Why Are Markets Dropping Now? S&P 500 In Corrective Wave

By: Chris Guthrie
Published October 4, 2018
04:20 PM GMT

Below outlines why the markets are dropping now. After new record highs for the U.S. stock market indices, it appears the markets have reached a point of exhaustion. Do not worry, this one is not the final big bang for the markets, but a quicker steep drop is anticipated over the next 2 weeks for the Standard & Poor's 500 Index . It appears the long awaited end to intermediate wave 3 may have finally occurred. This article is similar to my others. I have pinpointed the historical movement of the index and laid it out below. I have also included my counter-analysis indicators at the bottom.

Elliott Wave Theory Technical Analysis On Intermediate Wave 3

Why are the markets dropping now

Actual Intermediate Wave 3 Statistics

If completed, this wave alone:

     lasted 67 days;
     moved 247.87 points; and
     extended 162.44% beyond intermediate wave 1's movement.

Average Intermediate Wave 3 Statistics

This wave typically:

     lasts an average of 106 trading days;
     has a median length of 17 trading days;
     has a 181.78% average extension of intermediate wave 1's movement; and
     has a 164.77% median extension of intermediate wave 1's movement.

Based on derivative analysis, intermediate wave 3 on average:

     is 1.23 times longer than intermediate wave 1;
     is 4-10 times longer than intermediate wave 2;
     moves 1.35 times more than intermediate wave 1;
     moves 2.81 times more than intermediate wave 2; and
     has an extension of intermediate wave 1's movement that is 3.58 times the retracement percentage of intermediate wave 2.

Has Intermediate Wave 3 Met The Averages?

I will start with the analysis for wave 1. Wave 1 lasted 51 days. Wave 3 currently is 1.31 times longer than wave 1 which is close to the average. Wave 1 moved 237.67 points. Wave 3 has currently moved 1.04 times more than wave 1. This is below the average move seen between waves 1 and 3.

Next is intermediate wave 2's performance in relation to wave 3. Wave 2 lasted 11 days. Wave 3 is currently 6.09 times longer than wave 2 which is in the large average range for length. Wave 2 moved 99.48 points. Wave 3 has currently moved 2.49 times more than wave 2. This is not quite at the average, but close. Wave 2 retraced the movement of wave 1 by 41.86%. Wave 3 has currently extended beyond wave 1's movement by 162.44% which is 3.88 times larger than wave 2's retracement. This is above the average correlation typically seen between waves 2 and 3.

Based on the information above, there is a strong chance wave 3 has indeed concluded. The next portion of analysis for wave 4 should be accurate. Observable deviations will be covered in the counter-analysis section at the bottom.

How Intermediate Wave 4 Will Most Likely Move

Intermediate wave 4 is a corrective wave that currently began at 2939.86 on October 3. This top was initially pointed out in my September 12th article which was an update to my September 4th article. The following analysis is based on derivative analysis. On average, wave 4’s movement has been:

     0.53 times the movement of wave 1;
     1.10 times the movement of wave 2; while
     Wave 3 is around 2.65 times greater than the movement of wave 4.

Intermediate wave 1 moved 237.67 points, wave 2 moved 99.48 points, and wave 3 moved 247.87 points . Our levels of interest are 2813.89, 2830.43, and 2846.32.

Elliott Wave Theory Principle: the next set of movement target prices are derived from the correlation between retracement percentages of wave 2 and the extension percentage of wave 3. On average, wave 4’s retracement of wave 3 has been:

     0.95 times the retracement of wave 2; while
     Wave 3's extension of wave 1 is around 4.24 times greater than wave 4's retracement.

Intermediate wave 2 retraced 41.86%, and wave 3 extended 162.44%. Our levels of interest are 2841.29 and 2844.90.

We also keep in mind common Fibonacci percentages as potential retracement levels when determining future movement. It is important to remember one of the many Elliott Wave Theory Principles we operate under is that wave 4 cannot retrace beyond wave 3's starting point which was 2691.99. This means the index WILL NOT drop below this level during this current pull back. I strongly believe wave 4 will not drop below 2800, let alone 2700. Our Fibonacci levels of interest are: 2878.28 (which is a 23.6% retracement of wave 3's movement), 2840.19 (38.2%), 2809.40 (50%) and 2778.61 (61.8%). We now have 9 potential points for the index to find its next bottom.

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 1 day periods. On average wave 4 lasts:

     0.11 times the length of wave 1;
     0.45 times the length of wave 2; while
     Wave 3 is around 5 times longer than the length of wave 4.

Intermediate wave 1 lasted 51 trading days, wave 2 lasted 11 trading days, and wave 3 was 67 trading days in length. We estimate the bottom to occur between October 10th and October 24th.

We have taken the initial 9 levels of interest and removed the highest (2878.28) as an outlier. The key levels of interest reside between 2840.19 and 2846.32. The chart below outlines three different colored polygons where the next bottom could occur. The green polygon on the top of the three is the most likely and conservative target. The yellow zone in the middle is also likely but may not occur. This zone covers 2813.89 to 2830.43. The red level on the bottom is unlikely but could occur. This zone covers Fibonnacci retracements of 50% and 61.8%.

Level of
First Date &
Time Achieved
Reason for
Interest in Level
2878.28 10/05/18 @ 11:53 Fib retracement   23.6%
2846.32 10/10/18 @ 10:03 Avg move correlation to wave 3
2844.90 10/10/18 @ 11:04 Avg move % correlation to wave 3
2841.29 10/10/18 @ 11:09 Avg move % correlation to wave 2
2840.19 10/10/18 @ 11:10 Fib retracement   38.2%
2830.43 10/10/18 @ 13:03 Avg move correlation to wave 2
2813.89 10/10/18 @ 15:08 Avg move correlation to wave 1
2809.40 10/10/18 @ 15:02 Fib retracement   50.0%
2778.61 10/11/18 @ 09:30 Fib retracement   61.8%

All forecasted movement discussed in this article can be tracked in the interactive chart below. Simply click the play button on the right side of the screen and track the index over the next few weeks. My articles will follow as we monitor the prelude for the next stock market crash. After this drop, we should see a 150-200+ point rally in the index before the end. I am still projecting the final market top to occur in November. Check out my other articles and stay tuned for more. I recommend joining our free mailing list in order to get our latest articles immediately in your inbox when they are published.

Counter Analysis

My analysis could be wrong. A gain above the previous record high of 2940.91 before the index drops below 2870 would be a sign of this possibility. An update would be published in this instance. Otherwise the next planned article will come out when the index reaches the levels outlined in the green box on the interactive chart above.

Disclaimer: I do not currently have any positions on the index or funds covered by this article. I have purchased volatility options. I do not intend to enter additional positions at the time of writing. 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.

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