Since the recovery high on 18 February 2011 the S&P 500 has made two lower lows and one lowerhigh, indicating that a potential trend change could be at play here. We should be treating the S&P500 with the utmost caution at present as the market is subdividing to the downside following thecompletion of a 5 wave Elliott Wave pattern to form what looks like a C Wave of what currentlylooks like being an ABC corrective pattern.According to Elliott Wave theory, if the market is still in an uptrend, then the most likely place for adownside correction to finish is approximately where Wave 4 of the previous uptrend completed.Based on this guideline we could expect a correction back to the lows of November 2010 around1,173.
While I have given numerous reasons as to why I view the rise from July 2010 to the recent high aslikely being a subdivision of a countertrend rally, rather than a Wave 3 of a new bull market, froman Elliott Wave perspective, if this recent decline was the start of a Wave 4 decline and the rise toFebruary 2010 a Wave 3 advance rather than a Wave C advance as currently shown, then thedecline currently being experienced cannot fall below the April 2010 high of 1,219 as this would bea violation of the Elliott Wave rules. As such, a decline below 1,219 would put to rest this possiblebullish wave count alternative and will give greater evidence that more substantial falls will belikely over the coming 12 to 24 months.
At the moment we should expect further downside before a good sized relief rally. What happensafter the decent sized relief rally will determine whether a major top is in place.
I’m looking first for
5 clear waves to the downside and 3 clear waves up and a commencement of a new downmovement before being able to make a more informed determination.At the moment I can only see 3 waves to the downside.
A closer look
The recovery high of the S&P 500 currently stands at 1,344 on 18 February 2011. Since then themarket first declined to 1,294 on 24 February 2011, rose to 1,332 via a three wave pattern on 3March 2011 and then proceeded to decline below the first low of 1,294 to close below that levelover the past two trading days.In terms of levels to be considering at this stage, if considering shorting the market, a close of theS&P 500 above the 18 February 2011 high of 1,344 would be the first level to be placing aprotective buy order. From an Elliott Wave perspective, if the market rises above the recovery highof 1,344, the above wave count would be incorrect and some other wave count would be at play.