Thursday, October 6, 2022

S&P 500 Bears: Pay Me Now Or Pay Me A Little Bit Later


A month ago, when the was trading at 4370, I provided insights on the deteriorating market breadth of late, giving me pause about continuing the rally. See here. The index topped three trading days later at 4393, dropped six trading days later to the 4230s, and has since recovered to around 4410+/-10. Thus, the index has rallied a “whopping” 0.9% in a month while suffering an intermediate 3.6% drop. My conclusion back then:

“… I don’t expect a 35% correction, but anything in between 5-10% will suffice to reset the clock before the next rally can start.

That conclusion was, thus, appropriate and correct.

While most of the mentioned negative divergences in market breadth persist, the question is if the next rally will stall around current levels and bring prices back to around 4150+/-50 or allow for the last rally to the 4535-4595 level before we see an around 300p drop. Thus, bears, it is a “pay me now, or pay me later” scenario as shown in Figure 1 below.

Figure 1: S&P 500 hourly charts with detailed EWP counts since the March 4 lows.

S&P 500 Daily Chart.

The two different Elliott Wave Principle (EWP) paths I am tracking for the S&P 500 are shown in Figures 1A and B above. Figure 1A tells us the index topped at 4393 in early July for wave-3 and is now working on an irregular flat wave-4, with the 4233 low wave-a, the current rally wave-b, and wave-c pending. From the ideal wave-4 target zone, 4052-4177, I then expect the next rally to 4700. A daily close below 4370 (horizontal red line, this week’s and last week’s low) will strongly suggest this scenario is going to unfold.

Alternatively, see Figure 1B, the index will grind higher to complete (orange) wave-c of (grey) wave-v of (green) wave-5, etc., at around 4550-4600, with an ideal target zone of 4535-4595. It requires a daily close above 4450 to strongly suggest this path is operable, with confirmation above 4475. That is as high as I can allow the aforementioned possible b-wave to extend from an EWP perspective. The pending (black) wave-4 will then, ideally, bring the price back to around 4250+/-25p before the next multi-week rally to around 4900 starts.

Thus, my foresight of a month ago to expect a correction and then a rally came and went. Now, the market can decide if the next ~300p correction for the S&P 500 will start from around current levels or from about 150-200p higher. As such, please know your trading time frame and risk/reward from current levels as even scenario 1B has the index likely drop 200p below current levels once 4535-4595 is reached. Big picture-wise, I see this bull run will last well into 2022, and the described pending “pay me now or later” correction is merely another excellent buying opportunity.

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