Tracking Wave 4 - Market Analysis for Jul 19th, 2021

With today’s breakdown, it is quite likely that wave 3 is done, albeit a bit shy of the ideal minimum target in the 4440SPX region.  But, when in a bull market, I will always give the benefit of the doubt to the bulls on all set ups, as it is . . well . . a bull market. So, clearly, this was not my preference at this time, yet I have to adjust based upon price.   So, while we likely still have higher levels to attain later this year, we will first have to navigate this 4th wave.

Before I even begin my discussion about the wave structure, I want to remind everyone that 4th waves are the most variable within Elliott’s 5-wave structure.  Moreover, the b-wave within the 4th wave is the most treacherous, as there is really not general form it takes, other than a general corrective rally.   Standard b-waves take shape as an [a][b][c] structure, but many become much more complex. The main point you should take away from understand that a b-wave rally is likely next to be seen in the market is that they are treacherous and full of whipsaw.  So, if your intention to trade within the impending b-wave, please realize the environment into which we are about to move.

Normally, the a-wave of wave 4 will often target the .236 retracement of wave 3, which in our case was the 4265SPX region.  Yet, we have exceeded that support for this a-wave of wave 4 at this time.

In the micro count, I can now make out a 5-wave decline in the [c] wave of the a-wave.  While the market can always seek further extensions lower, we are extremely oversold on many different accounts. In addition to all the factors I cited over the weekend (which have now gotten even more extreme), the SPX MACD on the 60-minute chart is well into the lower end of the zone which has marked bottoms during this bull market run. Yet, we have been unable to mount much of an upside attack thus far.  Therefore, I will need to see us move back over today’s “bounce” high to suggest that the b-wave is in progress.

Normally, the b-wave target is generally the .618 retracement of the a-wave.  However, in our case, due to how extremely oversold we are, I am setting my minimum target for the b-wave at the .764 retracement of the a-wave.  Yet, I still think there is strong potential to rally back to the 4440SPX region.  Remember, when the standard impulsive structure fails to meet a target, it is quite common to see the b-wave of the ensuing corrective structure strike the target that was missed by the prior impulsive structure.  So, for this reason, along with the strongly oversold condition evident in the market, I think the 4440SPX is a reasonable target.

But, again I want to caution you about trading b-waves too aggressively.  So, if you are going to attempt to trade for that 4440SPX target, PLEASE make sure you are using appropriate risk management strategies.  

Ultimately, I still view the 4165SPX region as the ideal target for this wave 4.  It is the .382 retracement of wave 3, and it is the .618 extension of waves [1] and [2], which is the traditional Fibonacci Pinball target for a wave 3 that only attains the 1.00 extension of waves [1] and [2]. 

Lastly, I have had to come up with a new alternative count.   And, that would be a direct move down to the 4165SPX region to complete wave 4 rather quickly, as we have seen in other pullbacks.  While this is truly an alternative, we have seen this action happen many times since we bottomed back in March.  But, I do not think it is very likely at this time. 

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Avi Gilburt is founder of ElliottWaveTrader.net.