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The U.S. stock market rose last week beyond the resistance region we were targeting for a 4th wave rally in Elliott Wave theory.
And it dropped another time toward the 2,600-point support region on the S&P 500 Index SPX, -2.11% The benchmark index has now broken the 2,590 level, so stocks might be on their way to completing a wave (4), which began several months ago.
A breakdown below 2,620 suggests that Friday’s high will not likely be exceeded before we drop back down toward the 2,536 region next.
Read: Why stock-market investors should welcome the arrival of April
Still, the current structure suggests that as long as we hold below the 2,682 level in the coming week, then we will likely drop back down toward the 2,536 region.
When we began this wave (4) pullback several months ago, we set our ideal target region between 2,424 and 2,539 on the SPX. So far, the market has struck a low of 2,532. Based on the current structure we are seeing in the SPX, if the SPX does not exceed the high struck on Friday, the market has a potential setup to drop us down to the 2,500 region to complete wave (4).
In fact, it would take a very extended 5th wave to take us down to the 2,450 region, but the standard projections are not pointing that low at this time.
However, if we do rally up toward the 2,582 region early in the week, then we may not see anything more than a double bottom in the 2,530 region to complete this wave (4) in the coming week or two.
So, in conclusion, as long as the market remains below the 2,682 SPX region in the coming week, we have a setup to drop us down in the final leg of this 4th wave correction, which can complete within the next week or two. If the market is able to break out over the 2,682 region, then we will need to reassess whether a more protracted 4th wave will be taking us into the May time frame, or if a bottom has already been struck for wave (4), which is the lesser likely scenario at this point.
But it would seem we may have another “buy-in-May” situation on our hands this year (rather than the common expectation of “sell in May and go away”), similar to the one we correctly suggested for last year.
See charts illustrating the wave counts on the S&P 500.
Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live trading room featuring intraday market analysis on U.S. indices, stocks, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.