Last night’s rally in the S&P 500 comes just at the right time to suggest that the recent correction has now ended and the index is now poised for a rally to new highs.
To me there looks to be a case to say that the S&P 500 may now have completed the 4th wave of an Elliot 5 wave advance. I’ve labelled this on the chart above
Three things suggest that the 4th wave correction may have ended with the low on Monday
- It finished at the 61.8% Fibonacci retracement
- It’s common for corrective waves to alternate, with the one being simple and the next being more complex. This happened here. The 2nd wave was a simple swing lower. The 4th wave was a more complex, 3 part or “abc” structure
- Last night’s move has already moved back through the low at “a” in a sign of potential strength
What happens now?
If this scenario plays out according to the text book, the S&P 500 will now move above the major high at “3” i.e. above 2401.
However, it may not go too far. One possibility based on Fibbonacci projections would be a move to around 2410/2420.
That would fit with the fact that valuations are already pretty full with the S&P 500 currently prices at about 18.2 times forward earnings compared to an average of 16.6 over the last 4 years.