Two weeks ago, see here, using the Elliott Wave Principle (EWP) and technical analysis, I said:
“If the SPX can hold 4565, it should be able to move higher to ideally 4750-4800, baring any 5th wave extensions.”
The index and my EWP-based analyses did not disappoint, as the S&P 500 reached SPX 4744 on Monday and reversed hard. Close enough to SPX 4750, since I was only off by 0.1%? Possibly, now the question is: "Did the index top and is now embarking on a 10-15% correction? Or, can it squeeze out one more rally deeper into the ideal target zone?” This question is akin to my recent analyses on the Nasdaq 100 (see here).
Figure 1. S&P 500 daily chart with detailed EWP count and technical indicators
Figure 1 above shows the two options, highlighted by the black square, which is the area of focus of this article. Either yesterday’s low was the end of a complex wave-4 (grey a,b,c letters) correction or the start of a trend change, i.e., a more extensive correction. Flats in a bull market comprise three waves down, three waves back up, followed by five waves down. The latter shows nice for the NASDAQ (see my recent tweet here). Because this is possibly an irregular flat, where the three waves back up made a new all-time high, it is, therefore, a possible ATH – the top of (green) minor-5 of (red) intermediate-iii of (black) major-3. Subsequently, the five waves decline was the start of a more extensive correction.
Now, the market will have to thread through a needle. We should know soon enough. Please be aware that baring any unforeseen extensions of the possible final 5th wave, the upside potential is ideally around 120p on the SPX, while the downside risk is now potentially 300p. How do we know? A drop below the Nov. 10 low of SPX 4630 without making a new ATH will be an excellent signal that SPX4350+/-50 is, at some point, most likely next. On the other hand, a rally back above SPX 4725 will be a perfect signal that SPX 4800+ is next (green dotted arrow).
Lastly, please note the red dotted arrows on the technical indicators on the chart for the current period and back in April-May. Back then, the index also went through a small 4th and 5th wave setup (grey box). Indeed, the (orange) micro-4 wave was also an irregular flat (blue a, b, c). Besides, once the (grey) minute wave-iii completed, the swift, ~5%, minute-iv correction transpired in early May. Thus, with the similar setup in the technical indicators and a possibly similar type of 4th wave complete, albeit one degree higher than in the spring, odds favor higher prices followed by a more significant correction. But only as long as SPX 4630 holds.
Bottom line: The S&P 500 held 4565 and, therefore, moved higher to almost the ideal SPX 4750-4800 target zone as forecasted. Thus, the index has reached another crossroads. It can start its 10-15% correction now or try for one last rally to SPX 4800+ first. Analyses of prior similar setups during this rally suggest the latter. Besides, as I always say, “in bull markets, upside surprises and downside disappoints.” Thus, as long as SPX 4630 holds and the bulls can rally price above SPX 4725, I will look for one last rally. By then, I expect enough negative divergences on the technical indicators to help usher in the next correction similarly to what was seen in early May, but likely two to three times as severe.