SP500 Elliott Wave Update: Competing Interpretations

May 8, 2009: 12:21 PM CST

Let’s take a quick look at the updated Elliott Wave Counts for the S&P 500, noting one ‘ultra-bullish’ interpretation and one ‘ultra-bearish’ interpretation… and a moderate interpretation thrown in for good measure.

The top-view is that we are in a large-scale “Three-Wave ABC” correction of Wave 4 that began in 2000.  Wave A was 2000-2003; Wave B was 2003-2007; and Wave C began 2007 – ????.  With that in mind, let’s see how Elliotticians are interpreting the current 5-wave “C” Correction we are in currently.

First, the “Ultra-Bullish” Count, which implies “Wave C” has ended and now we’re in Wave 1 UP of a Large-scale Wave 5 (aka beginning of new multi-year bull market).

Corey’s note: Although very few people (including myself) believe this interpretation, I wanted to include it to play “devil’s advocate” and leave no analytical stone unturned.

This implies that the Bear Market is over.  That’s quite a premature call in my opinion, and the opinion of many others, but let’s also remember that in Elliott nomenclature (and wave characteristics), a “Wave 1″ will form when the prevailing sentiment is negative.  Wave 2 will be a “Told You So!” decline that fails to make a new low and surprises everyone when it turns up.  It’s only on the upswing into Wave 3 that people begin to realize “Oh my gosh – we’re in a new Bull Market.”

If this winds up being the dominant count, I don’t like how short Wave 5 was and how weak the ‘fractals’ were when compared to other waves.  It really felt like we should have gotten one more push to new lows before the very strong rally we’re having now commenced.

Let’s now move to a “Moderate” Elliott Wave count which would imply further potential for upside, but eventually target a retest of the March lows at a minimum or a slight breaking of those lows perhaps later in the year.

Under this count (which I would say is my preferred count), Primary Wave 3 bottomed in November and we’ve been experiencing a protracted Primary 4th wave (specifically an “Expanded Flat”) which could reach a terminal (final) point somewhere in the 1,000 region ((C) would need to make a new high above (A)).

The implication is that the current wave will be a 5-wave affair (C waves subdivide into 5-waves… except in a triangle) to break above the Wave A high and then afterwards, fall back down into a 5-wave decline to take us back to retest or break the 667 lows months into the future.

I call this the more “moderate” or ‘compromise’ count because let’s now look at a more bearish count:

I would go as far as to say this is *the* most bearish interpretation (Corey’s note:  I do not accept any wave count that assumes Primary Wave 1 completed in March and that the final target would be in the 100s for the S&P 500).

This count implies that Primary Wave 3 completed on the March Lows, and that a triangle formed for the fractal Wave 4 of Primary 3 (an interesting interpretation) and that we’re currently perhaps in Wave A up of an ABC Wave 4 that could take us up to 1,100 or even higher.  However, it is ‘bearish’ because it assumes the Bear Market has many more months to complete (perhaps mid-2010 or later) and that the final target will be lower (perhaps 550 – 600).

This wave count is a continuation of the “most bearish” interpretation I have posted in prior updates from November forward.

In terms of the ‘multiple interpretations,’ the collective forecast then was the same – after we complete a move to new lows, a strong “Wave 4″ rally will take us back to the 1,000 level.  Afterwards, a decline will insue.  In my opinion, the precise count is not as important as the collective interpretations.  If we rise as Wave 1, Wave 4, Wave A … it doesn’t so much matter short term because all virtually all Wave counts called for a strong rise.

After that rise, we begin to diverge – one interpretation says we will not make new lows but notice now what the collective forecast shifts to:  If we begin Wave 5 down, or begin Wave B down, the collective forecast will call for some sort of decline.  It’s up to more experienced Elliotticians to do the work to project targets, etc but for the average person, I think it’s most important to look at a couple of primary counts and then ask “Are there any points that the “next likely swing” projection aligns across non-correlated counts?” If so, then you’ve just used Elliott Wave analysis to arrive at a ‘confluence’ projection.

Does that mean it will be right?  No, but your goal is to put the weight of the evidence in your favor as best you can with the information you have.

And above all, remember that Elliott Wave analysis, along with any aspect of Technical Analysis (cycles, oscillators, trend, volume, patterns, Fibonacci, Gann) is not ‘god of the markets’ and nothing – to my knowledge – can give you a crystal clear forecast into the future.  Not even Fundamental Analysis can do that.

I’m also a strong proponent of the “Next Likely Swing”  Principle.  I believe that you can assess the immediate future (price swing) with better accuracy and confidence than you can forecast the next 5 swings, or 2 years out, etc.  Thus, your goal should be to look at a variety of inputs (fundamental, technical) and make a decision based on the weight of the evidence.

That being said, when you look at Elliott Wave Analysis (nothing requires you to do so), it’s important to have an open mind and know where your dominant opinion will be proven wrong (Elliott Wave only has three immutable rules after all) and then switch to an alternate count as needed.

The above three counts represent – in my assessment – three valid interpretations of the possible Elliott Wave Count.  Look for areas of alignment and fit this into your own research and analytical methods that you use currently.

Corey Rosenbloom, CMT

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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