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Elliott Waves: Stocks Moving Impulsively Higher as Inflation Eases

Published 05/16/2024, 10:28 AM

Stocks are in recovery mode, with major indexes trading at all-time highs. This movement began after the US unemployment rate showed a slight decrease in jobs two weeks ago, suggesting that inflation could potentially weaken. This trend was further supported by this week's CPI data, which indicated a drop from 3.5% to 3.4%. So it seems that speculators believe that the Federal Reserve might be one step closer to potential rate cuts later this year, although I think this is still a far away. However, the markets are definitely positioning for this move later this year.

Examining US Treasury yields, we have seen a strong reversal on the 10-year note, indicating that the dollar could continue its downward pressure. When looking at the S&P 500, which typically trades inversely to the US dollar, we see a strong upward move. In fact, several breakaway gaps in the cash market shows a very strong uptrend.

From an Elliott wave perspective, you need five waves up before looking for a potential completion of the uptrend. If we take a closer look of the rise from April, we can clearly see that this is not yet a five-wave movement. In fact, the strong middle move up from 5,000 typically represents an impulse within an ongoing trend. I would says that there is room for more upside, especially after the next retracement, which I believe could be wave four. Given the extended move in wave three, we should see some pullbacks as markets do not move in a straight line.

The first potential and interesting support area could be between 5,250 and 5,270, which was the previous high and the recent gap that occurred after the latest CPI figures. This certainly appears to be a key area for the next dip. If you want to play the long side, you will likely want to see the pullback first.

The invalidation level of the whole recovery would be around 5,124. If we believe we are in an impulsive sequence and expect more upside, then wave four must not intrude into the territory of wave one or wave two. If this happens, it means that the trend is most likely changing to bearish or maybe just moving sideways.

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