S&P 500 Forecast: SPX rally stalls as bears eye deeper correction toward 7,480

In our previous update about the S&P500 (SPX), we showed that “a rare technical setup, combined with weakening market internals and our Elliott Wave Principle (EWP) count, is raising the possibility that the recent advance is stalling.”

Fast forward two weeks, and the SPX managed a marginal higher high three days later and is now ~1.80% below our alert level. See Figure 1 below.

Figure 1. Daily chart of the SPX with several technical indicators, including the Bolling Bands and our preferred Elliott Wave Principle count

Thus, indeed, the rally has stalled. Hence, one of our preferred EWP counts remains that an irregular B-wave has topped: red W-b. Irregular means that it is longer than the preceding A-wave: red W-a. Since B-waves always comprise three waves (a-b-c), the green W-c has stalled out in the ideal target zone. In this case, the red W-c to ~6740-7120 is now underway, setting up a 3^rd of a 3^rd wave to at least ~7480. But before it can get there, we could first see a retracement back up to around 7720+/-20.

However, as always, there’s an alternative that offers a brief detour to ideally 7885-7945 before we reach 6740-7120. See Figure 2 below. It requires several steps, none of which have occurred yet:

·         a five-wave rally off the recent lows to ~7770 followed by

·         a corrective pullback that holds above yesterday’s high and

·         then a breakout above the recent ATH

Figure 2. Daily chart of the SPX with several technical indicators and our alternative Elliott Wave Principle count

Several potential catalysts are on the calendar for later this week (NVDA’s earnings, Jackson Hole, CPI, etc.), but the market has not yet indicated it wants to pursue the alternative path. Thus, our parameters are: support (7640+/-10) must hold to allow at least 7720+/-20, possibly as high as 7885-7945. In more detail, a break above Friday’s high can target 7743, then 7780-95, and above that, 7885-7945. However, if 7743 is not broken and the index drops below 7620 with follow-through below 7570, we expect 7480 in quick succession and 7150+/-50 ultimately.