SP500 Teaches Investors Another History Lesson

The SP500 clawed its way up to a new all-time high last week. It took the index more than two years to exceed its previous record set in the first days of January, 2022. Last time, we showed you how Elliott Wave analysis prepared us for the Q4 2022 bullish reversal when the inflationary crisis seemed to be getting from bad to worse. The bottom line was that the market doesn’t wait for newscasters to declare the end of a crisis. It anticipates it and turns long before it is over.

Now that the SP500 has climbed to a new record, perhaps it is time for another history lesson. This one begins with the reminder that the US was very close to a full-blown banking crisis in the spring of 2023. Rising interest rates led to enough bad loans at Silicon Valley Bank, Signature Bank and First Republic to force them into bankruptcy in the span of just five days in March, 2023. On top of that, plunging Treasury prices opened multi-billion dollar holes in the balance sheets of the ‘Too Big To Fail’ US banks.

It was a scary time to be in the markets, to say the least. And once again, to paraphrase Warren Buffett, the time to be greedy was when others were fearful. The SP500 bottomed at 3809 on March 13th, 2023, and never looked back. Just over ten months later, it closed at 4840 on January 19th, 2024.

Of course, things always seem predictable in retrospect. Life can easily be understood backwards, alas, it must be lived forwards. It is one thing to say that you were going to buy the dip and quite another to actually do it when everything seems to be falling apart. That’s precisely what the chart below helped us with.

SP500 Elliott Wave analysis on March 20th, 2023

This chart was part of our Elliott Wave Pro analysis of the SP500, published on March 20th, 2023. It revealed a complete A-B-C zigzag correction between 4819 and 3492. Wave A was a leading diagonal, while wave C was a regular five-wave impulse. According to the theory, once a correction is over, the preceding trend resumes.

Eventually, the market is supposed to recoup all of the losses suffered during the correction. This put long-term bullish targets above 4819 on our radar. The rest of the chart seemed to depict an impulsive recovery in wave I, followed by a running flat correction in wave II. Wave c) of II looked like an expanding ending diagonal.

Also note how the green line, which served as resistance throughout 2022, had been breached and was then turned into support by wave c) of II. If this analysis was correct, it was indeed time to be greedy, because wave III to the upside was just getting started.

Elliott Wave analysis of the SP500 as of August 7th, 2023

And start it did. Wave III lifted the SP500 to 4607 in late-July, up 17.6% since our March 20 analysis. Instead of getting carried away, however, we wrote on August 7th that a notable pullback in wave IV was likely to occur. Wave III could already be seem as a complete impulse, marked 1-2-3-4-5. The Elliott Wave theory states that a correction should follow, before the uptrend can resume in wave V. The up-to-date chart below shows how things went.

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

The SP500 index as of January 19th, 2024

Wave IV dragged the index down to 4104 in late-October, 2023. At 4101 the pattern would be invalidated, since first and fourth waves within an impulse must not overlap. But fortunately, the bulls didn’t allow it and instead made their way to a new record in less than three months. Is this a good time to join them, though?

Economists have been incorrectly predicting a recession for over two years now. U.S. Treasury Secretary Janet Yellen said earlier this month that the US economy has achieved a ‘soft landing’. Inflation is steadily declining and the consumer still looks strong. Everything seems to be falling into place for a great 2024 for the stock market, right?

If only it was that simple. Things looked terrible in October, 2022 and March, 2023. Yet, stocks headed up in both of these occasions. Everything looks great now in January, 2024. Can the SP500 surprise investors again, albeit in a different way? Just like in the past, the Elliott Wave principle is already giving us a hint of what to expect next. Our latest analysis puts the chart above into the bigger picture context and backs the conclusion up with some extremely reliable economic indicators. Check it out now or ignore the red flags at your own peril.

In our Elliott Wave PRO subscriptions we provide analyses of Bitcoin, Gold, Crude Oil, EURUSD, USDCAD, USDJPY and the S&P 500 every Sunday and Wednesday! Check them out now!

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