SP500 Drop Below 3900 Was Not a Random Walk

The random walk theory states that financial markets are totally unpredictable. Furthermore, it claims that beating the market is impossible, except by chance. While investors like Warren Buffett and Peter Lynch are a definitive proof that the latter claim is false, we disagree with the former one, as well. In fact, with the help of Elliott Wave analysis, we’ve been able to stay ahead of the next swing plenty of times. More recently, in the SP500 index.

The stock market benchmark dropped below 3900 last week on the back of a plethora of worries. High inflation, rising interest rates, the Ukraine war and China’s lockdowns disrupting global supply chains, just to name a few. So, with the benefit of hindsight, the SP500 ‘s plunge can be easily explained. Unfortunately, the trader of today cannot profit from yesterday’s market moves. Instead, we prefer to focus our energy on predicting, not explaining after the fact.

The chart below, published in our March 28th Elliott Wave PRO analysis, shows that the stage was set for a decline in the SP500 over a month ago.

Ahead of the drop below 3900 in the SP500 index

The SP500 ‘s daily chart revealed that the post-March 2020 uptrend was a complete five-wave impulse. The pattern was labeled I-II-III-IV-V, where the five sub-waves of wave III were also visible. According to the theory, a three-wave correction follows every impulse. And indeed, a drop from 4819 to 4115 did occur. It was far too shallow in comparison to the impulse it corrects, though, so we thought the bears weren’t done yet.

Staying Ahead of the 800-Point Selloff in the SP500 with Elliott Wave Analysis

Instead, we thought the bottom at 4115 market the end of wave W within a bigger W-X-Y double zigizag correction that was still in progress. Once wave ‘c’ of X was over, it would be time for another leg down in wave Y, which was likely to drag the SP500 close to 3800. A month and a half later now, the updated chart below shows how things went.

SP500 moving as planned

Similar Elliott Wave setups occur in the Forex, crypto and commodity markets, as well. Our Elliott Wave Video Course can teach you how to uncover them yourself!

Wave ‘c’ of X ended at 4637 on March 29th, 2022. By May 13th, the bears had already pulled the index down to 3859 in wave Y, whose structure was shaped as another simple a-b-c zigzag.

While the markets are not always that easy to predict, they are far from a totally unpredictable random walk. Repetitive patterns do form, allowing the experienced analysts to often stay ahead and take advantage of the next big price swing.

What will the SP500 index bring next? That is the subject of discussion in our latest Elliott Wave PRO analysis. Check it out now!

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