Charts on S&P (INX) - One More Pullback?

As the market continues to grind higher, and we are within a stones-throw of our minimum targets to complete wave 3 off the 2009 lows in the bigger picture, I think the market can finally clear up the path to completion in the coming week.

There are two paths I am currently tracking to get to the 3000 region next.  The immediate blue path presented on the attached 5-minute chart is the one I am forced to track as of the close on Friday, as the bull market must be given the benefit of the doubt as long as we remain over 2922SPX. 

But, the issue I have with it is that the sub-structure does not line up well within the larger degree wave structure pointing to 3225SPX, and would require sizeable extensions to strike the ideal target (3000 region) for this degree wave 3.  Even striking the minimum target for wave 3 of this degree at 2980SPX would also require larger than standard extensions.  Yet, despite these concerns, I have to respect the bull market as long we remain over 2922SPX and give this pattern primacy.

However, should we break down below 2920SPX early in the coming week, it opens the door to the yellow alternative which would make much more sense to me from a substructure standpoint.  In fact, if we pullback in this wave count to the 2880SPX level, we have a perfect alignment within the substructure pointing to 3005SPX, which fits the larger degrees we are tracking to 3225SPX quite nicely.  Specifically, a 1-2 structure as presented in yellow (with wave 2 bottoming at 2880SPX) points us directly to the 1.236 extension (3005) of the wave structure one degree higher with a 1.618 extension of yellow waves 1 and 2.  This would provide us with picture perfect alignment and set us up for the continued rally to 3225SPX.

This means that 2880SPX is now the perfect level of lower support for this bull market move, should we drop lower.  Any break down below 2880SPX at this point would be a strong warning to the bullish side of the market.  However, should the market move immediately higher early in the coming week and strike its next smaller degree target in the 2956/58SPX region, then you can move support up to the 2897-2910SPX region.  And, should we continue to move higher, then we will continue to move our support higher.

The main reason I am so intent on moving support higher aggressively is because I am still concerned about the potential that the market is tracing out an ending diagonal to complete wave 3 off the 2009 lows, which is presented by the green wave count. 

You see, when we completed wave (3) of v of 3 off the 2009 lows in January with that blow off top, it took at tremendous amount of “strength” out of the market.  And, as R.N. Elliott noted, ending diagonal patterns develop when the prior wave went “too far too fast.”  For that reason, we could very well be seeing an ending diagonal in the wave (5) of v of 3 to complete all of wave 3 off the 2009 lows.  That is why I am trying to be as cautious with the upside as possible, especially since the reversal is quite strong when an ending diagonal completes, and will take us back to the point from which it began (2500-2600SPX) in rapid fashion.

So, of course, all of this comes with the same caution I must suggest as we move through this final 5th wave in wave 3 off the 2009 lows.  Remember, when this wave structure completes, whether shortened or to full completion at 3225SPX, we will likely be ushering in a 30% correction.  So, one must be extremely cognizant of the risk of striking a major top as we move up to complete this last segment of wave 3 off the 2009 lows.  But, as long as we remain over 2880SPX, I can still maintain a pattern targeting 3225SPX. 

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Avi Gilburt is founder of ElliottWaveTrader.net.