Was That a Five-Wave Decline in S&Ps?

As you guys know I'm not a hard-core Elliottician, by any means. But when certain wave counts stick out, I have to pay attention. Especially when they coincide with additional support and resistance levels using our other technical tools.

Today we're looking at a potential end to a 5-wave decline. We saw something similar in early October and that turned out to be a key pivot point. But remember that this is a very subjective form of analysis, so we use Elliott Wave only as a supplemental risk management tool.

The way I use Elliott Wave is very simple: I look for long 3rd waves where the 1st and 5th should be an equal length with counter-trend 2nd & 4th waves in between. Here is the potential 5-wave decline in the S&P500 from the April 2nd highs:

If we're right, we should see a minimum 3 waves higher from the current lows established at the end of wave 5. Theoretically, one wave higher, one counter-move lower establishing a higher low, and then another higher high. The reason I like our chances here is because we also have an upward-sloping 200 day moving average and key Fibonacci support levels right around the same area. All of this stuff combined increases the likelihood of a near-term bottom.

So the best way, I think, to take advantage of this is to look for stocks and sectors positively diverging with the S&P500. In other words, we're looking for securities, or pairs, that did NOT make new lows as S&Ps rolled over the last few trading days. These tend to outperform the averages on a future advance, as opposed to the stocks and sectors that also rolled over and made fresh lows. These areas tend to perform the same or underperform the averages after a bottom.

From a risk management perspective, if this "wave 5" is taken out to the downside, then all bets are off and we'd have to reevaluate our bullish stance. But with a number of these technical indicators adding up and agreeing with one another, I have to pay attention.

Tags: $SPX $SPY $ES_F