Focus on the Forest

As I have been reiterating for months now, once wave 3 topped, we have been looking for the market to complete wave 4, with an ideal target in the 2100/2200 region on the S&P 500 (SPX).  That represents the .382 retracement of wave 3, along with providing confluence with other theoretical and mathematical Elliott Wave targeting within the same region.  So, I still consider it a high probability target region.

However, since 4th waves are the most variable of the waves within the Elliott Wave structure, I don’t think it will be a straightforward drop directly to that target region.

As you know, one of the factors I have been tracking is the bounce in the MACD on the daily charts.  At this point in time, this bounce looks like what we would typically see in the (b) wave of the a-wave.  (A bigger b-wave would likely take us higher into the target box overhead in the MACD).  However, what I would expect is that the next drop in the (c) wave of the a-wave of wave 4 would provide us with a positive divergence in the daily MACD when we are striking our lower price target levels for the (c) wave of the a-wave. 

From that region, I would expect a sizable and long grinding rally in the b-wave of wave 4.  The purpose of this b-wave is to convince market participants that the correction is over.  For this reason, I am expecting the MACD to rise to our target region on the daily chart, which can even support the SPX rallying back up to the 2880-2925 region, and possibly even a higher high.  Remember, when the prior 3rd wave does not strike its ideal target (3011), we can see the b-wave of the ensuing correction rally back to strike it.  For this reason, I would not even consider shorting that b-wave rally for a number of months, as it will likely rally for months, and provide the bullishness needed to drop us down to the wave 4 target below.

So, for now, I will be carefully tracking the next decline, and once we complete 5-waves in the (c) wave down, we will be preparing for a strong reversal to begin that b-wave rally. 

Keep in mind that we may still see more twists and turns I may be unable to foresee right now, as this is a 4th wave.  And, the purpose of a 4th wave is to whipsaw market participants as it makes its way lower during this correction.  So, please do not trade anything aggressively at this point in time, even though the market may provide us with what “seems” to be a nice set up.  You can make a lot of money on these big moves even though you are trading with much smaller position sizes, which I strongly suggest.

Lastly, I have said this many times before, and it is still worth repeating.  The goal for most investors during a 4th wave should be CAPITAL PRESERVATION.  You want to retain a sizable position in cash to re-deploy at much lower levels rather than burn through it during these whipsaws in the market.  It is this type of environment that causes too many inexperienced traders to lose a significant portion of the profits earned during the prior 3rd wave rally.  Please keep this at the forefront of your mind constantly during this 4th wave action.

1SPXdaily
1SPXdaily
Avi Gilburt is founder of ElliottWaveTrader.net.