SP500 Update: Rally since September 2020 Low Complete. Low-4000s Next?

It has been over two months since I last provided my Elliott Wave Principle (EWP)-based insights on the S&P500 (SPX); see here and here, Thus an update is certainly due. The index topped at SPX 4546 on Sept. 2. It has since moved lower every trading day. The last string of five down days ended Feb. 22. Thus, the current down week, therefore, appears to signals a trend change. Allow me to explain below.

Figure 1. S&P500 daily chart with detailed EWP count and technical indicators

A break below the mid-August low is needed to confirm the more significant correction.

Since the early May low, the SPX has been in an overlapping set of regular interval rallies, lasting about 20 TDs with 3-day corrections, all bottoming around the 18th of each month. Each low and high was a higher low and a higher high: a Bullish pattern. Hence, because the most recent string of down days is already five, a drop below the August low at SPX4368 (orange wave-4 at the green arrow) will confirm a (red) intermediate wave-iv to ideally SPX4030-4235 is underway. I prefer the upper end of the target zone because, in Bull markets, the downside often disappoints, and the upside surprises.

The beauty of the EWP is that we know with certainty in an impulse, the 3rd wave is followed by a 4th wave correction and then another 5th wave. Besides, the 3rd wave is made up of five smaller waves. In this case (black), major-3 comprises five (red) intermediate waves: i, ii, iii, iv, and v. Most likely intermediate wave-iii of major-3 has topped. Thus wave-iv is logically most likely underway, which means wave-v of major-3 is still pending. I expect wave-v of wave-3 to complete around SPX4800-5000.

Figure 1 above also contains many technical indicators (RSI, MACD, MFI) which exhibit negative divergence (red dotted arrows) to support the preferred EWP count. Although divergence is only divergence until it is not, it must be noted, and it will take a break above SPX4545 to erase the current setup and target SPX4600-4650.

Please note 4th waves are often quite tricky with lots of twists and turns (they can become any of 7 types of different flats or endless triangles). I, therefore, view the pending correction as more of a buying opportunity than a chance to short the index. For now, let us see if the August low can get broken to the downside over the coming days, and then I will be able to narrow down the target zone for wave-iv of wave-3 even better.

Figure 2. S&P500 hourly chart with detailed EWP count and technical indicators


Description automatically generated with medium confidence

Lastly, the hourly chart above shows the index can have completed already five (green) waves up off the March low following an almost picture perfect Fibonacci-based EWP pattern, with wave-3 to the 1.382x wave-1 extension, wave-4 back to the 0.764x Fib-extension, and now wave-5 only 0.28% off the mark. When five waves are complete, always expect -at a minimum- three waves in the opposite direction. Thus, caution to the long side is advisable for swing- and short-term traders. Longer-term, this Bull has, IMHO still plenty of upside potential. It will require a break below the recent March SPX3723 low to tell us a multi-year correction is at hand.