The S&P 500 is striking a strange chord that will resolve eventually into a potentially large trend move – the question is “Which way will it move?”  Let’s see this and look for clues.

First, the S&P 500 Daily Chart:

If you look at this structure, you likely see a powerful “sell” signal setting up as price tests the falling 20 day EMA and has formed a shooting star (yesterday – bearish reversal candle) and a similar pattern (so far) today – both of which have upper shadows at resistance, which hint at a bearish reversal.

However, you also see a clear and present positive momentum divergence on the prior two swings down (the wave structure is very choppy and volatile) which hints at possible bullishness.

Ultimately, I feel we’re in an Elliott Wave 4 retracement up which is taking the form of a classic descending triangle formation (which isn’t technically the same as an Elliott 5-wave triangle).

It’s also quite possible – from an alternate count – that the recent wave 3 down ended at the spike down around October 13th, formed a sudden and violent wave 4 up to 1,050, and then formed a 5-wave (mini) impulse down into new price lows at 850.  IF that is the structure, then we’re likely in a larger wave 4 up of the larger structure, but let’s not get too caught up in that for the time being.

Let’s drop our timeframe down to the hourly chart to see the recent action and see if it offers any sell signals too.

The S&P 500 Hourly Chart (showing recent triangle structure):

Here’s where it gets interesting.

A classic Elliott triangle pattern is a five-wave affair (which is what we could be seeing) and that the “E” corrective wave may be finishing and ready to roll back over to the downside.

However…

I wanted to point out a couple of points of bullish developments.

Most obviously is the triple-swing positive momentum divergence that has set-up for the better part of October.  Momentum precedes price, and divergences often resolve in reversals.

Second, we see that – no matter how you draw the descending trendline (off the spike high or off the ‘most touch’ method) we see price has indeed broken out of the triangle formation on the hourly charts, and in fact, both trendlines could provide potential support at the 920 level.

Finally, we see “Confluence Support” via these trendlines and from a cross-over of the 20 and 50 period EMAs at the 920 level – the 20 EMA just crossed ‘bullishly’ above the 50.

So what’s going on and what might happen?

I hate to say that it’s unclear, but there are possibilities.

1.  Should price find support at this level and break above the 20 period EMA on the daily chart, that would be a strong buy signal for a potential larger move up (retracement only – likely not to go beyond 1,150).  Keep in mind that multiple positive divergences on different time frames can lead to powerful moves.

2.  If price breaks support at the 920 (and especially) 900 level, look to get aggressively short, as we would be set-up for a test of the lows at 840 and could see if that level would hold and if not, then expect new lows to materialize from that.

Now, we’re near the US Presidential Election, and historically there’s a burst in the stock market as the new president is elected – provided there are no recounts (even after the recount fiasco in 2000, the market surged once certainty was achieved).  Keep in mind this possibility.

Historically, November/December have been good months for the market – let’s see if they continue to do so in this highly volatile environment.

Stay alert and continue to guard your capital.

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Published by Corey Rosenbloom of Afraid to Trade.

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