Market Direction and Stock Trends

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A downside setup is developing in the U.S. stock market
By: Avi Gilburt | May 20, 2019

Following the Elliott Wave analysis:

If the S&P 500 drops toward 2,800 points, it would be a warning of an imminent decline

The U.S. stock market seems to have topped over the past few weeks, with the recent decline suggesting it’s developing a change-of-trend setup. If it continues, there could be a drop of hundreds of points in the S&P 500 Index in the coming month.

The lower low in the market early last week completed five waves down off recent market highs. That is our initial indication that a larger decrease is developing, which we are viewing as a c-wave decline.

When we attempt to identify c-wave declines in the market, we look to identify an impulsive five-wave downside structure to signal it has begun. And, as we likely completed five waves down early last week (labeled as wave one), most of the week was spent in the wave two corrective rally. In fact, we may have completed all of wave two at the high Thursday.



That means that if the S&P 500 SPX, -0.42% drops toward 2,800-2,820 points early in the week in another five-wave structure, it would be a warning of an imminent decline that could drop hundreds of points quickly. So, a five-wave drop toward 2,800-2,820 would provide us with the 1-2, i structure highlighted in green on the five-minute chart. That would open a major trap door for this market. The market might then provide a smaller corrective rally in wave ii, and then follow through below the low of wave i to begin a bigger decline. Such follow-through would see the market fall through that trap door.

Alternatively, if the market doesn’t drop in five waves off last week’s high, it would suggest that wave two was going to trace out a larger a b c corrective structure, as presented in yellow, before it would drop to set up the i ii next downside structure.

In either case, the main point is that as long as the market remains below 2,920/2,930 and completes another i ii to the downside, we would then have a setup for a bigger decline. This is the set up I am looking for to suggest the next downside phase in the market has taken hold. Should this setup develop over the coming week or two, we would have a strong warning that a large decline is imminent.

As I have been tracking for some time, I think the market remains in a larger-degree corrective structure. I still think the probabilities suggest the market can drop down toward the lows struck in December, and potentially even break those lows. The manner in which the decline in wave three down within this impending c-wave would provide us with a better indication as to whether those lows will be broken. So, should we see the setup I outlined above develop over the coming week or two, we should prepare for a decline similar to what we experienced in the fall of 2018, in January of 2016, in August of 2015, and in August of 2011.

View additional charts illustrating Avi’s wave counts on the S&P 500 across various timeframes.

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