Charts on S&P 500 (INX): Setting Up the Next Decline

With the market dropping down towards the top of the main support box noted on our charts this past week, it has made it quite clear that the correction we were expecting off the 3011/45 resistance zone has begun in earnest.  And, I believe we will be heading lower in the coming weeks.

This past week, the market dropped down towards the 2775 region in the overnight session on Monday night, and struck the low of the week.  This concluded what we have noted on the chart as the a-wave off the recent highs.

I am classifying this as an a-wave since it is very hard to be able to identify a clear 5-wave downside structure.  For this reason, I have noted that the yellow count potential we have been tracking has now become a very low likelihood, and I have taken it off the chart.  However, should the market provide us with a direct break below the 2600 region during the impending decline, then the yellow count will return. But, this is not my expectation at this point in time.

For now, I am going to assume that the correction we have begun will take us lower in stair-step fashion, as presented in the green count.  To that end, I believe we have potentially completed the b-wave rally on Friday, which will be confirmed by a break down below the 2899SPX low we have struck on Friday. 

In fact, the b-wave rally has now reached the .618 retracement of the a-wave decline, which is a very common target for a b-wave retracement.  Furthermore, this rally provided us with an (a)=(c) relationship right into that target region (again, assuming we are taking into account the overnight low stuck on Monday night at 2775).  Moreover, we also have completed our minimum expectation for a 5-wave (c) wave, yet with a truncated 5th wave. 

While these facts normally suggest a completed b-wave rally the great majority of the time, the fact that we saw a truncated 5th wave does have me question if this rally has completed – at least until we are able to break down below Friday’s low of 2899SPX.

Alternatively, if the market is unable to break below the Friday low before it breaks out over the 2945SPX level, the market may attempt to stretch this b-wave a bit higher.  Should we move through the high we struck at the end of the day on Friday, and follow through over 2945SPX, it would suggest that the 5th wave of the (c) wave of b will be extending higher towards the 2977SPX region (1.382 extension), with a very strong extension pointing as high as 3004 (1.618 extension).

But, the main point to take away from this analysis is that once we break below Friday’s low, it likely signals that we have begun a c-wave down. 

As far as my targets for the next decline, since the market came within 8 points of the .382 retracement of the rally off the December 2018 lows, my expectation is that the next decline will likely break that support, and point us towards the .500 retracement within the 2685 region next.  In fact, that region would also provide us an a=c target off the all-time highs.  So, that seems to be a high probability target at this point in time. 

Should the market overshoot that target, with the internal structure of the next decline pointing to an extended c-wave down, it would likely target the next lower support in the 2600SPX region.  Clearly, we will track the next decline in real time, and provide updated analysis as we drop.

Now, the rally that I would expect to see after that decline completes will be the key to the difference between the primary green count and the alternative blue count.  You see, if the market rallies in a clear 5-wave impulsive structure off that support, and projects us north of 3115SPX, then I will have to assume the blue count is operative, which then points us to the 4000 region sooner rather than later.

Yet, if we rally in a clearly corrective structure, then it maintains our focus on what will potentially be a long, drawn out 4th wave, which could take us another year to complete.  And, for those that focus upon politics, it would mean we would likely see this correction take us into the elections in 2020.

So, while I think the market is setting up a decline down into the heart of our main support box below, I think the last quarter of 2019 will provide us with a strong indication as to whether we will be mired in another longer term correction, or if we will begin our trek towards the 4000 region to complete the bull market off the 2009 lows sooner rather than later. 

For those that are looking to begin to position to the long side, you may want to consider looking to the long side once we complete the next 5-wave c-wave decline into the 2600-2685 region.  In fact, our StockWaves analysts have highlighted a number of potential ideas to buy on the next drop, such as Netflix, for example.  So, stay focused on the fact that the upside still points towards the 4000 region, whereas the downside still seems to point towards the 2200 region if we see the full 4th wave correction in green.  But, when we drop below 2700, that means that the upside potential is almost 50% at that point in time and you may want to consider buying stocks that could be bottoming on this next drop.

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Avi Gilburt is founder of ElliottWaveTrader.net.