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Elliott Wave Analysis: What's Next for the S&P?

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If the charts are correct, the index could hit all-time highs.

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Back on January 15, my firm wrote an article and also produced an Elliott Wave forecast showing a likely top at a maximum of 1868 on the S&P 500 (INDEXSP:.INX). We said that Elliott Wave Major 3 of Primary Wave 3 would top no higher than that level. In fact, we can go back to September 4, 2013 and see that we projected a Major 3 high of 1822-1829. Turns out we were only about 1% off four months in advance of this likely top, and once again we are on track here with Major 4 commencing from Major 3 highs.

Below is the Major 3 chart we published on September 12, 2013.

Elliott Wave Forecasts

My firm simply uses Fibonacci analysis of wave patterns which are based on human behavioral tendencies that go back centuries. Elliott Wave Theory is often hard to put into practice, so sometimes it gets a bad name. However, having a bad steak at a restaurant doesn't mean you never have steak again, right? The practitioner must hone his or her skills over time and work to improve accuracy.

Our view is pretty simple in that the Major Wave 3 was 583 points, going from 1267 to 1850, the double top.

Below is the chart we created on January 15, in advance of this top:

Elliott Wave Analysis

We now know in hindsight that the S&P 500 topped out at 1850. So what my firm has done is simply taken the 583-point rally of 1267 to 1850 (Major 2 lows to Major 3 highs) and computed a retracement. We used 23.6%, 31.2%, and 38% Fibonacci figures to come up with estimates. Those came in at 1713 on the shallow end of a correction (wave 4) and 1628 on the lower end. (See chart below.)

Elliott Wave Theory

Now, assuming my firm is on track, once this Major 3 completes, we will see a Major Wave 5 of Primary Wave 3 taking us to all-time highs. This will then complete Primary Wave 3 of this five-primary-wave bull cycle, and then larger Primary Wave 4 corrections will ensue from those highs. We will know we are wrong in our degrees of wave counts if we pierce the 1628 level on the downside. That would indicate Primary 3 topped out 1850 and we are in Primary 4, but this is not our current view.

Twitter: @activetrading

Editor's Note: David Banister is the chief investment strategist and co-founder of ActiveTradingPartners.com, a small-cap portfolio and market advisory service.

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No positions in stocks mentioned.

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