S&P500 Update: Fibonacci in reverse!?

Remember my posted from October in which I showed the picture-perfect Fibonacci-impulse-pattern the Russell2000 had followed through most of 2018? Well, let’s apply Fibonacci again but now to the S&P500 and in reverse -looking down instead of up- to help assess downside targets and upside-reversal targets for the current Bear Market we are experiencing. And if you think it is not a Bear Market, just pull up the chart of the RUT again, see below, and we can see it has now almost retraced 3 years of gains in 4 months.

Fig 1. Russell2000 erased almost 3 years of gains in less than a quarter: Bulls take the stairs up, Bears take th elevator down.

But before we get started, let’s do a quick trip down memory lane: Already in early November I forecasted the S&P500 would ideally drop to SPX2475 (see here). And if you think that was easy, then I’d like to refer you to my weekly digest archive, where in September I already forecasted for my Premium Members a major market top was forming, while most other pundits were still looking higher, and which I further assessed in October from a cycle perspective. See here and here; respectively. But not everybody gets it right all the time, me included.

Therefore, let me start off with the “Anticipate, monitor, and adjust if necessary” principle as a lead in to my analysis because it is critical to understanding the financial markets and in forecasting them. Namely, back in early fall I anticipated a “simple” larger zig-zag corrective pattern, where c = a, measured from the b-wave high. Not until (later) this week was there information / confirmation to tell something else was going on (monitor), as the S&P broke below SPX2475 (adjust).

That said, I went back to the drawing board and re-assessed the charts using Fibonacci extensions and retraces: see Fig. 2. The daily S&P500 chart shows what I anticipate to happen next: either wave-c is extending into five or three (green) waves OR we will see five (i, ii, iii, iv, v) larger (red) waves down. Currently price has reached the green wave-3 target zone, from which we can expect a bounce back to the green wave-4 target zone.

Fig 2. S&P500: most likely completing five (green) waves down from the SPX2800 high. But, IF it eventually completes five waves down for the ATH then the outcome for the long-term will be very Bearish

As shown in the Russell2000 update, Elliott waves move to Fibonacci-based price targets and the bigger waves consist of smaller waves, which in turn consist of even smaller waves (fractals). Each wave-degree is therefore labelled different; e.g. intermediate, minor, minute, etc. I also color code them in text and chart for easy reference. Normally 3rd of 3rd waves move to the 1.382x wave-1 Fib-extension of the one-degree larger wave, 3rd waves move to the 1.618x 1 Fib-extension, the 4th wave rallies back up to the 0.764-1.000x Fib-extension and 5th waves down to the 1.764-2.000x Fib-extension. Of course waves can extend or truncate. But, what we see in Fig 2. is the (green) minor-wave 1.618x extension overlaps exactly with the (red) intermediate-wave 1.382x extension at SPX2334: 3rd of a 3rd wave?! The green minor-wave 1.000x extension overlaps well with the (red) intermediate-wave 100% extension (SPX2468 vs SPX2463); 4th of a 3rd wave!? And the (green) minor 2.000x extension overlaps exactly with the (red) intermediate 1.618x extension (SPX2251 vs SPX2554); 5th of a 3rd wave, with the 3rd wave possible only a c-wave.

Hence, what I anticipate to happen is for the S&P500 to drop in minor-3 to the SPX2384-2334, with SPX2334 preferred, (target zone already reacehd today btw!) then the index will bounce in wave minor-4 to SPX2467-2520, with SPX2467 preferred and then it will drop in a last minor-5th wave down to SPX2252-2303 to either complete all of intermediate-c or only iii. Namely, at that point, the market can decide it had enough and the first leg of the correction is over (black wave-a), with a bigger bounce (black wave-b; black dotted arrow) to follow before wave-c takes price to new lows, OR the markets can decide to tag on one more (red) wave iv and v wave to complete a picture perfect impulse to SPX2205-2125. IF and when that happens, the long-term ramifications for the markets will have shifted in favor of the long-term Bear Market, which the Benner Cycle predicts. See my September and October updates here and here; respectively. The third option is that (black) wave-a completes at the minor-3 target zone (grey dotted arrow). But, I find this scenario least likely since there’s no positive divergences on any technical- nor market-breadth indicator I track. Things are simple extremely oversold, which is more in line with a 3rd wave than a “THE low is in” setup. However, a “Santa Rally” bounce (minor-4) and then a “Sell the New Year’s Party Hangover” (minor-5) will accomplish those positive divergences needed to kick off an even larger rally/bounce.

And with this road map, which is as usual wrong till proven right, I would like to wish everybody a Merry Christmas, Happy New Year and Happy Holidays as Intelligent Investing will be closed until January 5th. My premium members will receive two weekly market digests during that time, but no daily market updates will be send out.

Arnout, Ph.D.

2014-06-10 17.07.27-small

Founder and President Intelligent Investing, LLC

Vice President and co-Founder NorthPost Partners, LP

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  1. Pingback: S&P500 update: Did Fibonacci leave the building? | INTELLIGENT INVESTING

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