With the market providing strong extensions over the last several months, we had to review our shorter-term targets for the bull market which began in 2009. While our much longer-term targets remain the same, the question the market has to answer is how many more highs may be seen before we see the larger-degree wave (4) pullback we have been expecting since last year.
During this past week, almost every bounce we saw was corrective in nature, which mainly kept me viewing the market as being in a weak posture, signaling that we will likely test the 2796 level on the S&P 500 SPX, -2.12% And, until I see a solid impulsive 1-2, i-ii bullish structure, I will continue to view the market in the same manner.
While it seems I may have wrongly given the bull market the benefit of the doubt last weekend, as the pullback we expected has now broken below the 2800 region support we cited last weekend, this break of support makes the much stronger immediate bullish expectation much less likely. Yet, as long as the next region of support over the 2700 region holds, we can still see another rally in the SPX before the larger-degree wave (4) takes hold. But, the action we have seen this past week does provide a bit more confidence that this wave (4) should begin by the second quarter of 2018, if it has not already begun.
However, as I have been highlighting during the past week, the iShares Russell 2000 ETF IWM, -1.93% RUT, -2.06% chart has now provided us with more than enough technically divergent price highs to view it as having finally completed its wave (3) of v of 3 off the 2009 lows. That would mean it has potentially begun its wave (4) already, with a sustained break below 152 making it much more likely.
Due to the posture of the IWM, while I maintained an expectation that the SPX can still see another rally to higher highs, I cautioned all week that I am unable to trade the market to the long side until we see a bullish set up in a 1-2, i-ii wave structure. And I maintain that perspective at this time.
As I expect that we can see a “bottom” in the market early in the coming week (as the drop didn’t look quite complete at the close on Friday), the nature of the rally off that bottom will be quite instructive as to whether the market is setting up for a higher high before the bigger pullback in wave (4) takes hold. If the rally we see in the coming week is corrective in nature, then I will assume we are setting up for a test of the 2700 region next.
So, while I still view the SPX as maintaining potential for another rally before it completes its wave (3) of v of 3 off the 2009 lows, and we still have the potential to continue to levitate until March (as I noted toward the end of last year), we will need to see an impulsive 1-2, i-ii structure take hold in the coming week, or we are going to put that potential wave (3) to the test with a drop to the 2700.
Clearly, any bullish potential remaining in wave (3) for the SPX has to be juxtaposed against the weakness in the chart being presented in the IWM. The next two weeks should likely provide us a more definitive answer as to when wave (4) will begin in the SPX, if it has not done so already. Ultimately, I see the wave (4) in the market as the next strong opportunity to position for a larger degree rally in the coming year, and that is what we should be focusing upon, as this bull market likely still has several more years to run.
See charts illustrating the wave counts on the S&P 500 and IWM.
Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring intraday market analysis on U.S. indexes, stocks, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.