I think the S&P 500 is headed for a new all-time high. And while I believe in the idea enough to be holding a long position in the E-Mini S&P 500 futures, this isn’t the place where I want new exposure. In fact, I started taking some profits a little over a week ago. On the surface, that might seem contradictory; often it’s a struggle to figure out market direction, why be cautious when I think I know the trend? Let’s dig in…
Both my outlook and my trading are informed by Elliott Wave analysis. These techniques can help us find the direction of the trend and, in addition, they can also help us anticipate possible targets and help determine whether a move is early in development or becoming more mature. The suggestion from patterns I am watching is that the move in the S&P 500 is becoming long in the tooth. Therefore, it is time for more caution.
The chart below shows the S&P 500 move up from 2009 lows. Elliott Wave tells us that moves in the direction of trend should be comprised of five moves called waves. While we cannot say now that this is the correct interpretation, it is plausible and there are many reasons to think that it is currently the best available interpretation.
The point to observe here is that if we’re already in the fifth wave (that portion that starts at the “IV” label and continues up toward the “V” label then the move is late in development so additional upside could be limited.
In general, one expects that V will end above III so there’s a reason to look higher, but technically it doesn’t need to.
Elliott Wave patterns unfold in all time-frames therefore the move up from IV to V is also expected to have five waves. The hourly chart below shows this move in detail and my best interpretation of how to count the waves.
Again, there is no way to know ahead of time if this is right, but it fits all the evidence and since it is plausible it argues that the move is becoming mature.
As we get into fifth waves, moves become more difficult, volume typically dries up, and fewer and fewer stocks tend to participate in rallies. Overall, these tend to be more difficult environments to trade. While it is too early to conclude that a high is in. However, in my opinion, there is less potential upside to new bullish trades.
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