A benefit of understanding Elliott Wave analysis is that it places the stock market into a bigger objective context, from which you can make major investment decisions. And, based on a current reading, we are likely still in a corrective wave structure, setting up another downside leg.
We’re now navigating a 4th wave structure, the most variable wave within the 5-wave Elliott Wave structure. And, in true 4th wave fashion, the market has not given us a clear path as to how we will complete it over the next month or two. But it does suggest we will likely be heading lower before we see the setup to break us out toward 3,000 points on the S&P 500 Index SPX, -0.85%
I warned you well before this correction began that it would convince most market participants that the bull market that began in 2009 has concluded. And, as I have been reiterating, I still think we have several more years to run before we complete this longer-term rally off the 2009 lows. Our bigger picture perspective is still expecting a rally to 3,011-3,223 points as our next rally phase, as long as we hold the 2,400 region on the S&P 500.
The greater probability suggests that this correction is going to push out longer in time.
Regarding the specific targets to complete this correction, I think much of it is based on whether the market can rally in the coming week. If we are able to rally in the coming week, then there is a good chance that the triangle pattern may hold, and not see us break down below 2,557 on the S&P 500. But that would require a 3 wave drop off the d-wave resistance box.
However, if the market were to immediately break down below 2,640 on the S&P 500, it opens the door for a direct drop to lower lows, with an ideal target in the 2,450/2,460 region. And if that break below 2,640 completes 5 waves down toward the 2,600-2,625 region, that would be considered wave 1 down for the c-wave of (y) of (4).
In summary, should we see a rally up to my target of 2,750-2,780 on the S&P 500 in the coming week or two that makes the triangle potential at least equal to the potential for the w-x-y pattern. The deciding factor will be in how we drop from that resistance region. However, if the market drops early in the coming week below 2,640, it would suggest that we may already be in the c-wave of the (y) wave of (4), which is targeting the 2,450-2,460 region within the next few weeks.
Lastly, be mindful that this is a bigger corrective structure that has no specific pattern to which it must adhere and that is why we experience so much whipsaw. While we have been able to identify most of the turns, we did warn even before we began this correction that it will be treacherous market action. This will not likely cease until we complete this wave (4). So it is likely going to take us more time (potentially several more months before we have waves i and ii in place for wave (5)) before we are able to develop our next major rally setup.
See charts illustrating the wave counts on the S&P 500.
Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring intraday market analysis on U.S. indices, stocks, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.