The quote from Mr. Buffett - "Investors pay a very dear price for a cheery consensus" comes to mind right now in respect to the forthcoming downside expectation we have for the S&P 500. Most investors and analysts appear to be viewing the move off the recent lows in the S&P 500 as an impulsive wave structure that is heading to new highs. We do not, and of course the cheery consensus won't occur until after a substantive breakdown begins to culminate such that the bulls are trapped, and the bears who missed taking a position are left wondering why they failed to do so.
In my recent article published here on Seeking Alpha, I said that we had positioned our subscribers* and investors* into shares of the ProShares UltraShort S&P 500 (SDS) near the high seen on May 16th. When this drop hit and held the 1.0 extension of the move off the all-time high seen on May 1st, we exited for a handsome profit.
For some time now, we have been suggesting that a move to the 2,200-2,300 S&P 500 region is the most logical. However, topping patterns are always difficult and large scale drops in equities happen when most least expect them to occur. In addition, this is a 4th wave of Primary Degree. 4th waves are notoriously the most difficult wave structures, as they can take on multiple forms of corrective action. The fact that this is a 4th wave of Primary Degree makes it even more difficult, as there are a number of ways of counting the drop. However, and what is both interesting and timely right now is that whether the move down takes the form of a 5-wave C-wave, or a more complex WXY pattern, or even worse a WXYXZ pattern, all paths point lower.
So in considering the potential routes to lower levels, let us first take a look at the S&P 500 Monthly Chart below. Again, the green circle 3 represents the Primary Degree wave 3. The blue A wave was the initial move down that occurred into the 2018 Christmas low. Off the Christmas low in the SPX, we saw it establish a new high in a B wave. It was near this high that we entered our initial downside trade in shares of SDS. Now we are expecting a move in the SPX to the 2,200-1850 region next. Once this Primary Degree wave 4 completes, it will set up an enormous upside opportunity for investors, with ultimate price targets of 3275-4251 in the S&P 500.
S&P 500 Monthly Chart
Now, allow me to drill down the time frames a bit by looking at the Daily S&P 500 Emini Futures Contract Chart below. Now here is where it gets interesting. Many have asked me why we count the move down on our charts as an ABC versus an impulsive C-wave. For those unfamiliar with Elliott Wave, C-waves are always 5 wave moves. This is absolutely true. However, what we don't know with absolute certainty is whether the high made on May 1st was a B-wave or an X-wave. If it was a B-wave, the next move down will be an impulsive 5 wave move to the 2300-2200 region.
IF it was an X-wave, the next move down will take the form of an ABC, or a 3-wave move. As investors and traders, at this moment in time, we are not concerned which pattern structure will occur. We will be able to measure the downside as it occurs, and watch the resistance levels to determine where to exit our position, and of course in the case of an ABC to lower levels, we will have another bite at the proverbial downside apple again upon the completion of a B wave bounce, shown here as the blue B.
Daily S&P 500 Emini Futures Contract Chart
While the current move up appears impulsive, very likely by the time this article is published here on Seeking Alpha, we will know if the top was established today, June 11th or not, and will know if our entry into shares of SDS was as prescient as I'm making it appear. The ABC pattern off the low established on June 3rd hit and held a picture perfect 1.0 extension today, causing us to believe there is a reasonable chance the high was established today, and we come down from here. However, in the event the S&P does extend further in this B-wave, or wave 2 in the more bearish case, then the next upside target is 2927, which is the 1.382 extension. A break of 2886, to be followed by a break of 2870 will almost certainly suggest the B-wave high is in.
The next drop will be very telling, as it will likely establish whether the SPX is in a larger C-wave down, or the more complex ABC of a larger WXY pattern.
For those investors who exit stocks near the highs, then re-enter from lower, this is an excellent place to exit positions. For those who trade the larger moves both down and up, this is an excellent place to position short. For those who hedge long exposure, this is an excellent place to hedge.
In summary, we are looking for a low from current levels or one notch higher into the 2927 region. We ultimately expect a move to the 2300-2200 region in the S&P 500, where we will be looking for long exposure for the final move up to much higher levels. We will establish on the next decline if the move down will take the direct route in a C-wave, or is completing a more complex WXY pattern.
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Disclosure: I am/we are long SDS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.