S&P500 weekly analysis

This week we saw the worst day for equities since March as S&P500 lost almost 8% from the high of 3233 down to 2982. Aggressive sell off happened on the rising fears of the second wave of COVID-19 in USA as more states are declaring record numbers of new cases. Also, Fed chairman Jerome Powell was quite pessimistic in his economic forecast for the next few years, suggesting potential permanent damage to the economy. All these fears triggered a sell off in indices across the board.

On the technical side Elliott waves show the end of wave (I) since the crash in March. We see a solid 12345 formation with appropriate sub waves in each one. Wave (I) was finished as wave v completed the 5th wave. The sell of was the start of wave (II), which is usually very sharp as we see here. It comes as the FOMO (fear of missing out) is over and those that caught wave (I) cashed in their profits and sold. Wave (II) is an ABC formation. Wave A seems complete in an 12345 formation, finding support just below 3000 and right on 200SMA on a 4-hour chart. If this is indeed the end of wave A, then we should see B wave forming now, potential to retrace at least to 61.8% and 50SMA at around 3120. As a rule, wave B can go up almost to the highs though.

End of wave (II) is always the start of the biggest rally in Elliott waves as all traders who missed wave (I) aggressively buy in a massive FOMO to get the next rally. This indicates that potentially we could see a V shaped recovery as the market climbs in wave (III). With financial institutions across the globe continuously adding more stimulus and pumping it into equities market, there is a high probability for a V-shaped move. Now 2960 is strong support as it was a high near wave 3, where price ranged for almost a month before breaking higher. Most traders will be crossing fingers for a sharp spike from here in hope that the market is done with a correction already and will go to all time highs from here. Let us see if Greed is stronger than Fear.

Considering the massive hit that the world economy took, stock market stimulus is the only thing that keeps the financial system from collapsing and the financial institutions are extremely aggressive as countries keep pumping money into the financial system. They learnt from 2008 crash, though such stimulus is creating a huge risk for fiat currencies to lose all value with such heavy printing. With US elections in November Mr. Trump needs the market to climb back up to have a shot at second term and of course to cash in on the market move if he fails in the campaign.

As a counter argument, this is only one potential count of the S&P500 chart. There is an alternative suggesting that March sell off was in fact a wave A and that the recent rally was wave B. If that is true, then Wave C down is what is coming next. That is of course the opinion of many ‘fatalistic’ economists and traders that always see more bears than bulls. But it does not minimise the validity of their argument that a potential slump further is possible, especially with a lot of uncertainty regarding the future development of the world economy.