S&P 500 ($SPX, $SPY) Monthly: If we take a step back and look at the long term monthly chart for the $SPX, we can see a fairly typical and well outlined Elliot Wave that has taken place since the bottom of 2009. We see a 2 year motive wave (wave 1) with a 1st wave extension to May 2011 and a corrective wave (wave 2) to about the 0.5 Fibonacci level, then a lengthy 3rd wave all the way to the middle of 2015, then another corrective wave (wave 4) to about the .618 Fibonacci line – which brings us to our final and last wave (wave 5), which the market is on, currently. There is no definitive rule when it comes to the last wave 5 in terms of how far it can go; it can be shorter than any of the two motive waves, or it can be longer – but the general rule, in a typical Elliot Wave, where the previous motive and corrective waves fall within the standard Fibonacci levels, one can expect wave 5 to be about the same length as wave 1. If that proves to be the case, then we can expect $SPX to run up another 100 pts or so, around 2525 level where the 2.618 fib level stands.
Now, it doesn’t mean that $SPX can’t have smaller corrections or downturns during that time, nor that we can’t have a downturn and reversal of this multi-year uptrend and the end to the post financial crisis rally. We saw on Friday the tech stocks (“FANG”) sell off, along with Semis ($SOX) and stocks like Nvidia $NVDA. But also should be noted that Financials continue to rally, and back off the Head and Shoulders formation – for now. But the long term MACD on the monthly chart seems to indicate that there is a bit more room for this uptrend left, and has not yet rolled over. But it also shows overbought conditions in the RSI, and divergence on the weekly chart view. When you see these indicators begin to roll over, then we can assume the possibility that the markets may finally be doing the same, in the 7-8 year cycle which is fairly a standard phenomenon. Coupled with the divergence in the bond markets, skeptical of this rally, one must consider that a major correction and the beginning of a bear market motive wave may be ahead in the next few weeks and months.
We can see similar Elliot Wave layouts in the Financials and Small Caps ($XLF, $RUT) – but the difference being that these have already reached their wave 5 targets. So given that often Small Caps and Financials move ahead of the $SPX, looking out for downturns in these areas may be a good sign that the rest of the markets will follow. Again, wave 5 CAN go further and do not have to restrict itself to always equal the length of wave 1; so I wouldn’t be married to this level by any means.
Now, it doesn’t mean that $SPX can’t have smaller corrections or downturns during that time, nor that we can’t have a downturn and reversal of this multi-year uptrend and the end to the post financial crisis rally. We saw on Friday the tech stocks (“FANG”) sell off, along with Semis ($SOX) and stocks like Nvidia $NVDA. But also should be noted that Financials continue to rally, and back off the Head and Shoulders formation – for now. But the long term MACD on the monthly chart seems to indicate that there is a bit more room for this uptrend left, and has not yet rolled over. But it also shows overbought conditions in the RSI, and divergence on the weekly chart view. When you see these indicators begin to roll over, then we can assume the possibility that the markets may finally be doing the same, in the 7-8 year cycle which is fairly a standard phenomenon. Coupled with the divergence in the bond markets, skeptical of this rally, one must consider that a major correction and the beginning of a bear market motive wave may be ahead in the next few weeks and months.
We can see similar Elliot Wave layouts in the Financials and Small Caps ($XLF, $RUT) – but the difference being that these have already reached their wave 5 targets. So given that often Small Caps and Financials move ahead of the $SPX, looking out for downturns in these areas may be a good sign that the rest of the markets will follow. Again, wave 5 CAN go further and do not have to restrict itself to always equal the length of wave 1; so I wouldn’t be married to this level by any means.