Using Short-Term Patterns to Determine the Main Trend

The 05/31/22 blog “S&P 500  Momentum Update – 05/31/22” noted the short-term S&P 500 (SPX) price action with the following observations.

“The hourly SPX high on 05/31/22 had a significant RSI bearish divergence  which implies  a decline could  continue until at least 06/01/22.

A  Fibonacci .236 retrace of the SPX rally from 05/20/22 to 05/31/22. is  at  4083.85.  There’s a secondary Fibonacci point at 4081.60 which could be the termination area  for an Elliott wave – Expanding Flat corrective pattern that began on 05/27/22.  Depending on market action a future blog will detail this potential corrective pattern.

The two close Fibonacci coordinates imply strong  support in the 4085 to 4075 area.”

The 5- minute SPX  chart courtesy of Trading View illustrates the subsequent price action.

A  near textbook Elliott wave – Expanding Flat correction completed at the SPX 06/01/22 low. Expanding Flat corrections  in a bull market are composed of three waves down followed by three waves up that marginally exceed  the point of origin of the first three waves down. The final portion declines in  five -waves.

There were two clues on 05/31/22 that implied an Expanding Flat correction was developing.

Clue – one: The 05/31/22 rally from the low to the high of the day has a 7-wave subdivision.  A simple  correction subdivides into 3 – wave subdivisions. Complex corrections subdivide into 7 – waves.  For simplicity I’ve illustrated the 05/31/22 rally as  a Single Zigzag.  The rally can also be counted as a 7 – wave  Double Zigzag.  When a market or stock makes  a new rally high in 3 or 7 waves  it implies higher prices.

Clue – two: The most common Fibonacci relationship between waves “b” and “a” in an Expanding Flat is 1.236.

Minuette wave (a) was 53.46 points.

Minuette wave (b) was 63.46 points.

63.46/53.46 equals 1.187.

The broad leeway zone for the Expanding Flat bottom was 4085 to 4075.  The bottom was at 4073.85.

Today 06/02/22 the SPX exceeded the 05/31/22 high and confirms  the Expanding  Flat correction is  complete – the SPX post 05/20/22 rally is  likely to continue.

The SPX 30 – minute chart shows a potential resistance zone. 

A .50 retracement of the SPX January  to May decline is at 4314.47.

A .618 retracement of the SPX 03/29/22 to 05/20/22 decline is at 4321.39.

There’s also a triple top with a high point at 4308.45.

The SPX has a good chance of rallying into this resistance zone.

Traders are holding long 100% non-leveraged SPX related funds.  Continue holding long.