Addressing The Wave (3) Extension

I have gotten many comments to my analysis about why it was not too long ago that I was looking for the 2360SPX region but now I am looking higher.   So, I wanted to take a moment to explain why and when I had to change perspectives.

For those that have been with us for quite some time, you would likely remember that we were calling for the market to “ideally” target the 2537-2611SPX region from the 1800 region.   However, based upon the manner in which the market was rallying in the summer, it was providing warning that we may not reach break beyond the 2500SPX region for wave (3).

As we moved into mid-July, I noted that I believe we can see a market pullback within 3 weeks.  My expectation was that the market was going to top between the 2487-2500SPX region, and then drop down to the 2300-2360SPX region, which will set up the next rally to 2600+.  While the market struck 2491SPX mid-day on August 8th, and proceeded to drop down to the 2417SPX region a little less than two weeks later, it clearly did not fulfill my full expectation on the downside.  So, my initial expectation was that this was only an a-wave within the larger degree wave (4).

For those who traded those two weeks with us, they know that we caught ALMOST all the twists and turns during that period, while many were getting whipsawed. Coming into the last week of August, we were expecting the market to drop down to support within the 2425-2430SPX region, and then rally back towards the 2465-2475 region, before it set up to drop back down to the 2400SPX region. As we now know, the market dropped hard and bottomed early that week at 2428SPX, and then rallied back to 2480SPX. When the market topped out at 2480 on September 1st, our expectation was that we would see a drop down to the 2400SPX region next.

While the market dropped 34 points from that level within the next trading day, when it came back up through 2460SPX I posted to all our members that we now have opened the door to the 2500-2510SPX region, rather than an immediate continuation down to the 2400SPX region. The main reason was that when the market did not follow through on our Fibonacci Pinball set up towards 2400SPX and came back up through the 2460SPX region, the market provided us with a strong warning that the downside follow through was much less likely.

So, while we follow standard patterns, when the market begins to provide clues that it will not follow through on those patterns, WE MUST LISTEN TO THE MARKET, and change our perspective.  To maintain a perspective when the market is providing clues otherwise is not how we do our analysis here.  We will NEVER stand fast on a perspective when the market tells us otherwise, and that is why we had to begin changing focus once we broke through 2460SPX. 

Now, once we the market finally reached the resistance in the 2510SPX region we pointed towards, we were watching to see if the market was going to roll over and break below support that we had on the chart between 2480-87SPX.  If support broke, we could move back into a more bearish perspective.  But, as we hit the support, I sent out a Wave Alert to members noting the market was striking important support right at 2487SPX – the top of our support box.  The market rallied strongly off that level, and then set up to rally to our next target in the 2530SPX region.

This is, in a nutshell, how we had to change perspectives when the market began to provide clues that wave (4) was not yet ripe to begin. This was also what I feared may occur and why I constantly urged members to avoid aggressively shorting, especially after we broke back up through the 2460SPX level.

So, for now, the market can still provide us with a top to wave (3) in an ending diagonal pattern.   But, we must still respect the bull market, as it has certainly earned it over the last 2 years.  So, I will NOT move into the more bearish potential in the market until we see a strong break down of the 2496SPX level. 

As I have noted many times over, markets are non-linear in nature.  And, we use our Fibonacci Pinball method of Elliott Wave analysis to be able to address the markets non-linear nature.  So, while I would LOVE to be right 100% of the time, it is simply impossible to do so within a non-linear market.  But, our Fibonacci Pinball method certainly provides us early warning as to when we may be wrong in our primary assessment, and allows us the opportunity to change perspectives quite quickly.

Avi Gilburt is founder of ElliottWaveTrader.net.