In our earlier replace about thew SP500 (SPX), we discovered that through the use of the Elliott Wave (EW) Precept
“…the index is almost definitely advancing within the Third of a third wave (orange Wave-3 of grey W-iii) for the ultimate fifth wave (inexperienced W-5) … contingent on worth remaining above the warning ranges. Right here, the usual impulse sample is proven; nevertheless, the inexperienced W-5 can even turn into an overlapping ending diagonal (ED), leading to an overlapping rally to the decrease finish of the goal zone (~7345).”
Quick ahead to at this time. The index peaked at 6986 (orange W-a) on January 12 and unexpectedly dropped to 6789 on Tuesday (orange W-b), breaking beneath the 4th warning stage we had set, which is true on the 76.4% retracement of the December-January rally (on the decrease finish of the orange Field). See Determine 1 beneath. Thus, the instant Third of the Third-wave state of affairs was invalidated, turning the index right into a extra advanced setup.
Determine 1. Quick-term Elliott Wave rely for the SPX
Particularly, it seems that the index is morphing into a bigger ending diagonal (ED), a 3-3-3-3-3 sample, because the December-January rally (orange W-a) includes three waves: blue W-a, -b, and -c. Furthermore, W-a was between 0.618 and 0.764 instances the prior one-degree-higher grey W-i, the November-December rally, a typical ratio.
Thus, the market took a detour however held above the important warning ranges we set, and if it will probably keep above the December low (6720) and particularly the November low (6521), with a severe warning for the Bulls beneath final week’s low (6789), we are able to permit for the orange W-c of the threerd wave (grey W-ii) to kick in. It will likely be confirmed on a break above the January 12 excessive and may then ideally goal round 7200. In our final replace, we had no indication that an ED would happen, however with three weeks’ value of extra information, it now seems to be the case. In an ED, the threerd wave (grey W-iii) sometimes targets solely the 123.6-138.2% extension of the 1st wave. On this case, that will be the 7185-7235 zone, which aligns with the orange 161.8% extension at 7218, assuming the W-iii subdivides into three smaller waves.
Lastly, whereas worth is the ultimate arbiter, we all know that market breadth is important for predicting bigger corrections, similar to these in 2022 and final yr. See Determine 2 beneath. Particularly, the cumulative Advancing/Declining line (NYAD) made decrease highs total a number of weeks earlier than these two occasions. That’s referred to as adverse divergence: the index moved larger whereas fewer shares participated, i.e., superior. See the crimson strains. Nonetheless, with out divergences, corrections can nonetheless happen, however they are going to be transient and result in new ATHs. See the blue strains. Presently, there’s no divergence to talk of. See the insert.
Determine 2: The NYAD vs SP500 because the March 2020 low
Lastly, actual bear markets just like the dot-com bubble and the housing disaster within the early 2000s, in addition to the Nineteen Seventies and the notorious 1929-1932 crash, had been all foreshadowed by months to years of adverse divergences between the A/D line and worth. Now? Nothing.
Backside line: with none divergence between the A/D line and worth, it’s laborious to be bearish, despite the fact that the market is carving out an ending diagonal fifth wave, as in late 2024. Make no mistake, as soon as the sample completes, we count on a multi-month correction to 5800 +/- 300 earlier than the following rally to ideally 8100+ can start.
