The S&P 500 fell to an intraday low of 2583 yesterday, bringing its total decline to 12.1% from the top at 2941 in September. In Wall Street’s dictionary, a pullback of more than 10% is officially a correction and many are already worried about the big bear market ahead. On the other hand, it was only a month ago when the benchmark index touched 2815 and everyone was expecting a new all-time high soon.
Trade, Brexit and the slowing global growth are among the usual suspects the media explains the current plunge with. But all three were present a month ago as well and the market didn’t seem so worried about it then. What happened?
Our answer is that market psychology simply took a turn for the worse. The good news is there was an Elliott Wave warning for those who know where to look. Our subscribers received the following chart on November 12th, when the S&P 500 was still looking healthy at 2780.
The 3h chart of the SPX revealed a triangle correction, labeled a-b-c-d-e. Triangles precede the final wave of the larger sequence. In this case, the bulls managed to lift the index to 2941 before running out of momentum. When that happened, a five-wave impulse, labeled i-ii-iii-iv-v, caused a selloff to as low as 2603.
Impulses indicate the direction in which the larger move is going. The three-wave recovery to 2815 completed the 5-3 wave cycle, which meant more weakness can be expected. A week later, the SPX fell to 2632. On November 28th, our clients received this:
The decline from 2815 to 2632 looked like nothing more than another three-wave structure. This made us think wave B is probably still in progress and higher level can be expected in wave c) before the downtrend resumes. No news was taken into account. The news is usually good at the top and bad at the bottom, so it often pays to simply ignore it. The updated chart below shows the S&P 500 as of yesterday’s close.
The SPX did not even manage to exceed 2815. The bulls were even weaker than we thought and 2800 turned out to be the best they could achieve. Soon the market entered into sell-now-ask-questions-later mode and the next 220 points went into the bears’ scorecard. The S&P 500 has returned a negative 1.34% year to date and it looks like 2018 will be a lost year for stock market investors.
As for 2019, we will keep counting on the Elliott Wave principle for guidance.
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