Elliott Wave Corrections

07/14/05 11:55:00 AM

by David Penn

Once again, Elliott wave projections prove helpful in anticipating market moves.

Security: $SPX
Position: N/A

Reaching a short-term peak in mid-June, the S&P 500 entered a deep swoon--falling from nearly 1220 to under 1190. The correction that followed was a classic ABC correction in the Elliott wave mode. (I'd argue the correction from late June to early July was a second-wave flat.) As such, it is little surprise that the correction peaked near the 1205 mark--which is just where a Fibonacci projection of the flat would have it.

For those who don't follow, I'm using the same methodology that I used to anticipate the upside from the April 2005 rally (see my article, "Will Divergences Doom The Rally?", Traders.com Advantage, May 23, 2005). As I wrote in a followup to that article ("The Return Of The Count Right Now," Traders.com Advantage, June 21, 2005):

"Specifically, I pointed out that by multiplying the length of the first "a" leg of the correction by 1.618, and then adding that amount to the value at the bottom of the second "b" leg, traders can approximate the upside of the subsequent third "c" leg of the correction. This was the thinking that led me to believe that the S&P 500, which at the time was trading between 1192 and 1188, could move significantly higher."

And here we are with a similar situation, as we see in Figure 1. Because the previous correction was extended, I suspected that this correction was likely not to be so--based on the notion of alternation. So rather than multiply the "a" leg of the late June correction by 1.618, I simply added the length of the "a" leg to the value at the bottom of the "b" leg (which ran from 1203 to 1191). This gave me a projected upside for the third and final "c" leg of 1205. The closing high for the correction and the "c" leg was 1204.99 on July 5.

I did make a projection of the "a" leg multiplied by 1.618 to get a target in the event that this correction was also extended. That suggested a maximum upside of 1214--but, again, only in the unlikely case that a second wave of one degree (the rally from the April 2005 lows) would have the same wave structure as the next second wave of a lesser degree (the smaller rally from the late June lows). As I noted above, the rule of alternation suggested they would not.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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