Sp 500 Technical analysis based on Elliot waves

11 de abr. de 2020

This is what I am putting my money into, yet, I do not recommend anyone to follow anyone's advice blindly. Please Like this post for reputation :)


On a logarithm scale of the weekly Sp 500 chart we can see clear as day the formation of a reverse symetrical triangle. According to Elliot`s theory, this kind of formation is usually seen at the end of a larger trend, meaning that even thought on the medium- short term would see a fall all the way to 2000, followed by a rise at the end of the formation, reaching new highs on the long term. On the first part of this post I will explain what is this pattern, on the second part the arguments in favor of this theory, wich have hold thus far, and on the third part, I will explain what to watch for in case I am wrong, the events that would debunk this pattern. Let's get into it.

Part one: What is a reverse Symetrical triangle?

In his book, The Wave Principal, RN Elliot said that reverse symetrical triangles are the rarest kind of triangles and are a form of correction usually appearing at the end of a one degree higher formation being wave four of an impulse, wave B of ABC or the final wave X in a double or triple zig-zag or combination. They only appear in one variation: 3-3-3-3-3, meaning that waves ABCDE can all be subdivided into 3 waves.

Part two: Arguments in favor-

1- Subwaves count: ABCDE waves can be subdivided into 3 subwaves: impulsive, corrective and impulsive.
2- Volume: Since it's a corrective wave of a larger bull trend, the main direction of this triangle is down. Therefore we shoud expect waves ACE to point down and have a higher volume than BD and an expressive increase of volume from A to C and C to E (Elliot stated that even thought volume is not a rule of markets, it can appear, giving strenght to the analysis). On the chart we can see that wave A had a spike on feb 18 2018, and wave B a very small volume. Once we enter wave C there is an huge spike of volume when compared to both B and A. Wave D, again, shows decreased volume even though the prices go up by 40% during that period. Finally we enter wave E, the recent 36% drop followed by 26% recover in 56 days. The biggest volume spike world has ever seen.
3- Time Periods: While Impulsive (ACE in a triangle) waves have the charachteristic of dramatic price changes in relatively small periods of time, corrections waves (BD in a triangle) are slow and drag for really long periods. On the chart wave A drops roughly 10 % in 50 days. Wave B goes up by 15% in 195 days. Wave C drops 18% in 90 days. Wave B goes up by 40% in 420 days and finally wave E drops 36% in 30 days, only to continue on a 26% rally up on the following two weeks.

Since this is a simultaneous analysis, as I`m writing this we are still in wave E I can only estimate how far down it will go once the current rally up finishes. It is also important to say that this rally is to be expected in this fomation, since it has only so far corrected the initial 36% movement.

Part three: what to watch for?

If the prices go past the 2870 resistence (green line in chart) and continue to go up or stay there for a long period of time ~3-6 (months), this would mean that either there was never this formation, my analysis is ultimately wrong and we are indeed seing the begining of a bull market or federeral interference is manipulating the market prices.
If the prices cannot go past 2870 and the market starts again to fall, it would be expected to go all the way to the 2000 resistence in another really fast drop.

I would also like to point for education purposes mainly, since it starts with too many if`s, that it is common for E waves to do what elliot called a throw over, go past the point it is expeted to go, only to rally back on the opposite direction. On our current example, If we were to see another large drop, and if it completed the pattern going all the way to 2000, the panic can cause a throw over, making the prices go even lower, only to be followed by a new strong bull market.

Extra: The light at the end of the Tunnel

On my personal analysis I believe that once we hit the 2000 point, we will see the next bull market, and it will take the sp 500 to new highs. Let's see how the following years go. Best of luck on trades!

Caio