Outside the Box: U.S. stock market is set to fall this week, according to Elliott Wave theory

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Those who have followed us for at least six months know how well we’ve identified major turning points in the U.S. stock market.

When the S&P 500 Index SPX, +0.12%  broke below 2,880 points in the fall, I noted that I thought the downside risk outweighed any further upside potential. And, as we now know, that breakdown opened the door to the correction to the 2,345 level.

As the S&P 500 dropped below 2,800, we set up a bottoming target between 2,250 and 2,335 for what I viewed as the initial phase of this larger-degree correction. That is what we have labeled as our a-wave on our 60-minute and daily S&P 500 charts.

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As we also know, the market bottomed within our target region (in the futures), but did not provide us with a clear five-wave structure into that bottoming region. However, even before we bottomed, I was highlighting my expectations for the “corrective” rally I expected once that a-wave was completed.

And, for those who followed us closely, you would remember that my minimum target for this rally off the 2,350 region was 2,800, with the potential to even rally as high as the 3,011-3,040 region. At this point, the only change I may make to this potential is raise that target to the 2,900 region up to as high as the 3,011-3,040 region, depending on how deep the current pullback is.

Elliott Wave analysis subdivides this corrective rally I have been expecting (which is labeled as a b-wave) with an [a]-[b]-[c] sub-structure. While I had placed my target for the [a] wave on our chart even before we bottomed, the market rallied 50 points higher than my ideal target region for this initial rally off the lows. But, as I also noted during the rally, the higher this [a] wave takes us, the higher we will likely rally into our upper target region for the b-wave.

At this point, it seems likely that the market has topped in the [a] wave, and we are now within the throes of the [b] wave pullback. And I generally expect that [b] wave to subdivide as I have outlined on the attached five-minute chart.

The question with which we will grapple in the coming months is how high this b-wave rally will travel. The answer will depend on two things. First, we need to confirm where the bottom of the [b] wave pullback will form. My minimum target for that is in the 2,600 region at this time, with the potential to drop as deep as the 2,500 region, as you can see based on my target box on the 60-minute chart. And, since the b-wave target often displays a relationship of [a]=[c] within its sub-structure, a [b] wave bottom within 2,500-2,600 points to a target in the 2,900-3,000 region.

Moreover, since the [c] wave is comprised of a standard five-wave Elliott Wave structure, and they tend to target the 2.00 extension of waves 1 and 2 within that five-wave structure, we will be looking for a target that provides confluence between the extensions of waves one and two in the [c] wave, and the relationship between the [a] and [c] waves. So, if the [a]=[c] target coincides with the 2.00 extension of waves one and two of the [c], we have a high probability target for a top to the market in the coming months. But, right now, it is too premature to make such determinations since we have not completed the [b] wave yet.

So as long as the S&P 500 remains below the 2,725 region, I am looking for further downside in the coming week as we form more of the [b] wave pullback structure. Alternatively, if the market is able to rally impulsively through this past week’s high, then it opens the door to the potential that the [b] wave has already been completed and we are already in the [c] wave rally, pointing us directly to the 2,940 region. This I have labeled as the “FOMO count,” presented in purple.

As I have also highlighted many times before we even began this correction, my ideal target for this larger-degree fourth-wave correction resides in the 2,100-2,200 region. Moreover, I also believe that we will still see a multi-year rally pointing us to at least the 3,200 region, with the potential for a blow off top to as high as the 4,100 region, taking us into the 2022/23 estimated time frame. We will not be able to identify the higher likelihood target for that final rally stage until waves one and two of that final rally are completed. We can then project our targets to narrow in on a high probability topping target for the bull market, which began in 2009.

At the end of the day, and based on our general expectations, it seems we are in the seventh-inning stretch in this bull market.

View additional charts illustrating Avi’s wave counts on the S&P 500 across various time frames.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

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