Monday, November 26, 2018

The beginning of a new bull run in US equities?


From a technical standpoint, today’s rise in the S&P 500 makes sense and here is why.

On the chart below you will see that at the beginning of 2016, the S&P 500 started forming an Elliot Wave Bull Cycle. This bull cycle manifested with a rally between February and August 2016 and then prices traded sideways between August and November of the same year due to the uncertainty in regards to the outcome of the US elections. Following the results of the US elections in November 2016, prices started rising again and formed the third wave in the Elliot Wave cycle, which is usually characterized by the longest and strongest price change. The third Elliot Wave ended at the end of January 2018.

This wave was then followed by a steep correction marking the fourth wave in the cycle and the second corrective wave. The fourth wave ended at the end of March and was followed with a rally that lasted for only six months marking the fifth and final wave in the motive phase. You will also notice that the fifth wave did not reach much beyond the end of the third wave meaning that the fifth wave was a “truncated fifth” which usually warns of underlying weakness in the market, explaining why the S&P 500 dropped sharply after that.

The motive phase was obviously followed by a corrective wave presented with three smaller waves (A, B and C): two pointing downwards and one pointing upwards. There are two interesting bullish attributes with this corrective phase: First, Wave C (final corrective wave) ended at the key support zone between 2598 and 2636. Second, within the support zone, Wave C ended at a higher price than Wave A. The formation of a higher low is a clear indication of buying demand in the market. Note that the same behavior was seen in the initial motive phase during the 5th wave.

With that being said, we believe that a new Elliot Wave Bull Cycle might begin and the first motive wave will end at the 1.27 Fibonacci extension of the previous cycle’s fifth wave. Thus, the price target for the S&P 500 between today and May 2019 is 3040, representing a 15.47% rise from last Friday’s closing price.