S&P 500 Waves - Wave 5 or Wave B??? Lots of details inside.
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I have reviewed all of my Elliott Wave theory documentation and took another look at the S&P 500. Not that most of you would be surprised, but the S&P is struggling with its identity. Is it a motive Wave 5 or a large corrective Wave B? I am going to lay out the case for both arguments.
I prefer to always use fib level to help define my wave rather than guessing based on look. I also find the use of trend lines to be very helpful.
Looking at the basics you can see:
1) A nice up channel based on the 2002-2008 rally, which by the way was a large corrective wave B of the dot com bubble (wow, I know). Corrective wave Bs can be up to 1.236*Wave A (the dot com crash).
2) Starting in 2009 another set of clear up channels driven by the rally after the housing market crash.
3) An emerging down channel starting 2017. The mean of that channel helped define the top in Feb. Note how the market did a test above this level before correcting. Moving that mean to the next clear set of wave tops brings the channel to this past week's top.
4) Take note of that the large correction in Dec 2018 bounced off the bottom of the channel, but the correction in 2020 clearly broke it.
Okay, now for the wave counting. I use a lot of info from this website:
elliottwave-forecast.com/elliott-wave-theory/
Guidelines
• Wave 2 can’t retrace more than the beginning of wave 1
• Wave 3 can not be the shortest wave of the three impulse waves, namely wave 1, 3, and 5
• Wave 4 does not overlap with the price territory of wave 1
• Wave 5 needs to end with momentum divergence
Fibonacci Ratio Relationship
• Wave 2 is 50%, 61.8%, 76.4%, or 85.4% of wave 1
• Wave 3 is 161.8%, 200%, 261.8%, or 323.6% of wave 1-2
• Wave 4 is 14.6%, 23.6%, or 38.2% of wave 3 but no more than 50%
• There are three different ways to measure wave 5. First, wave 5 is inverse 123.6 – 161.8% retracement of wave 4. Second, wave 5 is equal to wave 1. Third, wave 5 is 61.8% of wave 1-3
Wave Personalities (subjective so you need to apply cautiously).
• Wave 1: In Elliott Wave Theory, wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
• Wave 2: In Elliott Wave Theory, wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and “the crowd” haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern
• Wave 3: In Elliott Wave Theory, wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to “get in on a pullback” will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1. Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1 high is exceeded, the stops are taken out. Depending on the number of stops, gaps are left open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out, the Wave 3 rally has caught the attention of traders
• At the end of wave 4, more buying sets in and prices start to rally again. Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
• Wave 5: In Elliott Wave Theory, wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received). The wave 5 lacks huge enthusiasm and strength found in the wave 3 rally. Wave 5 advance is caused by a small group of traders. Although the prices make a new high above the top of wave 3, the rate of power or strength inside wave 5 advance is very small when compared to wave 3 advance.
The challenge here is trying to determine if Wave 4 happened in Dec 2018 or it was the drop in Feb 2020. I have laid out both in this chart. I am focused on these rules.
• Wave 4 is 14.6%, 23.6%, or 38.2% of wave 3 but no more than 50%
• There are three different ways to measure wave 5.
a) wave 5 is inverse 123.6 – 161.8% retracement of wave 4.
b) wave 5 is equal to wave 1.
c) wave 5 is 61.8% of wave 1-3
First theory: Wave 4 occurred in 2018 and wave 5 end in Feb 2020. In this scenario wave 4 is less than 39.2% of wave 3. Wave 5 is just a little more than 1.618 of wave 4. Also note that on the 1M timeframe wave 5 ended with divergence (bear).
Now for this to be true than we are currently in Wave B. and the rule for a wave B is that it cannot be greater than 1.236*wave A. And that is right where we stand today.
Second Theory: Wave 4 occurred during the 2020 March low. In this scenario wave 4 goes just beyond 50% of wave 3. Does this mean it broke the Wave 4 rule? Or, since it only lasted about one day does it just count as a test and that is okay? However, the low was very much below the support line and was under the support for 5 days. That is more than a test IMO, but on the scale from 2009 to this point it is pretty small amount of time. Last thing to determine is wave 5 which by this theory we are still in. The rule here is 123.6%-161.8% of wave 4. That would put us at a max in the 4200 range.
Well, I guess that is it. Most of the details are in the charts. Hope it helps.
I prefer to always use fib level to help define my wave rather than guessing based on look. I also find the use of trend lines to be very helpful.
Looking at the basics you can see:
1) A nice up channel based on the 2002-2008 rally, which by the way was a large corrective wave B of the dot com bubble (wow, I know). Corrective wave Bs can be up to 1.236*Wave A (the dot com crash).
2) Starting in 2009 another set of clear up channels driven by the rally after the housing market crash.
3) An emerging down channel starting 2017. The mean of that channel helped define the top in Feb. Note how the market did a test above this level before correcting. Moving that mean to the next clear set of wave tops brings the channel to this past week's top.
4) Take note of that the large correction in Dec 2018 bounced off the bottom of the channel, but the correction in 2020 clearly broke it.
