S&P 500 Index Set To Cool Down For Labor Day

By: Chris Guthrie
Published August 30, 2018
02:10 AM GMT

The markets have continued their uptrends and record setting habits over the past few weeks. While some believe this will go on forever, Elliott Wave analysts know better. I believe we have reached another natural point of exhaustion. The S&P 500 Index (SPX) will drop slightly over the next 2.5 days based on our analysis. The drop will be short-lived, lead to more record highs before ultimately reaching a market top in November 2018.

Technical Analysis

The index has been in an impulsive wave, intermediate wave 3, since the end of June. I track all movement of the sub-waves inside of this larger wave in order to determine turning points as well as likely tops and bottoms. The intermediate wave has additional sub-waves, referred to as minor, minute, minuette, and subminuette waves. The index currently finds itself in minor wave 3 and minute wave 3 has just ended. I marked this top at 2916.50 around 3:30 PM today (August 29). This is outlined in the image below

S&P 500 Index Set To Cool Down For Labor Day

Once the top was identified, I used derivative analysis based on the index’s movements during intermediate wave 3 to determine the market bottom for minute wave 4. Minute wave 4 has begun at this top, 2916.50. On average, wave 4’s movement is:
0.36 times the movement of wave 1;
0.76 times the movement of wave 2; while
wave 3 is 3.8 times greater than the movement of wave 4.
Minute wave 1 moved 66.14 points. Wave 2 moved 59.99 points and wave 3 moved 114.01 points. Our levels of interest are 2892.74, 2870.91, and 2886.50

Another set of movements is derived from the correlation between retracement percentages of wave 2 and extension percentages of wave 3. On average, wave 4’s retracement of wave 3 is:
0.61 times the retracement of wave 2; and while
wave 3’s extension is 6.85 times greater than the retracement of wave 4.
Minute wave 2 retraced wave 1’s movement by 90.70% and wave 3 extended past wave 1’s movement by 181.68%. Our levels of interest are 2853.42 and 2886.26.

We also keep in mind common Fibonacci percentages as potential retracement levels when determining future movement. Per the Elliott Wave Theory rules we live by, wave 4 will not retrace 100% of wave 3’s movement. This means the index will not drop below 2802.49. Honestly, the coming dip should not come close it. Our Fibonacci levels of interest are: 2889.59, 2872.95, and 2859.50. We now have 8 potential points for the index to drop.

We use the same methodologies to project the days, minutes, and hours it will take for the wave to complete itself. Our ratios are based on 5-minute periods. On average wave 4 lasts:
0.4 times the length of wave 1;
0.6 times the length of wave 2; while
wave 3 is 5 times greater than the length of wave 4.
Minute wave 1 lasted 404 5-minute periods, wave 2 lasted 315 periods, and wave 3 lasted 870 periods. We have estimated the bottom to occur between the start of the trading day on Tuesday September 4 through the first 2.5 hours.

Although we had 8 potential points for the index bottom to occur, we removed some of the outlying levels. We have narrowed the zone of the bottom to occur between 2870.91 – 2886.50. This means we project the index to drop no lower than 1.56% from its 2916.50 top over the next 2.5 days.

We continue to monitor the index and see interesting moves over the next 2.5 months. We anticipate another top when intermediate wave 3 ends near the end of September. From there intermediate wave 4 could drop through the first two weeks in October, leaving intermediate 5 to produce the final gains and market top through the middle of November. You can follow our projections in the interactive chart below and continue to check our site for further analysis as each wave is completed.

From TradingView.com

Real World Application

We try to apply logical real world events that could be the catalyst prior to wave tops and bottoms. The technical analysis is conducted without regard to real world events. Real world events are applied to the analysis after technical levels and days are determined.

While applying real world events to a small correction detailed in this article would most likely be profit taking, an extended weekend between trading days could sow simple doubt in investor’s minds. The current application of real world events to the end of intermediate waves 3, 4, and 5 line up perfectly with potential major news headlines in the United States.

I have wave 3 finalizing at the end of September which coincides with the end of the fiscal year for the U.S. government. The government does not have a budget approved to keep the government open past this date. The federal government will shut down if a budget is not passed by midnight on September 30, 2018. October 1, 2018, the first day of a government shutdown, leads off a trading week on Monday. Previous shutdowns have generally lasted less than one week. The most recent one ended after less than two business days had elapsed. There will most likely be more pressure to end any shutdown spanning through the work week, especially in an election year. Intermediate wave 4 would most likely end around the conclusion of a government shutdown resulting in the final uptrend for the market.

Our projection for the length of intermediate and wave 5 is relatively short. The end of wave 5 falls on the day prior to the mid-term elections in the U.S. I have tried to rationalize what could cause this and a few things come to mind. Most people are aware the Republican party controls the House of Representatives, the Senate, and Presidency. All three under the same ruling party create the greatest likelihood of agreement when it comes to legislating (for better and worse). While split control of the three is not a bad thing, it could be perceived as complications to future law passage. Parties in Congress typically fail to agree over some issues. A party change to the legislative branch would most likely change the flow of policy in the U.S. Talk or perception of potential attempts for impeachment proceedings can also rattle markets. A chance exists for greater regulation of businesses, particularly free speech issues by large technology companies as discussed in the media if there is no change to the ruling party in D.C. These perceptions could be the catalyst for the top of the market.

There are additional “unforeseen” events that could cause the major down turn in the markets. This could range from failure to reach trade deals with China, failure to sign and implement already agreed to trade deals with the European Union, and Mexico (maybe add Canada to this list in the coming days). North Korean tensions could re-erupt in a negative way if rhetoric and behavior changes. Lastly, an unforeseen military conflict could occur.

The top of the market is due. Regardless of the pundits believing stocks can move sky high forever, the top will occur soon. Pundits stating the bull run will continue forever is ludicrous. I believe my analysis is sound and eerily aligns with major news making events prior to the end of 2018.

Counter Analysis

As I am human, I can always be wrong. Key movements that would display this fact would be if the index moves above 2916.50 before the close on Friday August 31. If a move occurs above this level, minute wave 3 is still alive, albeit, short-lived once it crosses this level. This would most likely shift my projections above to the right 2-3 days. If this is the case, an update will be published.

Disclaimer: We do not currently have positions in stocks, funds, or indices mentioned in this article. We may initiate a position within the next 48 hours. This article is for reference only and should not be solely relied on to predict future movement. Historical movements and technical indicators should never be the sole basis for entering positions involving risk. You should not take a risk without fully understanding the system, market, and having established trading discipline. Make sure appropriate research is conducted prior to taking any risk in a marketplace. The author and Limitless Life Skills LLC do not have an interest, outside of the holdings disclosed, or relationship with the companies mentioned in this article and all expressed views are that of our writers.

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