I am posting this around 1.30 pm EST on 3rd April. The S&P500 index is straddling the bottom of a diagonal triangle, and a break seems imminent. What you can learn from the chart below is how the internal waves are all so related to each other, and have followed the Elliott Wave rules. Enjoy.
Now that the S&P500 has entered the 1435-1450 window that I had discussed in my Forbes article, it is natural that we ask ourselves what next for the index. I thought maybe this is a good time to spell out my approach to the markets again. Elliott Wave analysis is a great tool to have in your armory if you know how to use it. Some of us are under the illusion that Elliott Waves will give all the answers to our problems (the main one being our craving to know in advance where the market will turn). The truth is (and I have no hesitation in admitting this) no one knows the future. Can I be wrong about the anticpated turn in the 1435-1450 window? Of course! Does that make all the charts (and my interview on Forbes) utterly useless? Of course not. The key point we have to learn is this. Have a model on which to base your trades. Then get into the market at key levels. When the odds are highly in your favor, you should risk real money. Elliot Waves gives you that opportunity. For example, in my most recent update I had suggested that we will get a dip below 1400 and then rally to 1435-1450.
The prospect of something bitterly disappointing in terms of news flows was quite remote at that point in time. So there was a low-risk trade below 1400. However, as we enter the window where a turn was anticipated by my analysis, the odds for a continuation of the rally seems to be better than an about turn. In such a situation, we have to be cautious. Even if the market does make an about-face in the next few sessions, the bulls are not going to give up without a fight. So we will very likely get a full re-test of the highs from which any such about-face happens. In these circumstances, it is to our benefit that we remain patient and watch the market developments with interest. Never get into a trade while the odds are not yet moving markedly in your favor.
Now a few words about the value of Elliott Wave analysis even if one is going to be wrong. While the market was recovering from the lows at 1267, Elliott Waves told us to look for a 3-wave recovery before a possible sell off. Then, as the market developed, and not too far away from the lows, I pointed out that we are very likely going to get a full test of the highs (which at that time was still 1422). ANd further out, I came up with a diagonal triangle scenario that suggested we will travel to 1435/1450. AT every stage, if one were persistently bearish, he would have refrained from selling until a better level was seen! However, this trader who remained a bear would have missed buying on dips. Without a question, that was an opportunity loss. But this trader was still following his model. There could have been short-term low risk trades that a bolder trader could have made (for example, the move from 1396-1435) but in general, the value came from being faithful to your model. The persistent bear would strike it rich at some point because he is following a model. Not because he is clever, but because he has a method. That, dear reader, is the lesson that we all have to bear in mind. Use Elliott Waves to tarde the market, not to showcase we are brilliant at counting. Good luck.
PS. The bearish counts on the S&P are still not negated by the way
In his latest post on Forbes, Ramki says that Elliott Waves warn of a big tumble ahead for stocks.
When one is dealing with a complex correction, it is best to let others do the trading while you sit back and watch. This is what I have done with the S&P 500. I made my views clear. I pointed out this was a complex correction. A lot of people are trying to figure out tops and bottoms. It is a futile exercise. There are just too many possibilities.
The best way to deal with it is to wait for a clear impulse move in one direction and then trade on the retracement. There are other clues, and these are explained in my upcoming book. (Some of you with long memories will remember I posted a teaser chart that is appearing in the book. That called for a retest of the highs. How I came up with that back in mid-June is explained in the book too). But seriously, you should avoid trading a complex correction if you can. At worst, you would have missed an opportunity. On the other hand, you could have saved yourself needless tension and perhaps even some hard-earned cash!
A detailed Elliott Wave analysis on S&P500 is posted on Forbes here. But here are two charts that are relevant. The first chart shows the big picture and a five wave move from 667 to 1370. We got a correction down to 1074 before another rally commenced.
The next chart shows you how I would interpret the movement from 1074 levels. I think we are in the midst of a complex correction where an irregular B wave will finish between 1435 and 1475, after which we will see an aggressive sell off.
The current rally in the S&P500 index looks powerful, and this should make people wonder about the medim term outlook for the US stock market. Readers might remember my post of 16 December 2011 where I suggested that we will probably see one strong rally in the index. What is happening now is part of that powerful rally.
The key point to note is we should not see any weakness under 1265 going forward. Any such move will violate one of the main rules of the Elliott Wave Principle, that wave 4 should not trade below the top of wave 1. Suppose the current strength carries the index to 1376, then we will actually move the trigger point higher, from 1265 to the top of Wave A. Let us see how things unfold.
Two things are clear from the attached chart. First, there is a reasonably good chance that we will go back and forth for a few more weeks, and it is possible that one particular rally will be relatively powerful. However, just when everyone starts to cheer, I suspect we will get some news that will be interpreted as detrimental to the market sentiment,and the index will come straight down to around 1020. Why is that? It is because of the way I have chosen to label wave A. It is made up of 5 waves, and we know that a correction cannot be made of 5s. We need to see a three-wave move.
Just for a moment imagine that I have labeled it all wrong, and the correction actually finished at the point marked A. What does that mean? It means we have embarked on a third wave, which should be steeper than the first wave. Also, the third wave should travel quite a distance! Given the current uncretainties in the market, this seems unlikely. Besides, the correction of the prior five wave rally that finished above 1350 seems inadequate.Thus, I am professing the view that we will see a move down to 1020 early next year.
Your next question is why am I anticipating a relatively powerful rally that will fail to live up to its promise? It is because the move that you see labeled in black as (a) was made of 5 smaller waves, and for the same reason I explained above, (that a correction cannot be made of 5 waves) we need to see a (c) wave posted. And because that set of (a)-(b)-(c) together is deemed a B wave of the next degree, we will see some traders left stranded up there. Let us see how all this turns out.
Happy new year, and best wishes to you and your families.