The oversold rally that began with the lows made on March 6th began to fade late this week. Overall there are three potential scenario's developing for those that follow Elliott Wave Theory.
The first scenario is that the major averages have completed their final 5th Wave to the downside (Primary 1) and are now beginning a corrective ABC oversold rally (I will use the S&P 500 as an example for charts in all of these scenario's). If this is the case then we should see the S&P 500 go through a drawn out ABC pattern with an eventual rally possibly up to around the 1000 level over the next several months which would act as Primary 2.
The second scenario is that Wave 5 (5) hasn't completed yet as we have just completed sub wave 4 of 5 (5) which will now be followed by sub wave 5 of 5 (5) which may only drop slightly below the low of 667 made on March 6th. This pattern would look similar to what occurred for Wave 1 (5) as highlighted by the green lines. Once Wave 5 (5) of completes then we would see a longer term ABC corrective rally with a potential rise back into the 900's to around 1000 at some point later in the year.
Finally the worst case scenario is that we have just completed Wave 3 (5) and not Wave 5 (5) as the latest oversold rally is just the beginning of Wave 4 (5) which might rise back to the 850-880 range. Once 4 (5) ends then we would see the final Wave 5 (5) occur with the S&P 500 potentially dropping back into the 500's before a substantial ABC type rally would evolve.
At this time we really don't know which if these 3 patterns is in play as there is evidence to support all three. I believe the key thing to watch in the S&P 500 over the next few weeks is whether or not it will hold support above its 61.8% Retracement Level calculated from the most recent high of 803 to the low of 667 which is at 719 (point D). If the S&P 500 does hold support above the 719 level then the 5 Wave pattern has likely completed with 667 being a significant low for this current Bear Cycle.
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