I believe it’s important to be fully aware of where the SP500 is today on the daily chart so we can better respond when, soon, it breaks out of this impasse and perhaps better understand its medium-term direction.
I’m writing this piece because the price action of the SP500 daily is likely to be a textbook situation if you understand Elliott Wave theory. I won’t go into details here, but I’ll simply explain the wave the US index is likely in today.
In fact, the index is making a double top after a sharp decline that took place exactly a week ago. Therefore, today we can’t be sure of the index’s direction, because until yesterday we might have thought it would continue to decline. However, with yesterday’s return to the highs, this belief is starting to crumble, and many are already buying back the index to avoid being left behind.
This situation of losing conviction in the index’s direction, frustration, and then capitulation, is typical of Elliott waves B or Wave 2.
Wave B or Wave 2 in Elliott Wave theory is also called the because it scares investors, who end up doubting their convictions and giving up. They close losing positions, which were in the direction they expected, but where the index is actually going against them. Not only do they close at a loss, but they also open trades in the direction of the “old trend.” However, precisely (in this case) on double tops, the index reverses and resumes its “current” bearish trend, thus causing investors to lose twice.
Personally, I believe we are indeed experiencing a Wave B or Wave 2. We don’t yet know which, but it doesn’t matter, so I’m sticking with my short positions and will consider closing them only if the previous high is confirmed.
Of course, the loss will be greater than the current one, but I don’t think the index will “run away” because it’s very likely we’re facing a “scary wave.”
Undoubtedly, the price’s current return to the double top makes one sincerely doubt one’s beliefs, but now we know (probably) what wave we’re in.
This situation is very similar to the one in January-March 2025, just before Liberation Day.
In that case, the movement produced was an impulsive five-wave movement, and the rising one was therefore a wave 2, not a wave B.
We see that not only the double top price action but also the reduced strength of the indicator points to a potential short-term reversal.
Will this double top therefore have an impulsive five-wave movement like then? We can’t say for sure today. What we do know, however, is that we’re very likely in a “scary wave” and we need to act accordingly, that is, delay decisions to confirm the movement that will unfold.
But what if this isn’t a wave B? What is the alternative plan?
Well, the indicator shows a loss of strength, and when we still have a high with less strength, we are in the presence of the final wave 5 of an impulsive (primary) movement.
Elliott waves are fractal, meaning that within a wave, there is a complete set of waves, only with smaller movements.
If this were the case, the bearish movement should be a wave 4, and now the index is on its way to a new high, which will likely be the high of the main wave 5 and the sub-wave 5 of the minor movement.
The target for the new high should be at least 6,831 futures points, as shown in the second chart I’m attaching, or a 1.1% increase from current prices.
CONCLUSIONS:
In both cases, we are in the final or very final part of this bullish movement. We cannot know whether it will be a long-term reversal or just a retracement.
I think it will be a retracement, perhaps even a significant one, because the Fed still has many options, such as lowering rates further, or we’re already hearing talk of the end of QT. This doesn’t mean a new QE will begin, but at least the end of QT will lead to a greater repurchase of Treasuries by the Fed and therefore a new injection of money into the system, due to the reinvestment in Treasuries with the liquidity the Fed receives from the maturity of Treasuries already in their portfolio.
I hope you appreciate the timing of this communication, which I believe is very useful. To know what wave we’re in, we’ll have to wait for the price action of the next few days.
In this communication, I outline what I expect and an alternative movement.
There’s also a third alternative, which would be a very strong bullish impulse that keeps the movement up to or above 7,000 points for a while longer.
This shouldn’t be ruled out, but I believe it’s currently less likely and therefore premature, but we must take it into account.
Greetings
Francesco Maggioni