Okay, now for the wave counting. I use a lot of info from this website:
elliottwave-forecast.com/elliott-wave-theory/
Guidelines
• Wave 2 can’t retrace more than the beginning of wave 1
• Wave 3 can not be the shortest wave of the three impulse waves, namely wave 1, 3, and 5
• Wave 4 does not overlap with the price territory of wave 1
• Wave 5 needs to end with momentum divergence
Fibonacci Ratio Relationship
• Wave 2 is 50%, 61.8%, 76.4%, or 85.4% of wave 1
• Wave 3 is 161.8%, 200%, 261.8%, or 323.6% of wave 1-2
• Wave 4 is 14.6%, 23.6%, or 38.2% of wave 3 but no more than 50%
• There are three different ways to measure wave 5. First, wave 5 is inverse 123.6 – 161.8% retracement of wave 4. Second, wave 5 is equal to wave 1. Third, wave 5 is 61.8% of wave 1-3
Wave Personalities (subjective so you need to apply cautiously).
• Wave 1: In Elliott Wave Theory, wave one is rarely obvious at its inception. When the first wave of a new bull market begins, the fundamental news is almost universally negative. The previous trend is considered still strongly in force. Fundamental analysts continue to revise their earnings estimates lower; the economy probably does not look strong. Sentiment surveys are decidedly bearish, put options are in vogue, and implied volatility in the options market is high. Volume might increase a bit as prices rise, but not by enough to alert many technical analysts.
• Wave 2: In Elliott Wave Theory, wave two corrects wave one, but can never extend beyond the starting point of wave one. Typically, the news is still bad. As prices retest the prior low, bearish sentiment quickly builds, and “the crowd” haughtily reminds all that the bear market is still deeply ensconced. Still, some positive signs appear for those who are looking: volume should be lower during wave two than during wave one, prices usually do not retrace more than 61.8% (see Fibonacci section below) of the wave one gains, and prices should fall in a three wave pattern
• Wave 3: In Elliott Wave Theory, wave three is usually the largest and most powerful wave in a trend (although some research suggests that in commodity markets, wave five is the largest). The news is now positive and fundamental analysts start to raise earnings estimates. Prices rise quickly, corrections are short-lived and shallow. Anyone looking to “get in on a pullback” will likely miss the boat. As wave three starts, the news is probably still bearish, and most market players remain negative; but by wave three’s midpoint, “the crowd” will often join the new bullish trend. Wave three often extends wave one by a ratio of 1.618:1. Wave 3 rally picks up steam and takes the top of Wave 1. As soon as the Wave 1 high is exceeded, the stops are taken out. Depending on the number of stops, gaps are left open. Gaps are a good indication of a Wave 3 in progress. After taking the stops out, the Wave 3 rally has caught the attention of traders
• At the end of wave 4, more buying sets in and prices start to rally again. Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, fourth waves are often frustrating because of their lack of progress in the larger trend.
• Wave 5: In Elliott Wave Theory, wave five is the final leg in the direction of the dominant trend. The news is almost universally positive and everyone is bullish. Unfortunately, this is when many average investors finally buy in, right before the top. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak). At the end of a major bull market, bears may very well be ridiculed (recall how forecasts for a top in the stock market during 2000 were received). The wave 5 lacks huge enthusiasm and strength found in the wave 3 rally. Wave 5 advance is caused by a small group of traders. Although the prices make a new high above the top of wave 3, the rate of power or strength inside wave 5 advance is very small when compared to wave 3 advance.
The challenge here is trying to determine if Wave 4 happened in Dec 2018 or it was the drop in Feb 2020. I have laid out both in this chart. I am focused on these rules.
• Wave 4 is 14.6%, 23.6%, or 38.2% of wave 3 but no more than 50%
• There are three different ways to measure wave 5.
a) wave 5 is inverse 123.6 – 161.8% retracement of wave 4.
b) wave 5 is equal to wave 1.
c) wave 5 is 61.8% of wave 1-3
First theory: Wave 4 occurred in 2018 and wave 5 end in Feb 2020. In this scenario wave 4 is less than 39.2% of wave 3. Wave 5 is just a little more than 1.618 of wave 4. Also note that on the 1M timeframe wave 5 ended with divergence (bear).
Now for this to be true than we are currently in Wave B. and the rule for a wave B is that it cannot be greater than 1.236*wave A. And that is right where we stand today.
Second Theory: Wave 4 occurred during the 2020 March low. In this scenario wave 4 goes just beyond 50% of wave 3. Does this mean it broke the Wave 4 rule? Or, since it only lasted about one day does it just count as a test and that is okay? However, the low was very much below the support line and was under the support for 5 days. That is more than a test IMO, but on the scale from 2009 to this point it is pretty small amount of time. Last thing to determine is wave 5 which by this theory we are still in. The rule here is 123.6%-161.8% of wave 4. That would put us at a max in the 4200 range.
Well, I guess that is it. Most of the details are in the charts. Hope it helps.
Nota
Nota
Monday morning at 8:40amNota
10amNota
11:15am and rejected off the top of the down channel but still in the recent up channel. Below 1.236 fib but above major trend line.Nota
1:43pm. Fell a bit farther down but found support on the major pink down trend. This closes the gap up from this morning. I do see that it is having trouble getting back inside the up channel now that it has broken it.
Nota
End of day and it broke down below rising channel and end at the bottom of the up channel. Note that I tweaked the pink line to be a little lower based on looking at other candles in the past.
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