S&P 500 Elliot Wave Analysis
If one were to believe all the doom and gloom pundits -and there are too many of these days- the S&P500 should be at 0 because of the same old news: inflation, war, FED, earnings guidance, etc. Law-and-behold , the index is rallying. Markets are forward-looking and all about “tell me something I do not know.” Thus, objective, fact-based analyzes are the prudent and proven way to go when forecasting the financial markets.
One method that often gets it right is the Elliott Wave Principle (EWP). Namely, two weeks ago, without knowing any “news” (see here), I showed the market correction that started on January 3 had become increasingly complex but that it had reached the ideal downside target zone and could be considered complete. Using the EWP, I found,
†If the index can hold around today’s lows, not break below last week’s low, and rally back above yesterday’s high, then it can start trying to fill in an impulse pattern to the upside (blue arrows; gray “i?”, “ii? ”, “iii?”, “iv?” and “v?”).†
Fast forward, and Figure 1 shows the same blue arrows and how the index has followed that path very well. Thus, the index appears to follow an impulse higher, which is a good thing as it signals the start of a new uptrend. But, now it is at a short-term crossroads, which I will explain below.
Figure 1. SPX hourly candlestick chart with detailed EWP count and several technical indicators
The recent rally can already be counted as five waves up.
The rally into last week’s high can be counted as five waves up, but there’s the possibility the sideways price action over the previous seven trading days is part of a more complex (grey, minute) wave-iv. See figure 2 below “grey iii?, iv?, v?”. In the latter case, a daily close above SPX4155 (dotted blue line) will signal wave-v is underway to ideally SPX4250-4275 to complete wave-1/a. From there (green, minor), wave-2/b should take hold and ideally target around SPX4025+/-25 before wave-3/c takes hold. This option is exemplified by the grey/green path in Figure 2.
Figure 2. SPX daily candlestick chart with detailed EWP count and several technical indicators
Alternatively, the index has already completed (green, minor wave-1/a) and is now in wave-2/b, targeting ideally SPX3975-4000 before wave-3/c takes hold. A daily close below SPX4075 (the recent lows; red dotted line) will confirm wave-2/b is underway. The green path in Figure 2 exemplifies this option. The technical indicators on the daily charts are pointing up and are on a buy, so I prefer the first option. But sideways chop requires patience, and the market will tell us soon enough. Ultimately, it is simply a matter of “rally first, then drop, followed by at least one more rally,” or “drop now then rally.” The ideal upside target zone for wave-3/c is similar: SPX4550+/-50.
The index will have to drop below SPX3950 to tell me a much more complex outlook is at hand and that “pesky” SPX3760-3730 will still be attained. It is not my preferred POV, merely an alternate, but that does not mean one should dismiss it. Be prepared for it by having appropriate stops, for example.
Bottom Line and Price Forecast
Two weeks ago, I found the S&P500 had two options, with the Bullish one preferred:
- Hold around today’s lows, a rally above yesterday’s high that targets ~SPX4160, drop to ~4050, and rally to ~4225 for a more significant impulse path. or,
- Drop below last Friday’s low targeting, ideally, SPX3732-3762, before we can start to look for another possible impulse to move higher.
Last week the index topped three times: SPX4158, 4168, and 4177. And it dropped three times to as low as SPX4073, 4074, and today to SPX4080. Thus option 1 was correct, reliable, and accurate. That’s the real power of the EWP. Therefore, based on the bullish technical indicators, the preferred path is for a continued rally to SPX4250-4275 to complete wave-1/a.
I then expect an around 5% pullback before the next leg higher, to ideally SPX4550+/-50, takes hold. Alternatively, the index will break more directly below SPX4075, bottom at around SPX3975, and then rally to SXP4550ish.