S&P 500 5-Year Elliott Wave Analysis – Feels like July 2007
It feels just like July 2007 once again. That was when the housing issue was at its peak. The stock markets reacted negatively, there was a lot of fear, and it was reflected in a sharp drop. The FED at the time, tried really hard to bring calm back to the market and finally decided to lower the interest rates. The market then cheered and snapped up, making a new all time high before plunging.
It feels like the same scenario is repeating itself. There has been warnings about the Euro debt crisis for a while, mainly focusing on Greece. It later came to light that other European nations, including Italy, was also having the same debt issues. The leaders of these nations were changed, austerity measures were implemented, Greece got its bailout money, though some investors had to take a huge loss, Italy’s debt was restructured and the fear in the stock market has subsided. All of a sudden, there’s no more talk about the Euro debt crises anymore. The stock market is once again looking ahead to higher highs.
Fundamentally, the debt is still a problem, it is just being managed so as to reduce it’s impact on the economy. One of the main measures taken is the austerity measure to reduce the spending and increase the tax. First of all, there is no guarantee that this would work. Secondly and more importantly, it is not growth oriented. Growth is necessary so that debt can be paid off and the other major risk which is unemployment will get worse in a no growth scenario. Thirdly, a huge problem like this cannot be solved in a couple of months with a few changes in policy. More needs to be done.
So what does this mean for the stock markets? As mentioned earlier, the fear is no more in the stock market and with that, higher highs are very likely before any major correction sets in. The below chart is the 10-Year Chart of the S&P 500 highlighting the peak of 2007. There are two things I want to highlight. Firstly is the MACD which as you can see, has turned over and diverged at the peak of 2007. That type of turn over and divergence has not yet appeared currently which means that there is a good chance for the stock market to head higher from here. Secondly is the volume. Notice how the volume increased all the way to the peak of 2007. And notice how it has been decreasing with the recovery since 2009. Price move without volume confirmation is not healthy, is not impulsive and not bullish.
Primary Elliott Wave Chart
Below is the Primary 5-Year Chart Elliott Wave Chart. It shows the down move since 2007 and the recovery phase with the counts labelled. The Primary count is that S&P 500 is in the final phase of Primary wave [B]. Primary wave [B] is a complex combination of zig-zag – flat – expanding triangle. I believe that we are in the final leg E of the expanding triangle. The target for this leg E is 1450 – 1500. I’m expecting a sideways, contracting triangle to pan out before the final surge to 1450.
Alternate Elliott Wave Chart
The Alternate 5-Year Elliott Wave Chart is also similar except that the expanding triangle is with a flat base. This count is losing probability as it has advanced further than expected. But it is still valid. I do not have any bullish 5-Year count for the time being as I cannot find any impulsive move since the recovery from 2009.