S&P 500: Lessons from 6 Trading Days in June

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S&P 500: Lessons from 6 Trading Days in June
A recap of the stock market action on June 14-21

By Vadim Pokhlebkin
Fri, 22 Jun 2012 17:30:00 ET

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Thank you all who participated in our U.S. Intraday Stocks FreeWeek on June 14-21. Those of you who have missed it, here's a recap of some of the market action during those 5 days -- and the Elliott wave lessons they taught us. (Don't miss the special offer below.)

Thursday, June 14:

Here's what Elliott wave analysis is all about: You study charts to find non-overlapping 5-wave moves (trend-defining) from overlapping 3-wave ones (corrective, countertrend). With that in mind, please take a look at this chart of the S&P 500, which our U.S. Intraday Stocks Specialty Service posted for subscribers at 9:37 AM today (June 14):

Immediately, you can see that the S&P 500 has been moving sideways in a choppy, overlapping manner. That's the definition of a correction -- i.e., that is NOT the trend. The trend, as the U.S. Intraday Stocks Specialty Service said in the morning market overview, was higher -- at least in the short-term:

"...sideways-to-up over the very near term will be expected. Simply put, overall higher near-term remains the intraday call -- to complete a corrective second wave."

And here's a chart of the S&P 500 at the close of the market that the Service posted at 3:34 PM on the same day:

To make this bullish forecast, the Service editor Tom Prindaville was simply following the Elliott wave model of market progression. The model called for a completion of the developing wave 2 -- in this case, "higher near-term." Market corrections -- the sideways, choppy moves you see in both charts above -- are notoriously hard to forecast. And not every Elliott wave forecast works out. But you do get a real, practical roadmap of the expected market action.

Friday, June 15:

There were few "fundamental" reasons to be bullish on U.S. stocks on Friday morning (June 15). If anything, the news that the U.S. unemployment rose in 18 states in May sounded downright bearish. But stocks rallied anyway -- for a seemingly unlikely reason, explained the pundits: Because all the bad news lately makes it likely that the Fed will step in again.

From an Elliott wave perspective, there was another reason for the June 15 rally: the S&P 500 had some unfinished technical business on the upside. Here's what the editor Tom Prindaville wrote on Friday morning in EWI's U.S. Intraday Stocks Specialty Service:

S&P 500 (Intraday)

Posted On: Jun 15 2012 9:30AM ET / Jun 15 2012 1:30PM GMT

Last Price: 1331.33

Trade pushed beyond the 1319.74 level yesterday...[which] is significant because it implies that, minimally, the S&P wants to take a closer, more deliberate look at 1338, and the overall proportionally of the recent Elliott wave action backs that up. For today, persistence atop 1319.74 is needed to see the very near-term trend up with a minimum upside target of 1338.32.

The S&P 500 closed trading on June 15 at 1342.84, exceeding the bullish price target U.S. Intraday Stocks Specialty Service gave on Friday morning by 4 points.

Monday, June 18:

After a 13-point gain last Friday, the S&P 500 opened trading on Monday (June 18) with caution. There was a 9-point dip at the open, followed by a 12-point gain, followed by a 6-point drop… then more of the same. The mainstream experts attributed such hesitation to the "uncertainty" surrounding the outcome of the Greek election that took place Sunday. Well, that may explain what the market has already done -- but what will it do next? On that, the "fundamental" view takes a wait-and-see approach: Let's wait for more news and see how the market reacts.

Elliott wave analysis allows you to be much more proactive. All market action fits into one of the 13 known Elliott wave patterns -- and so does the sideways trading in the S&P on Monday. Our U.S. Intraday Stocks Specialty Service suggested in the Market overview on Monday morning that the day's trading would likely be a 4th wave correction:

S&P 500 (Intraday)

Posted On: Jun 18 2012 9:38AM ET / Jun 18 2012 1:38PM GMT

Last Price: 1339.85

In the basic 5-wave Elliott wave sequence, 4th waves are corrective -- i.e., slow, choppy and overlapping. That describes the trading on Monday pretty well, doesn’t it?

Tuesday, June 19:

If you watched the financial headlines this week, you know that the rally in stocks has been attributed mostly to hope and optimism: "June 19 (Reuters) - World stocks rose and the euro gained on Tuesday amid optimism the world's major central banks will provide more economic stimulus as the euro zone debt crisis worsens."

Funny: Every book on trading tells you to forget the word "hope" when creating an investment or trading strategy. Yet here they are, "hope and optimism," apparently pushing up global stocks. Fine, but how do you know when this hope-driven rally may end? You won’t -- until after the fact. When stocks finally fall, the same news sources will inform you that "investor optimism about central bank stimulus has evaporated."

You can do better than that. At the close of trading yesterday (June 18), our U.S. Intraday Stocks Specialty Service had already made this bullish forecast for today:

S&P 500 (Intraday)

Posted On: Jun 18 2012 3:44PM ET / Jun 18 2012 7:44PM GMT

Last Price: 1344.82

A final look at the action may not instill great confidence in the immediate internal count. Yet, the fact that trade is above the 1338.32 proportional subdivide, as well as price and technical trendlines promotes the notion that still higher is the game. This will remain the call while these conditions continue to be satisfied with a final push expected into the 1366/70 region.

That specific price target was calculated on the market's Elliott wave patterns, not "hope and optimism." On June 19, the S&P hit the intraday high of 1363.42, just 3 points shy of the expected price target range.

Wednesday, June 20:

On Wednesday, the S&P made almost zero net progress -- and then...

Thursday, June 21: ...then came the sharp drop on Thursday, June 21. Going into the close on June 20, our U.S. Intraday Stocks Specialty Service posted this comment:

S&P 500 (Intraday)

Posted On: Jun 20 2012 3:26PM ET / Jun 20 2012 7:26PM GMT

Last Price: 1350.17

…today’s action has the look and feel of only scary fourth-wave action prior to another leg up. [Earlier comment] What cannot occur and still be able to see the broader trend as up, is for trade to unexpectedly fall below the 1338 mark before a new high is struck.

We all know what happened on June 21: After a small rally, the S&P 500 fell sharply, eventually breaking through that 1338 price point that drew the "line in the sand" for the Elliott wave count to another high for the week.

That's a good example of how, even when an Elliott wave forecast doesn't pan out, you almost always have a fallback plan: a price point which, if broken, tells you something else is going on. That's a remarkable feature for those traders who are careful about risk management.

Again, thank you all who participated in our U.S. Intraday Stocks FreeWeek. Stay tuned to EWI's front page for announcement of the future special events. Also, allow us to introduce this...

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Tags: Elliott Wave trading, futures trading, S&P 500

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