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The S&P 500 Breaks Support Again (NYSEARCA:SPY)

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In this article we will look at the SPDR S&P 500 Trust ETF’s (SPY) macro three wave structure and what another break of support may mean for an immediate direction.

The S&P 500 is in a macro third wave due to land at 3380 if wave three were to replicate wave one. Topping out in a bullish set up at 4820, the SPY then dropped to 4104 to create what we now know as a wave one along with a major support at that level. From 4104 there was then a bounce towards 4639 while failing to go higher the SPY topped at that point to form the wave two. This was only confirmed by a break of 4104 in May that subsequently found support at the 4810 region. A break of 4104 confirming waves one, two and three.

Third waves can play out in different ways. They can at best go directly to their target of numerically replicating wave one, they can also challenge the wave two high/low before completing their move to target and even extended outside the high/low of the wave two challenging the wave one high/low before completing their journey to numerically copy wave one. It is not until a third wave extends outside the wave one high/low before touching its target that the move is rendered a fail.


SPY monthly

We can see here on the monthly structure a clear wave one, two, and three with the break of 4104. A bottoming so far at 4810 with a very wick-heavy monthly candle for May. A wick-heavy candle like this represents significant action between bulls and bears. So what could be the SPY’s next move? We will now work backwards one timeframe to examine what an immediate direction might look like and see if it is likely we will see a challenge for the wave two high at the 4600 region or a drop below the low of 4810 as the SPY lingers around the major support region.

Here is a weekly chart for the SPY.


SPY weekly

If we look at this weekly chart, we can see the top end of the wave two at 4639, with a steep and direct decent past support bottoming at 4810. With a bullish candle in place from the new support of 4810 and an additional all important rejection candle at 4204. This rejection candle is of importance because in order to form a three wave pattern in any direction there must be a rejection candle. This candle confirms the mismatch between buyers and sellers. In this case if this weekly candle is immediately broken above at 4204 the SPY can possibly form a third wave north to land at 4595 on the weekly. Alternatively, a firm re-break of support with a continuation below 3810 will open an immediate door to new lows towards its current third wave target of 3380.

An imminent break above 4204 can challenge the wave two high area, but the SPY remains in a bearish pattern until technically confirmed otherwise. We could expect a break of the 3810 support and a move downwards to the target region of 3380 within the next 90 days.

The three wave theory was designed to be able to identify exact probable price action of a financial instrument. A financial market cannot navigate its way significantly higher or lower without making waves. Waves are essentially a mismatch between buyers and sellers and print a picture of a probable direction and target for a financial instrument. When waves one and two have been formed, it is the point of higher high/lower low that gives the technical indication of the future direction. A wave one will continue from a low to a high point before it finds significant enough rejection to then form the wave two. When a third wave breaks into a higher high/lower low the only probable numerical target bearing available on a financial chart is the equivalent of the wave one low to high point.

It is highly probable that the wave three will look to numerically replicate wave one before it makes its future directional decision. It may continue past its third wave target but it is only the wave one evidence that a price was able to continue before rejection that is available to look to as a probable target for a third wave.

Read More: The S&P 500 Breaks Support Again (NYSEARCA:SPY)

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