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Elliott Wave Analysis Of The S & P 500 – New Market Projections

|Includes:DIA, IVV, IWM, QQQ, SPDR S&P 500 Trust ETF (SPY), XLB

Before the August rally took the S & P 500 to new highs, I was convinced, within an Elliott Wave framework, that the bull market was over. My analysis showed that the 2011 high was a market top, and then the new highs shortly after that were corrective waves of a much larger bear market. That scenario was invalidated in the beginning of last September, and with no other probable bearish counts, the bullish scenario was activated.

So here is where we are right now, according to my analysis.

  • The bull market starting in 2009 is a correction of a larger, deflationary bear market (especially in real terms. Did you know that the market is still over 35% lower than the 2000 high in inflation-adjusted dollars?).
  • ^^This scenario^^ would be invalidated only if the S & P and Dow could break above their 2000/2007 highs in nominal or real terms. Then another long term, secular bull market has begun.
  • Therefore, our wave count for this "corrective bull market" will take the form of an "A-B-C" wave, rather than a "1-2-3-4-5″ wave.

  • Still, with no valid bearish wave counts in the short term time frame, the market should still rise, giving a naive (just using the last few bullet points and logic) target range of anywhere from the current S & P level of 1466-1576.

So, you may have figured out the bad news, which is that under this scenario, less than a 10% profit is still "up for grabs" by simply investing in the S & P. Therefore, it is important to invest in strong sectors at this point (Materials, Industrials, Financial) , rather than just buying and holding an S & P ETF.

Using my analysis, I have come to the conclusion that we get one last proverbial "kick at the can" before the market tops. Instead of, however, focusing on individual wave labelings, let us just present the key target levels for the index.

First, using a simple proportion target projection method, we have two targets. The immediate target, which I am confident will be touched is 1501. The second, 1566, given the current upward momentum and breadth of this rally (i.e. most stocks are rising), should also be touched. That will be the final market topping point, only 10 points away from the maximum of our naive target range.

Now, if we use Elliott waves, you will find that each rally since fall of 2011 covered the same amount of price territory. That's three rallies in a row, so i do not think it is simply coincidence. It is expected then that this rally be the same exact magnitude. Here is the chart.

Now, ordinarily, I would not say that this point will be the market top, but I am still working under the premise that this bull market is a long term correction, which means the SPX cannot rise above its 2000/2008 high. If that level is actually broken, well, back to the drawing board. Even if it is though, the current target still sits at 1552, and it will act as a strong resistance level.

What's the time frame for this? I'll answer with the idiom, "Sell in May, go away!" No, really. Look at the RSI, and other indicators of overbought/oversold. If the speed of this rally continues at its previous pace, an overbought reading should be printed sometime in early April/late March that will eventually reverse the market by May.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: SPY, DIA, QQQ, IWM, IVV, XLB