The S&P 500 has reached a seemingly important ‘make it or brake it’ zone. Here’s why:
For the last couple of weeks, I’ve been following two scenarios:
1) Washout decline with target of 2,500 – 2,500 (purple arrow, chart below)
2) Accelerating wave 3 lower (yellow arrow, chart below)
The two scenarios were first introduced via the December 9 Profit Radar Report, which stated that:
“A brief drop below 2,618 (with next support at 2,607, 2,550 and perhaps as low as 2,500) followed by a quick recovery would preserve the bullish divergences and suggest sellers got ‘washed out’ and a year-end rally is underway. Persistent trade below 2,618 and 2,607 means we need to allow for more weakness.”
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Both scenario had the same outcome, mentioned in the December 12 Profit Radar Report: “We assume with a high degree of certainty that this rally will ultimately re-lapse to new lows. The question is not if but when.”
Although I amended the ideal down side target for scenario #1 to 2,478 (December 16 Profit Radar Report), the decline has gone a bit further than I initially thought.
Nevertheless, up until now, both scenarios pointed in the same direction. That’s no longer the case.
A (sustained) break below the blue trend channel and Fibonacci support (both around 2,478) will tilt the odds significantly towards scenario #2, which could see the S&P drop another 100 – 300 points.
Assessing the Odds
Based on Elliott Wave Theory, the odds are 50/50.
Statistically, the odds of a breakdown are less than 15%. How so?
The red graph below shows the average path of the past 10 bear markets (as defined by Ned Davis Research). On average, the S&P does not fall more than 16% during the average bear market (this average includes the 2000 and 2008 bear markets).
Today’s performance was unique and remarkable in many ways:
- S&P 500 closed down 1.54%, but VIX was unchanged
Since 1992, VIX was unchanged or lower when the S&P was down more than 1% only 32 other times. Over the next month, the S&P rose 81% of the time, on average 2.4%
- S&P 500 turned a >1.5% gain into a >1.5% loss
Since 1982, the S&P turned a >1.5% gain into a >1.5% loss 7 other times. 1 week, and 1 month later it was up 86% of the time.
- S&P 500 lost > 1.5% on an FOMC day
Since 1996, the S&P lost >1.5% on a FOMC day 5 other times. 1 week later, it was up 60% of the time, 1 month later it was up 80% of the time (datasource: SentimenTrader).
The S&P 500 just suffered the worst start to a December since 1931. Although statistical odds favor a bounce from here, Elliott Wave Theory cautions that a break below 2,478 can unleash another wave of selling.
Continued updates are available via the Profit Radar Report.
Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron’s rated iSPYETF as a “trader with a good track record” (click here for Barron’s evaluation of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, 24.52% in 2015, 52.26% in 2016, and 23.39% in 2017.
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