One Wave at a Time on the S&P 500

Elliott waves are powerful, but they don’t make one omnipotent. For instance the S&P500 quarterly bar chart’s trend is bullish and the monthly is bullish; but, the weekly bull trend is ripe for a pullback based on RSI trend analysis. The daily on the other hand got stuck at 62 on the RSI which suggest a more bearish potential for that time frame. The daily bears took control for the first time since July 29. What conclusion can we draw? And, as a trader, what prediction is premature?

“I like to make sure that I don’t get thrilled by a possibility that has not been proven by the market yet.”

Last Friday formed a bearish reversal signal right on the target price we previously discussed in a post.  The RSI value was 62 at the close, which is usually the maximum we’d expect to see prior to any significant bearish action. That signal was triggered on Monday (when the market broke below Friday’s bar), and prices travelled far enough to make sure the initial bears don’t get caught in the next leg up. They are happy campers now.

Some in the Elliott wave community are posting charts with four (or more) degrees of trend being complete at the recent top. Are they correct? Probably, but I always like to make sure that I don’t get thrilled by a possibility that has not been proven by the market yet.

The daily chart of the S&P 500 cash index on September 23 with wave 5 of 5 at the top
The top of wave [v] of 5 of (5) interpretation is too early for my taste; the larger time frame momentum does not confirm that. At least place a large question mark there.
For instance, a top of wave [v] of 5 of (5) would mean that we reverse the whole trend up from the 2011 low, if not aiming for the test of the 2009 lows. It is a constant disillusion among traders, and analysts, that they try to look too far in time and price.

I would rather say that this new bearish daily momentum may drag the weekly to a 7 to 10 week long correction, which will end up around the 40+ level on the RSI. The last time a pullback of this magnitude happened was back in 2012, when we saw 130-150 S&P points drops. An equal move now would take us to just below 1900. That is probable enough for me, and it’s not an unnecessary stretch in math terms.

An (over)extended fifth wave’s swift reversal can trick the RSI, but fifth wave extensions usually have a parabolic appearance, therefore it is better not to consider it as the operative labeling. Consider the following alternative when you are weighing the context:

S&P 500 Daily chart showing a different Elliott Wave interpretation suggesting a large range
A less radical solution in which the market slows down the larger time frames.

What happens if the market falls much below the 1900 level?

Stepping stones - you have to get through the river one step at a time
Photo by: Tim Green

I will then look to sell any strength and will probably write another article for you about the minimum S&P target level of 1,660. But, and this is important, I just stay calm and patient for now because the monthly and the quarterly time frames need much further deceleration to support a Cycle degree trend reversal. By the way, a large range trade between 1900 and 2020, which I have been posting about, would serve wonderfully to cool down the above mentioned bullish larger timeframes and trend degrees.

One last issue to discuss is how to play a decline to the 1900 level. Avoid the daily signals. This tiny bear is premature for that kind of daily-sized risk. Beyond that, the daily timeframe does not have clear larger timeframe coordination. So, I will pursue this leg down with 120-240 minute signals on the continuously traded instruments, and 15-30 minute signals on the cash market. And if you only remember one thing, remember this:  Traders need to take it one wave and one trade at a time.

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.

About Laszlo Nagyferenczi

Laszlo Nagyferenczi is a day trader, analyst and instructor as well as the creator of the proprietary Context-Momentum-Signal concept. He has authored over 200 blog articles about his unique approach to trading and the Elliott Wave Theory. His clients appreciate his ability to go from the theoretical to the practical i.e. all the way to the actual trade set ups.

Originally hailing from Hungary, Laszlo is fluent in English and Hungarian with a long list of education credentials including BA in Economics, Certified Elliott Wave Analyst (CEWA), Certified Adult Educator for T-Groups, Professional Co-Active Coach (PCC) at CTI. The real education, though, has been the trial by fire in the markets, with real capital at risk.

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