In our previous update, we anticipated using the Elliott Wave Principle (EWP) for the S&P 500 (SPX):
“…the (grey) $5093 level is support, tested today, and a break below it would be a strong warning to the bulls. Ultimately, we need to see a break below $5056 … and a follow-through below $4946 … to confirm a significant top has been struck. However, if, like last, the index breaks higher because the bears fail to break below critical levels and reach the next target zone of ~$5260, support will be moved up to $5150.”
Fast forward, and the index held the $5093 level, broke higher, i.e., above the March 8 high at $5189, and reached $5264 on March 28 as anticipated. However, it has rallied over the last three weeks in an overlapping fashion, which strongly suggests an ending diagonal is forming. See Figure 1 below.
Figure 1. Daily SPX chart with detailed EWP count and technical indicators
In a five-wave ending diagonal, the wave structure is most often an overlapping, confusing, 3-3-3-3-3 count as all five of the waves of an ending diagonal break down to only three waves each, indicating exhaustion of the larger degree trend. Most ending diagonals have a wedge shape where they fit within two converging lines. The 3rd, 4th, and 5th waves often reach the 100-123.60%, 50.0-61.8%, and 138.20-161.80% Fibonacci extensions of W-1, measured from the W-2 low, respectively. In Figure 1 above, we can see that the grey W-i, ii, iii, and iv thus far are all made up of three waves and that W-iii and W-iv topped and bottomed at the exact Fib-extensions. The grey arrows show that if the length of W-i, iii, and the potential W-v are equal, the latter can target precisely the 161.80% extension at $5390.
Thus, the price action is ticking off all the ED boxes. However, as always, the forecast is contingent on holding above the colored warning levels, with a 1st warning (blue) for the Bulls below yesterday’s high, a 2n warning below Tuesday’s low, and a break below the red warning level at $5055 will trigger a drop to $4600+/-100.
Our last update found that “the negative divergences between several technical indicators are blatantly obvious, but they are a condition, not a trigger, as “divergence is only divergence until it is not.”
Price is the final arbiter, and as such, the Bears have yet to break it below the colored [warning] levels …, which we use to alert our premium members the odds are for a top are increasing with each subsequent break lower.” Three weeks later, the divergences are even more apparent. Still, the index’s price has yet to respond to it, showing that, indeed, price is the final arbiter as divergences are a condition, not a trigger.
Suppose our assessment of the ending diagonal’s price pattern is correct, as they are notoriously tricky due to their overlapping price action. In that case, a breakout above last week’s high can ideally target $5390. Ultimately, we still need to see a break below $5056 with a severe warning below $5100 to confirm a significant top has been struck.