After the May 27th and June 3rd tests to the all time high the S&P500 index reversed down for a second bear leg in the sequence from the all-time-high top. As we described “bulls had the directional edge…bears the short term timing advantage”.
Although the halt to the bearish price decline at 2.072 is not a full disappointment to the bulls, it is worth taking a look at the larger picture to get a handle on the function of this muddled wave structure that overall moves sideways along a few weak breakouts to new highs. When you see such a rambling pattern on the daily you can switch to lager time frames to find clues about how this fits into the larger degree Elliott Wave cycle.
Based on the monthly chart (below) we are looking ahead to a Primary wave 3 in circle top and the weekly inset explains when and how it might develop. The S&P500 may climb to another marginal all-time-high to complete the Intermediate wave (5) ending diagonal. The move might take as long as 4-5 weeks before the actual reversal happens; and, when I say “marginal,” I mean that on the weekly scale, and I am not suggesting that the S&P500 might exceed 2126 by only a fraction of a point. The new top can be 10+ points higher easily.
Is the coming reversal from the diagonal the point where it is better to batten down the hatches? The picture might be somewhat scary since the market has not experienced such a large degree slide in four years. But, on the other hand, we are talking “only” about a Primary degree wave four correction. It might take as long as a few years to develop but what is more important is the depth it can reach. To demonstrate the proportions of the impending wave four correction, I copied the territory that has been seized by Wave 2 in circle back in 2010-2011. We are expecting a move against the trend that is similar in magnitude. It is almost sure that wave four will not have the same shape (i.e. will not last 17 months and at the same time fluctuate within a 360 point span). According to Elliott’s guideline of alternation the correction will either be more time consuming and shallower like 240 points in 25 months, or sharper such as a 500 point S&P decline in about 13 months, or anything proportional in between. Anyway, due to the large degree cycle top it is a “take profit and buy back later” size pattern, even with a risk tolerant investment approach.
For now, just be patient until there is clear evidence of the bear break form the completed ending diagonal.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.