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The S&P 500 Takes Aim at 1250


The market has been hitting the projected targets, but the situation may be turning even more bearish.

MINYANVILLE ORIGINAL If all my talk of waves and wave degrees leaves you confused, please bear with me. Sometime in the next few days I'll publish an update that explains how my go-to targeting and prediction system (Elliott Wave Theory) works. For now, I'll try to keep things as simple as possible.

Yesterday's rally exceeded my target zone by two points, and has necessitated a slight shift in the wave degrees. This leaves an interesting situation where red wave i and red wave iii are nearly equal lengths – and this type of behavior commonly precedes a bearish extended fifth wave.

That means that while the target zone of 1240-1260 for the S&P 500 (SPY) remains unchanged, the potential exists for a fast drop down into the low 1200s. In other words, things may be even a bit more bearish than previously anticipated. We'll have to see how the wave unfolds to confirm or deny this expectation.

The first chart is reprinted from the May 18 update (see: SPX Update: 81 Points of Profit Captured as Market Hopes for a Facebook Bounce). We can see that the preferred wave count (in blue) had a target of 1294-1300, and then expected a bounce into the mid-1320s. This is exactly what happened. Try doing that with fundamental analysis!

Click to enlarge

The next chart is the updated version of the chart above, with the current price action filled in. It also reflects the aforementioned labeling shift in wave degrees (from blue (3) to red iii).

The rally has now formed a clear a-b-c structure, and it has probably topped at Tuesday's 1328 print high. As I've said before, though, fourth waves are known to string several fractals together, so another down/up sequence can't be ruled out (or anticipated -- it either happens or it doesn't).

Click to enlarge

The intermediate outlook is unchanged -- with the exception of the additional more bearish potential of an extended fifth wave decline to the low 1200s.

Click to enlarge

In conclusion, outside of the new, more bearish possibility, there's really not a whole lot to add. Things have, so far, played out almost perfectly in line with the updates and targets. It remains my belief that we have seen an important and major trend change at the spring highs, and that this decline is only the first wave down of many more to come. Trade safe.

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No positions in stocks mentioned.
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