A LONG-TERM TRADING RANGE FOR THE S&P 500 -- REVIEWING THE EXPANDING TRIANGLE IN 1974 -- MAPPING OUT AN ELLIOTT WAVE TRIANGLE INTO 2014 -- BROKEN RESISTANCE MARKS FIRST SUPPORT FOR $SPX -- STANDARD DISCLAIMERS APPLY FOR FORECASTS
A LONG-TERM TRADING RANGE FOR THE S&P 500 ... Link for todays video. Chart 1 shows the S&P 500 in a trading range the last 10-12 years. With the surge over the last few months, the index moved above the midpoint of this 12 year range. Looking at the full chart, there was a surge from the 1991 low to the 2000 high and then an extended trading range. Applying Elliott Wave to this chart, the 1991-2000 surge is some sort of impulse wave that is part of a bigger uptrend. That would make the sideways pattern of the last 10-12 years a corrective pattern, which limits the possible Elliott Wave counts to corrective counts. As a sideways corrective pattern, it would fall into the category of flats. These are ABC patterns that break down into a 3-3-5 sub-wave sequence. In other words, Wave A consists of 3 waves, Wave B consist of 3 Waves and Wave C consists of 5 waves. If this were just an ABC correction, then the current advance of the 2009 is another impulse Wave higher. Chartists would have to go back to the 1975 low to find out which one. This can be done with the historical charts at Stockcharts.com (here.)
(click to view a live version of this chart)
Chart 1
REVIEWING THE EXPANDING TRIANGLE IN 1974... Obviously, there is going to be lots of debate regarding these wave and sub-wave counts. The alternative to an ABC Flat would be some sort of ABCDE triangle, which breaks down in to a 3-3-3-3-3 wave sequence. ABCDE Triangles can be ascending, descending, contracting or expanding. An expanding ABCDE triangle formed from the mid 60s until the mid 70s as the stock market traded in a flat, yet volatile, range. The S&P 500 went nowhere for some 10 years as it oscillated above/below 85. Trading was rather wild with a higher highs at 108.37 followed by a lower low at 72.25 (-33%) and a higher high at 119.87 (+66%) was followed by an even lower low at 62.34 (-48%) to mark the 1974 low. The surge off the 1974 low marked the beginning of one big advance that basically lasted until the index hit 1527.46 in 2000.
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Chart 2
MAPPING OUT AN ELLIOTT WAVE TRIANGLE INTO 2014... If the current ABC Flat is not the correct count, we must then consider an expanding ABCDE triangle as a possibility over the next few years. With a higher high in 2007 and a lower low in 2009, such a pattern is certainly possible. The current Wave D would be expected to continue above the 2007 high to forge a higher high. While an all-time high would certainly be all the bullish rage, the index would peak soon after this high and head back down towards its 2009 low. Yes, these patterns are brutal. In fact, the 1973-1974 bear mark was one of the most brutal on record. Sentiment would no doubt turn seriously (excessively?) bearish if the S&P 500 were to break back below 800 in the next few years.
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Chart 3
Should this expanding triangle evolve, a corrective Wave D up would sub-divide into three wave (abc), which means the advance from March-09 to April-10 is Wave A, the May-June correction is Wave B and Wave C started with the July low. Wave C up would be expected to peak above 1500.
BROKEN RESISTANCE MARKS FIRST SUPPORT FOR SPX... Correct Wave counts for the future depend on correct wave counts for the past. Based on the past wave counts shown above, the current advance off the 2009 low is Wave D up or part of a new impulse series. Either way, the prior highs mark the next target just above 1500. Chart 4 shows the S&P 500 from the March 2009 low. The advance from March 2009 to April 2010 is impulse Wave I that subdivides into 5 smaller waves. After an ABC correction for Wave II, the index started Wave III with the July low. Wave III subdivides into five waves with the advance from July to January marking Wave 1. This Wave 1 also subdivides into five waves (i,ii,iii,iv,v). Yes, the sub-wave never seem to end. At this point, it looks like wave 1 up is near its end and we could be due for a Wave 2 correction before continuing higher. Broken resistance around 1200 turns into support that could mark the end of a Wave 2 correction.
(click to view a live version of this chart)
Chart 4
STANDARD DISCLAIMERS APPLY FOR FORECASTS... Last week I wrote about the difference between watch indicators and warning indicators. This is the same as the difference between forecasting and trend-following. Elliott Wave, sentiment analysis and cycle analysis are techniques that allow us to look around-the-corner and forecast. We really cant see the future, but these techniques provide a possible road map An Elliott Wave count allows analysts to map out future market moves based on past wave counts. Sentiment indicators tell us to expect a bearish reversal when sentiment turns excessively bullish. Cycles provide dates to expect turning points in the future.
The problem, as always, is that strong trends can trump these forecasting techniques. Trend-following is the opposite of forecasting. Trending followers wait for actual evidence of weakness with a support break, bearish reversal pattern or breadth breakdown before actually turning bearish. Trend followers will never pick a top or bottom. They will be late to the party and there will be whipsaws (bad trades). Success depends on the strength of the trend. Forecasters will never be late, but they can be early, which is the same as wrong. Trend following focuses on what IS HAPPENING. Forecasting focuses on what MIGHT HAPPEN. From a trend following perspective, I see no evidence of weakness on the S&P 500 price chart. A major bearish reversal pattern has yet to take shape, support levels are holding and resistance levels have recently been broken.
