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Elliot Wave - Corrective Wave 4?

Elliott Wave Theory was developed by a famous stock market analyst, Ralph Nelson Elliot, during the 1920s and 1930s. It provides a technical analysis of price patterns based on investor sentiment and market psychology. The theory identifies impulse waves of a primary trend and finds corrective waves to the prevailing and dominant trend.

Elliott believed stocks and stock markets have a well-defined structure and specific patterns and are not as chaotic and random as many claims. His work on cycles and waves remains the core basis for long-term and shorter-term forecasting. The technical analysis discipline can be a helpful tool for traders and investors. However, it should be deployed with other technical analysis disciplines, confirming potential buy and sell signals.

For every price action, there is a reaction. For every impulsive move, there is a corrective one. The first five waves are the impulse moves that follow the direction of the primary trend. The subsequent three waves provide the countertrend or corrective waves.

The golden rules of the Elliot Wave Theory are as follows: Wave 2 cannot retrace more than 100% of Wave 1. Wave 3 cannot be the shortest of the three impulse waves (i.e., Waves 1, 3, and 5). Wave 3 will always go above the top of Wave 1. Wave 4 cannot come into the territory of Wave 1. Wave 5 is the extended wave of all of the impulse waves. It should be at least 38.2% of wave 4. One of the five impulse waves must be extended moves from Wave 1, Wave 3, and Wave 5, where an extension is the longest in an impulse wave.

The following is an Elliot Wave Theory analysis of the SPX Index (SPX). Based on the daily SPX chart, the mid-October 2022 low at 3,491.58 (10/13/22) is an important market bottom and the start of a primary uptrend. A well-defined 1-year uptrend channel has developed, suggesting higher SPX prices over the near-to-intermediate term.

The first of three bearish island reversals at 4,607.07 (7/27/23), coupled with an 8/2/23 gap-down (4,550.93-4,567.53), and two more bearish island reversals (8/4 and 8/10/23) confirm the end to impulse Wave 3 and warns of the corrective Wave 4. The correction should lead to another higher low pattern resulting in impulse Wave 5.

The question then becomes when and where Wave 4 ends.

Based on the golden rules of Elliot Wave Theory, combined with other technical disciplines (i.e., Fibonacci retracement, moving averages, trendline analysis, prior breakout, and others) it would imply SPX is likely to bottom around 4,100-4,300 during the end of August to late September 2023.

The 1-year primary uptrend can continue as long as SPX stays above Jun 2023 breakout (4,325), 38.2% retracement (4,302) from Mar-Jul 2023 rally, the top of wave 1 (4,195.44 – 2/2/23 high), the May 2023 breakout (4,177.5-4,195.44), the bottom of the Oct 2022 uptrend channel (currently at 4,172), and the 200-day ma (currently at 4,122).

Traders need to recognize SPX tends to be volatile during late summer to early fall, coinciding with the seasonality weakness period. Also, the next FOMC meeting will be September 19 and 20. Since March of last year, the Fed has engaged in a historically aggressive campaign of rate hikes to control inflation. Will the Fed signal the end of the tightening cycle in the next FOMC meeting?

Source: Charts courtesy of

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