Elliott Wave Analysis of the SPX

Before we get into this, a caveat: I am not and will not pretend to be an expert in Elliott Wave analysis. Aside from agreeing with the self-evident general premise that markets move in wave-like fashion, rather than in straight lines, I’m not convinced that the Elliott wave counting method is a reliable predictor of market movements. For me it is another tool in the analyst’s toolkit, but certainly not among the primary tools.

Having said that, I do look at wave formation when analyzing charts, and do take note when a reasonably clear Elliott type of pattern emerges. The SPX movement off the March 2009 bottom looked to me like a fairly clear five wave move that ended at the April 2010 high and began to correct. My initial interpretation was something like this:

(click on charts to enlarge)

Looking at the SPX more recently, I have begun to suspect that this initial interpretation was incorrect, and the wave count may be something more like this:

This is more than an academic curiosity. Whatever analytical tool we are using, a pertinent question at this juncture is whether the SPX will break through the April high at 1217. A break through that level would be a very bullish technical signal for stocks; a failure would be bearish. If we really are in a truncated fifth wave then the failure could be expected, and the risk/reward on the SPX at Friday’s closing level of 1183 is unfavorable. As it is I am moderately bullish on equities and carry a number of long positions, but am not in the habit of picking up pennies in front of a steamroller.

Anyone out there who has Elliott Wave expertise is particularly welcome to comment. What say ye?

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