SPX 3886, it tells me that perspective is invalidated, and the alternative perspective will be adopted. Aka, “forewarned is forearmed.”
This saying is appropriate because this approach is no different from a general drawing up a primary battle plan and, at the same time, drawing up a contingency plan if the initial plan does not work out. After all, battles can evolve unexpectedly. It is how one must prepare for any battle, as nothing is set in stone. There’s no difference in approaching the financial markets. As such, I – or anybody for that matter – will never be able to tell you with 100% certainty how the market will move in the coming weeks, months and years. Just like the general cannot foresee how the battle will go because there are, in both cases, almost an infinite number of variables at work. But with the EWP at hand, I can present you with enough information to know where the stock market will go under that primary perspective. And when it is invalidated, based on specific price levels, you can adjust your trading positions accordingly.
I hope you recognize the beauty of this approach, as well as the accuracy and reliability of it. It allows me – and you – to view the market objectively using a mathematically based methodology. Moreover, the EWP combined with Fibonacci levels provide objective price targets and invalidation levels. Thus, when I am wrong in the minority of circumstances, one can adjust perspective and positions quickly rather than fighting the market, which is a fight you will never win.
