A rally in the U.S. stock market is becoming less likely, according to Elliott Wave theory By: Avi Gilburt | November 19, 2018
Following the Elliott Wave analysis:
The path of least resistance for stocks is a decline, possibly to as low as 2,100 points in the S&P 500
When I say the U.S. stock market is treacherous, I am not using that word lightly.
The market still seems to be setting up for a drop to the 2,100/2,200-point region in the S&P 500 Index SPX, -0.72% as we look toward 2019, but the specific path is not always easy to discern within a 4th wave correction in Elliott Wave theory.
Even before the market broke support, I have been warning that once this 3rd wave off the 2009 lows ended, there would likely be a 30% correction. Moreover, I warned in late September that should we break below 2,880, it would open the door to the market having topped, with the potential for the initial drop pointing down to the 2,600 region. And once we broke down below the next level of support in the 2,770 region, it would make it much more likely that we would be seeing the 2,600 region sooner rather than later.
However, from that 2,600 region, I expected we would rally, with an ideal target of at least the 2,860 region. And while most were expecting that the inverted-heads-and-shoulders pattern being followed last week would project us to new all-time highs, I was trying to figure out how we would fail in that pattern. You see, when many in the market develop a strong expectation, it often fails to materialize in the manner in which most expect.
But that does not mean we cannot rally to 2,860 or higher before the next major bout of selling takes hold. It just means it can happen in an “unexpected” manner. And with many turning bearish when the inverted-heads-and-shoulders failed to hold support for its right shoulder, a rally at this time will likely be unexpected.
The one thing we know about 4th waves is that they are the most variable wave within the 5-wave Elliott Wave structure. So it can often take unexpected twists and turns. At this point, I would like to retain an expectation for a rally up toward the 2,860 region but have a hard time trusting this market action. We’ll have to take this step by step.
You see, the path of least resistance at this point is likely lower, and we will encounter several setups along the way that can point us south earlier than ideally expected. Any breakdown below this past week’s low of 2,670 can certainly open a trap door pointing down for at least another 100 points, with a break below 2,690 providing us a strong warning.
Yet, the setup to 2860 is still alive and well on our charts. Since the rally to 2860-plus would be a c-wave, which is usually a 5-wave rally structure, it means the market will have to maintain our Fibonacci Pinball support levels all the way up. Anyone who is trading this for the bigger c of (b) wave potential to 2,860 should do so with smaller positions in this treacherous market, and must use stops.
As of the close on Friday, the market is setup to rally this week. Support now resides at 2,700, and our next resistance zone is the 2,775 region. As long as we remain over 2,700 early this week, we should rally to the 2,775 region. At that point, 2,740 becomes support, and as long as we remain over 2,740 on pullbacks after we strike 2,775, we are likely heading up to the 2,860 region in the coming two weeks.
However, should we break down below 2,690, or if we rally up to 2,775 and then break below 2,740 in an impulsive fashion, both of those would trigger the yellow count and suggest we will likely be heading much lower sooner rather than later.
So as the title of this update suggests, while I still think we can head higher before we see the next bout of selling, trading the long side in this market is akin to playing with fire. You have to be very careful the market does not burn you, and you have to be quite mindful of support on the way up. A breakdown of support on the way up can set your portfolio on fire if you do not manage the risk properly. For this reason, we will continually adjust those supports to stay on the correct side of the market, as it will give us early-warning signs that a bigger break down can be seen sooner rather than later.
At the end of the day, I still think we have a date with destiny in the 2,100/2,200 region as an ideal target for wave 4. But how we get down to that region is still in question. Should we rally to 2,860-plus in the coming weeks, the drop from that region can be a direct drop to 2,100/2,200, but I suspect we will only drop back down toward the 2,500-2,550 region in a c-wave of a larger a-wave of wave 4. But we will have to take this one step at a time. For now, I am looking higher toward 2,860 as long as we hold over 2,700, and maintain all support levels on the way up.
See detailed charts illustrating the wave counts on the S&P 500.
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