The S&P 500 did wind up rallying to complete the five-wave formation as we discussed in my Thursday night post. This rally wound up stopping right at the 1522 price target that I have mentioned on more than one previous occasion. This implies that a potential top is in place. I would prefer to have some downward price movement to confirm this analysis. Additionally, the S&P 500 can move up to 1525 or so without invalidating this count.
The number of 1522 was arrived at by using a standard technique of Elliott Wave analysis. I believe that the recent rally off of the March lows represents Wave 5 in a formation that began in October 2005. The first wave in this formation rallied 158.11 points before completing in May of 2006. The next rally began in July 2006 and ran up to the highs of February 2007. The length of this rally was 237.81 points. It just so happens that 237.81 is roughly one and one-half times the length of 158.11.
This proportionality was no coincidence. It is common for the lengths of the waves in a five-wave formation to unfold in a such a manner. It is also common for two of the waves to be of equal length, while a third is extended. Given that Waves 1 and 3 were proportional to one another, with Wave 3 being extended, it is only consistent with common Elliott Wave Principles to expect Wave 5 to be roughly equal to Wave 1.
As the chart above shows, a rally from the March low of 1363.98 of 158.11 points would place the S&P 500 right at 1522. The exact target was 1522.09. Friday's high was 1522.75. Should this level hold, then that would create a perfect Elliott Wave formation in terms of price proportionality.
It would also imply that a sizable decline awaits over the next few months. It would not be out of the question for this to reach down to the March 2007 low of 1363.98, but should not go below the May 2006 high of 1326.53. So, this is roughly 10% from our current levels. I will discuss probable targets more specifically should this prove to be a top.
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