Sharp Stock Reversal – Part – Three

Objectivity is the most important trait that traders must have.  Traders objectively analyze the balance of evidence before acting.  If the evidence indicates a market/stock could rise – it does rally but is subsequently quickly reversed, then conditions have change.  If conditions changed, then you must objectively view the new evidence produced from the change.

On 04/18/22 the S&P 500 (SPX) had evidence that an Elliott wave corrective pattern may have ended.  This was occurring during the period for a potential lunar turn signal, with momentum indicators showing bullish divergences.  On 04/22/22 the SPX broke decisively below the 04/18/22 bottom invalidating all three bullish signals. 

A subjective trader would ignore this new evidence and hold to their bullish convictions.  This type of thinking can sometimes lead to devastating losses.  Traders need to be flexible and adjust to changing  market conditions.

The steep decline in the prior two trading days has opened up the possibility for several SPX – Elliott wave patterns.

The  SPX – 30 – minute chart courtesy of Trading View illustrates  one of the bearish wave counts.

This chart is a  follow up to the SPX chart shown in the 04/22/22 blog and focuses on the Elliott wave count subsequent to the 03/29/22 top.

Minute wave “I” – boxed is a  Leading Diagonal Triangle, these occur in the first wave of motive patterns and in the wave “A” position of corrective patterns.

Minute wave “ii” is  a  Combination wave composed of a Single Zigzag, Double Zigzag and Single Zigzag.  Combination waves can sometimes  take a shape similar to an  Expanding Flat, which this one has.  The difference from Expanding  Flats  is  that the third phase labeled Minuette wave (y) is composed of  three waves, not the five waves  of an  Expanding Flat.   

The NYSE – Advance/decline issues chart ($NYAD) courtesy of StockCharts.com illustrates  the break below the 04/18/22 support.

The NYSE – 52-week highs minus lows chart (MADN) courtesy of BarChart.com shows the break of a prior bullish divergence.

The daily SPX chart is an update to the Elliott wave count illustrated in the 04/18/22 blog “Possible S&P 500 – Full Moon Bottom – 04-18-22”.

This bullish alternate Elliott wave count of a forming  Horizontal Triangle  is  still possible. Note that the  presumed Intermediate ( C ) is  near a .786 retracement of the SPX 03/14/22 to 03/29/22 rally.  .786 is  the square root of the Fibonacci Golden ratio of .618 and can sometimes  be a  support/resistance level.

The next chart shows the SPX Bullish Percent Index ($BPSPX)

The Bullish Percent Index  is  a breadth indicator based on the number of stocks on Point & Figure  buy signals within an index.

At the SPX 04/18/22 bottom the $BPSPX did not have a bullish divergence, however it was declining  slower than the SPX.  This relative strength to the SPX has continued with the $BPSPX only retracing  .50 of its  mid to late March  rally vs. nearly .786 for the SPX. 

In large declines $BPSPX is  usually weaker than the SPX.  This could mean that at least for the next few weeks the SPX  holds above its  4114 – bottom made on 02/24/22.

As of 04/22/22 the balance of evidence is  bearish for US stocks, however the SPX has been in a trading range  since  the beginning of 2022.  The situation could change in just a few trading days – as we have just seen.

It’s possible the SPX could soon break below the bottom made on 02/24/22, the recent powerful move down has increased the chances of that happen. At the same time, we can’t completely rule out the possibility of the SPX making  a new all-time.

Currently the bears  are in control – lets see what they can do in the next few trading days.    

Published by Mark Rivest

Independent investment advisor, trader, and writer. Articles have appeared on Technical Analysis of Stocks and Commodities , Traders.com Advantage, Futuresmag.com, and Finance Magnates.

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