Get 40% Off
🚨 Volatile Markets? Find Hidden Gems for Serious OutperformanceFind Stocks Now

S&P500: A Trading Lesson Using Elliott Wave And Fibonacci

Published 10/16/2020, 01:31 PM
Updated 07/09/2023, 06:31 AM

In Wednesday’s Premium Major Market’s Update I stated for my members: “Below SPX3465-60 and the impulse Elliott Wave count, as said yesterday, is under severe pressure. You can use these levels as stops against long entries if so desired.

On Thursday the S&P 500 dropped to as low as SPX3440 and recovered. So, why did I state that? Because if an instrument – in this case the S&P500 – rallies to the 1.236 extension in a potential wave-iii of 3, it “should” hold the 0.764 extension (SPX3465-60 in this case) as support for wave-iv of 3, before rallying in wave-v of 3. See Figure 1 below.

Figure 1. 

S&P 500 Hourly Chart With Elliott Wave Principle Count.

Note the “should” as that is the ideal/text-book pattern. But the market does not have to be text book. It often isn’t. That would be too easy, wouldn’t it? But it is all I can go by initially when forecasting the next move. Obviously, the market broke below that extension level yesterday at the open. That, in turn, already put pressure on the bullish sequence. The next, and last, level of support to keep the bullish thesis alive is the 0.618 extension. Below that and the prior rally was with 99% certainty not an impulsive rally, but a corrective rally. In this case, that 0.618x extension is SPX3435, which is pretty much where the market held (SPX3440). Thus, the bullish case is still alive, but hanging on by a thread. It would, however, not be the first time the bulls stick save it.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

So, normally, if the 1.236 extension is hit like it was, and then price breaks below the 0.764 extension, it is – as said – a strong warning that the bullish EWP count is not playing out. I then have to questioning it and, as a trader, become more cautious. But, until the market actually breaks below the 0.618x extension at SPX3435, I do not know with certainty if the recent rally was a larger b-wave top (only three waves up), or only wave-iii of 3 of an impulse.

This is why one initially must always label each rally as a/1, b/2, c/3 until the market proofs it is indeed only three waves up (a, b, c) or an impulse up (1, 2, 3, 4, 5). That is the only honest way to label the price action. Anything else is informed bias. Yesterday the index was very close to proof the “three waves up” scenario. But close is no cigar. Thus, for as long price stays above SPX3435 we can look higher to ideally SPX3550-3575 for a possible (grey) wave-v of (green) wave-3. If the SPX breaks below that level then a c-wave down to the low SPX3200s has with 99% certainty started.

From a trading perspective: this is why one must always take profits on the way up. In this case, reduce long exposure in my grey target zone shown in Figure 1. I had already outlined to my premium members on Oct. 7, when the SPX was trading at 3420: “look for higher prices, and symmetry targets SPX3460-3540, as long as SPX3400 holds.” We got SPX3550 so far. And, this is why one must raise stops on remaining positions as the index moves higher towards those targets to make sure one doesn’t get caught on the wrong side fully exposed when the market does decide to go against you. This way profits are safeguarded and trading becomes less stressful. Remember the name of the game is to make money, not to hold a position the longest or to be right about the market.

3rd party Ad. Not an offer or recommendation by Investing.com. See disclosure here or remove ads .

If the market decides to move higher again after being stopped out at some point, one simply catches the next bus. It is as simple as that. No buts, no regrets. Place your stop accordingly (SPX3435) and, hopefully, the trade will work in your favor: rinse, lather and repeat.

Latest comments

Thank you Arnout!  Since I started reading your articles I have been ++$$ consistently and I am much more confident now than I used to be :)
Its too complicated to understand the market
Come Fri 4pm we know you were wrong...my point we all are always wrong...no one can predict the future...stock markets are not complicated it takes 3 trendlines - short, mid or long term...that’s all you need!
Great article. This is the kind of info that I need to trade SPY & QQQ If I become a premium member, we I have access to you via a chat room like SeekingAlpha? Please provide a link. Thanks!
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.