S&P 500 ELLIOTT WAVE COUNTS -- A BIG IMPULSE WAVE HIGHER -- EXPANDING TRIANGLE TARGETS NEW HIGHS -- THE FIFTH OF THE FIFTH -- SIX MONTH BULLISH CYCLE ENDS IN APRIL -- PRESIDENTIAL CYCLE GOES INVERSE
S&P 500 ELLIOTT WAVE COUNTS - A BIG IMPULSE WAVE HIGHER ... Link for todays video. Even though there is no real change to the Elliott Wave counts put forth on January 21st, a few readers have been asking for an update so now is a good time for a review. As far as I know, there are really only three RULEs for Elliott Wave. One: Wave 3 cannot be the shortest impulse wave. Two: Wave 2 cannot go beyond the start of Wave 1. Three: Wave 4 cannot cross below the high of Wave 1. Everything else is just a guideline. Rules cannot be broken. Guidelines are open to interpretation.
The first step to Elliott Wave analysis is picking the look-back period. While we could go back 100 years, I will stick to recent history and look at the last 20 years for a long-term perspective. Chart 1 shows the S&P 500 embarking on a massive advance from 1991 to 2000. Such a move can only be considered a big impulse wave. Unless this advance is the infamous fifth of the fifth of the fifth, the sideways pattern of the last 10 years should be considered a corrective pattern within a bigger uptrend.
(click to view a live version of this chart)
Chart 1
Traditional chartists could even view this pattern as sort of a flat flag, which is also a bullish continuation pattern. After the massive advance from 300 to 1500, a little rest was certainly in order. This consolidation digested the gains of the prior ten years. Also notice that the consolidation found support near the 62% retracement mark and formed an ABC pattern. Both the retracement amount and the pattern are typical for Elliott wave corrections. This means the advance that began in March 2009 is another impulse wave higher that signals a continuation of the prior advance (1991-2000). As you probably guessed by now, this calls for a break above the prior highs in the coming months or years.
EXPANDING TRIANGLE TARGETS NEW HIGHS... Just like economists, Elliott Wave is famous for its alternative counts. Chart 2 shows the possibility of an ABCDE expanding triangle. Waves A, B and C are done deals. The move from the March 2009 lows signaled the start of Wave D with an upside target above 1500. Each wave within these patterns typically subdivides into three waves, which gives it a 3-3-3-3-3 structure. However, it is often hard to find just three waves within each wave. Should an ABC structure evolve now, the current Wave D would be within Wave C of an ABC advance. Once completed, we can expect a reversal around 1500 and a move back towards the lows for Wave E. Frankly, this sort of broadening pattern appears to fit with the times right now. Bubbles push to new highs and then these bubbles deflate quite quickly. As the chart now stands, Waves A, B, C and D have gained or lost more than 50% each. That is four 50% moves in the last 10 years. Despite four big moves, the S&P 500 is still trading below its 2000 peak. We can blame the finance sector for this one.
(click to view a live version of this chart)
Chart 2
THE FIFTH OF THE FIFTH... The first two charts are quite long-term oriented and a lot can certainly change in just a few months. If we ignore the prior charts and focus on only the structure of the current advance, a clear five wave pattern emerges. Moreover, the S&P 500 appears to be in the fifth of the fifth. The red numbers show five big waves extending up from the March 2009 low. The black numbers show five smaller waves that make up the advance from the July 2010 lows.
(click to view a live version of this chart)
Chart 3
Big Wave 1 extends from 676 to 946 (270 points or 39.9%). Wave 3 extends from 879 to +1217 (338 points or 38.45%). Wave 5 currently extends from 1023 to 1343 (320 points or 31.3%). So far, wave 1 is the longest in percentage terms and Wave 5 is the shortest. Wave 3 would become the shortest if Wave 5 exceeds 1422, which is another 100 points higher. According to the 3 rules of Elliott, the current fifth wave cannot exceed 1422 for this five wave structure to remain valid. Extrapolating from this idea, we could see an intermediate top soon and a correction that retraces a portion of this advance. This means we could see an ABC correction unfold that retraces a portion of the advance. Where might this correction lead? Broken resistance turns into the first support zone around 1200 and the 38% retracement marks the second support zone around 1100.
SIX MONTH BULLISH CYCLE ENDS IN APRIL... No matter what the wave count, we can all agree that the current trend remains up for the stock market. We can debate overbought conditions, low volume, sentiment and other indicators, but the trend is the trend. The chart above shows the S&P 500 moving from the lower left hand corner to the upper right hand corner. There is simply no argument on trend right now. Those looking for a reversal are using tools that predict and allow chartists to look around-the-corner. This is also known as seeing the future! Cycles are one such tool that allows traders to look ahead. The most popular time cycles are the six month cycle and the presidential cycle. The six month cycle is bullish from November to April and bearish from May to October. This is where the term, sell in May and go away, comes from. Like all cycles, the six month cycle is does not have a perfect track record. However, it has proven itself more times than not over the last 50 years or so. Should the fifth of the fifth play out on the chart above, we may see the market peak in April this year. I am not calling for a major peak, but one that may give us a correction. Chart 4 shows the S&P 500 with the six month cycle.
(click to view a live version of this chart)
Chart 4
PRESIDENTIAL CYCLE GOES INVERSE... Chart 5 shows the S&P 500 with the presidential cycle. This cycle favors the bears during the first two years of a presidential term and the bulls during the last two years. The rationale is pretty straight-forward. Presidents juice up the economy as they head into election or re-election. Despite a historical precedent for this cycle, the cycle did not work over the last six years (3 cycles). Stocks moved higher in 2005-2006, which marked the first two years of the second Bush term. Stocks moved lower in 2007-2008 as the financial crisis hit the last two years of Bushs term. The Fed and Congress stepped in with big stimulus to propel the market higher the first two years of Obamas term. We are now entering the second half of the current presidential term. Will this cycle invert like it has the last three times or will it get back on track? The market could still correct from May to October and then resume its upward trajectory to move back in line with this presidential cycle. The Detrended Price Oscillator is shown in the indicator window. See our ChartSchool Article on using this to define cycles.
