The posts on this site have examined the history of US stocks over the period of two centuries down to the last few years. Now it’s time to focus on the most recent actions, in particular the sharp decline in US stocks September 2 to 4, 2020.
The first daily S&P 500 (SPX) chart from Trading View illustrates the prime Elliott Wave count since the crash bottom on March 23, 2020.
It appears a clear Elliott extended five wave pattern could be forming. In this case the supposed Intermediate wave (3) is extending, meaning you can clearly see the formation of the developing five sub waves of the structure. Typically, fourth wave retraces are shallow usually .236 or .382. The reason wave “fours” are shallow is because by the time the third wave has ended, the crowd recognizes the main trend – which in this case is up. In fourth waves declines are usually met with eager buyers, which lessens the decline.
An exact .382 retrace of the supposed Minor wave 3 rally which began at 2965.70 and ended at 3588.10 targets SPX 3350.30. The actual bottom on September 4th was 3349.60, a near perfect hit.
Evidence supporting the case for the SPX continuing to make new all-time highs comes from the daily RSI, which reached its highest level at the rally high. For stocks and stock markets this indicator almost always has at least one bearish divergence at significant price peaks.
In the next few trading days supposed wave “4” could continue. The supposed Minor wave “2” lasted 26.50 trading hours, Minor wave “4” has lasted only 8 trading hours, a ratio of 8/26.50 = .30, usual Fibonacci time ratios between waves two and four are equality 1.0 or .618.
Daily Stochastic has just had a bearish crossover implying down or at least sideways action in the next few trading days.
In Elliott Wave theory there are always alternate counts and sometimes they can be more important than the prime wave count.
The second daily SPX chart examines an alternate wave count.
In this situation an Elliott Wave – Horizontal Triangle may have formed from the February 2020 SPX top to the correction low of late June. This count is suspicious because the supposed sub wave ( C ) is much shorter than normal. Even though this is a low probability wave count, low probability does not mean “no probability”.
If within the next few weeks, if the SPX breaks below 2999.70 it could be a major clue of something more bearish developing.
The sharp two day decline last week does present a trading opportunity. The following advice is for aggressive traders that hold positions from a few days to several weeks. If you have primarily retirement funds – just keep holding all investments.
If the SPX reaches 3420 to 3380 buy any non-leveraged fund that tracks the performance of the SPX. To limit losses, sell half of the position if the SPX breaks below its 9/4/20 low at 3349.60. Sell the remaining portion if the SPX reaches the top of the supposed Minor wave “1” at 3233.10 – this action would invalidate the prime wave count.
Future blogs will update the progress of this recommendation with upside profit targets assuming the buy zone has been reached.