The U.S. stock market has rallied from the December lows in what is an almost straight line higher. Those types of moves do not often end well.
While we expected the S&P 500 Index SPX, +0.37% to drop to 2,250-2,335 points to complete the a-wave of an a-b-c, larger-degree 4th wave correction, we also expected that the b-wave rally would take us back to at least 2,800 and even potentially higher. From that perspective, the market has been acting almost exactly according to the plans we set even before the S&P 500 broke 2,700.
However, I had initially expected a more drawn-out [b] wave pullback/consolidation before we rallied to 2,800 and higher, yet the market is suggesting it may have other intentions. And the coming week will likely either confirm or invalidate this intention.
Howard Gold: Stick with domestic and defensive stocks as S&P earnings growth slows
Last week, I noted a downside setup in place that would give us that downside consolidation we wanted to see for that [b] wave pullback. But I also noted that the market must remain below 2,725 to keep that perspective intact. With the rally through 2,725, the market gave us strong indications that it may take the more direct path to the 2,900 region, which we presented in the “FOMO count” over a week ago and is represented on our charts in purple.
While it is still possible for the market to provide that bigger [b] wave pullback, based on its current structure, I cannot assume that to be the case anymore as long as we remain over the 2,740-2,755 support region. In fact, the market will now have to break back below 2,730 to tell us that a [b] wave pullback has become a higher probability again. And if the market should break out through the 2,780 region first, then support moves up to the 2,750 region, and we are likely targeting the 2,810-2,840 region before the next pullback/consolidation takes shape.
As you can see from our five-minute chart, should we be able to move through this “continuation resistance” box noted on my chart, it should signal that the purple path is what we are following to complete this larger-degree corrective rally. And once we reach the target box overhead for what is labeled as wave [iii] of 3, then I am going to expect the market to pullback toward the FOMO market pivot for wave [iv] of 3. Take note again that, should we break out through 2,780, our support region will move up to 2,750. If we are able to reach our ideal target box overhead for wave [iii], then the support region for this wave [iv] pullback will move up to the 2,770 region.
Should the market be able to strike the 2,800-plus region, this 2,770 support is going to become extremely important. You see, once we get over 2,800, any sustained breakdown below 2,770 will be an initial indication that the b-wave rally we are tracking may have completed prematurely, and may be following the path we have outlined in the yellow count on our daily chart. Yet, as long as we hold over that 2,770 support, the pattern continues to point higher for wave [v] of 3, with a target box beginning in the 2,867 region.
The issue with the market taking the direct path for our b-wave rally is that when it stretches this much to the upside, it suggests the downside may be fast and furious. In fact, I think it may be akin to the downside we experienced in February 2018, January 2016 and the summer of 2011. All three had direct and strong rallies higher in their respective b-waves, only to be followed by very strong “crash-like” c-waves lower. So the more this market continues to stretch to the upside in direct fashion, the more likely the impending c-wave down will be even stronger. So, yes, the market seems to be setting up a dangerous structure indeed.
In summary, as long as the S&P 500 is over 2,740-2,755 in the coming week, I am looking for a breakout through 2,780, which will then initially raise support up to a floor of 2,750, with a further raise to 2,770 should we be able to move to 2,810. Alternatively, should the market break below 2,740, and follow through below 2,730, it points us back down to the 2,600 region, and potentially lower for the [b] wave pullback.
I will also continue to reiterate that I do not believe the bull market, which began in 2009, is over. In fact, we have maintained a minimum target of 3,200 points for this bull market, with the potential to even reach as high as 4,000. However, until the 1-2 structure is in place for that final multi-year rally, we will not be able to identify the higher probability target.
View additional charts illustrating Avi’s wave counts on the S&P 500 across various time frames.
Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.