S&P has reached our targets of 1610-20 the past week and pulled back down to test the first short term support level at 1600. The upward move in S&P from 1560 looks impulsive but has topped and found resistance at the 61.8% Fibonacci retracement level. This was something expected and several days before we mentioned that this area should generate selling pressures. Friday was the day were selling was again strong and prices during the early trading hours reached the short term support of 1600. Prices bounced upwards but couldn’t break above the recent high at 1620. Our main view is that this downward correction is not over and we should expect prices to fall towards 1595-90. The marked with red area is where we believe support will hold prices from falling further.
From the Elliott wave theory perspective we continue to see as most probable scenario the fact that the three wave correction from 1687 is over at 1560. The upward move to 1620 could be wave 1 of a new upward starting wave. Wave 2 is expected to find support and bottom near 1590. Even if it falls as low as 1582 it would be something normal as this is the 61.8% retracement. If however prices break below that level, the bullish scenario will be at risk. If the bullish scenario prevails we expect prices to move towards 1660. Confirmation will come with the upward break of 1620. If on the other hand the correction is not over and we are heading towards 1500, we should expect S&P to continue sharply lower by first breaking 1600 and then 1580. If upward pull backs are not sustained but met with more selling, this characteristic will strengthen our bearish scenario.
So what strategy should be followed. Stop loss for bulls is 1560. So buying as close to that level will minimise risk. Adding longs above 1620 could be seen as a less risky strategy specially if we started buying near 1590. Bears on the other hand would not want prices to break above 1620. On the other hand, bears would want prices to fall below 1580 in an impulsive form. That’s all for now, for more analysis and a view of my trades real-time through our exclusive twitter account, ask for a week free trial and see for yourself.
As always, thank you for taking the time to catch up on my thinking.