One and two weeks ago, see here, by applying the Elliott Wave Principle (EWP), I was looking for the S&P500 (SPX) “wave-iii targets ideally SPX4289-4442, which fits very well with the SPX4315-4375 target zone found using the hourly chart (see my previous post).”
On Wednesday, July 7, the index reached SPX4362, and yesterday it fell a little out of bed to SPX4289. The top reading is well within the ideal target zone and only 0.28% off the mark: well within the margins of error. Thus, is the wave-iii top in? And will the index now fall back to around SPX3940-4040 for a wave-iv, before wave-v of wave-3 rallies the index to SPX4442-4682? See Figure 1 below.
Figure 1. S&P500 daily chart with detailed EWP count and technical indicators
A break below the mid-June “FED low” is needed to confirm the more significant correction.
Since the early May low, there are now enough EWP moves in place to suggest the rally is complete. However, markets can always tag on another wave, so we have to remain vigilant and wait for a break below the mid-June “FED induced, we-will-raise-interest rates-sooner-than-we-say” drop to SPX4164 to know for sure. Using the simple moving averages (SMAs), we can also devise a “traffic light”: as long as the price is above the 10d, 20d, 50d, it is “go.”
As soon as the index closes below the 10d SMA, the light will turn orange: downside risk increases. And a daily close below the rising 50d SMA (now at SPX4217) will tell us the “traffic light” turned red, which means stop. In this manner, we have an objective way of knowing what to expect most likely next and the odds of a continued rally.
Figure 2. S&P500 hourly chart with detailed EWP count and technical indicators
Lastly, the hourly chart above shows the index can have completed already five (green) waves up off the March low following an almost picture perfect Fibonacci-based EWP pattern, with wave-3 to the 1.382x wave-1 extension, wave-4 back to the 0.764x Fib-extension, and now wave-5 only 0.28% off the mark. When five waves are complete, always expect -at a minimum- three waves in the opposite direction. Thus, caution to the long side is advisable for swing- and short-term traders. Longer-term, this Bull has, IMHO still plenty of upside potential. It will require a break below the recent March SPX3723 low to tell us a multi-year correction is at hand.
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