Where is the Stock Market Headed Next?

Wouldn't we all like to know where the stock market is headed next? I know I would. I've added a couple of charts and analysis below with some key price levels, patterns and similarities from the past to look over. Please remember, "these are only my personal views" and I am NOT a Financial Advisor.

Notice on the chart below, that you can see a clearly identifiable 5 wave downward trending pattern beginning near 155 and ending just below 141.

For those of you that don't know, a 5 wave pattern based on Elliott Wave Theory, is considered an "Impulse" wave, which is a move in the direction of the next larger degree trend. In the chart image above, the 5 wave pattern is signaling a downward trend since it is occuring as prices are moving lower.

The next chart below is an extension in the timeframe from the chart above, and you'll notice a 3 wave upward pattern has formed.

A 3 wave pattern can be considered a "Corrective" wave and is a "Counter Trend" signal, meaning it typically will occur in the direction against the one larger degree trend. The 3 wave pattern shown happened to be an ideal basic example. There are many variations of patterns that can form at different degrees that make determining the next movement a bit diifficult to most people without the right training which is why I would suggest to take advantage of this Free 10 part - 50 Page Elliott Wave Tutorial to learn more about the subject from the "Experts".

If correct, the 3 wave pattern above, since it was a counter trend movement, would have been a signal to go short (since the counter trend movement was up).

Looking at the next chart below, you can see that the price action following the charts above worked out like a textbook example, lower. Once the counter trend wave above was complete, prices continued lower. Notice what clearly appears to be another 5 wave move lower from near 152 down to 126. Textbook again.

If you haven't guessed yet what time period the above charts were from, they are from the previous Market high in October, 2007 thru January, 2008.

We all know what happened in the following months: after several months of a sideways to higher "counter trend" move, an extremely painful move lower ensued up through March 2009.

You can see on the chart above, that we are currently at a strong prior price level, both as resistance and support, near 105. Also notice the red dashed line I've added back in October, 2007 as well as a second red dashed line most recently.

The similar "initial" leg (wave) down price movements bear a striking resemblance of each other. Not just in terms of a potential "initial" move from a peak, but also notice that support was found in both cases at a previous mid trend support level, and appeared to have formed a "Double Bottom" at the time.

The next chart below shows the current price level in the market. Notice the increase in volume (and prolonged increase in volume) on the recent leg (wave) down from the begining of May, 2010 as compared to the volume during the leg (wave) down from mid-January, 2010 to early February, 2010. Panic selling, profit taking by large institutions, hedge funds or whatever the case may be, someone has been taking profits over the last several weeks in large amounts.

The final two chart(s) below are for the most recent 3 months time period. Remember the 5 wave pattern in the first chart above that signaled the next larger degree trend?

You can see in the chart above that there appears to be another 5 wave pattern from near 177.50 in mid may, 2010 to near 104.50 a few days later. If so, well, I'll leave that up to you to decide......

Here's an alternate possibility that also shows a recent 5 wave down:

From the low near 104.50 up to 111 at the beginning of June, 2010, is displaying a 3 wave (a,b,c) pattern (a counter trend move). As I mentioned earlier though, there are many variations of the patterns that can be forming. To learn more about the variations that can occur, get your Free 10 part - 50 Page Elliott Wave Tutorial or Free Elliott Wave Video Crash Course and begin to find out.

Here are some possibilites of where is the stock market headed next and potential future price movements (in my opinion of course):

  • The 111 price level holds as resistance and will remain a near term high, with a move lower begining within the next few days at most.
  • A type of Symmetrical Triangle may be forming. In this case, I would expect some up and down zig zag type of price action, frustrating traders, for the next few days up to a week or so, before a potential move lower.
  • The low near 104.50 towards the end of May may be a near term bottom, with prices moving higher with upper potential resistance levels between 115 and 118. A move above 111 would increase the odds that this may be happening.

The similarities between now and the first chart of this article are scary to say the least. Not just in appearances. I also looked at the decline in terms of points from the October, 2007 high near 157.50 to the low of the first leg down near 140.50 (which was a total of approx. 17 points) and compared that with the price movement recently. The high near 122 in late April, 2010 down to the recent low just under 105, is also 17 points. I'm not sure if that means anything, but it sure is a strange coincidence.

Speaking of coincidence, if the pattern repeats even more so, and the market drops in similar fashion, the approx. 90 point loss from October, 2007 to March, 2009 would equate to a price level near 32 in SPY. Levels not reached in the S&P 500 since 1990. Now that's scary.... Even considering the percentage drop from October, 2007 to the March, 2010 low of approx. 57% would eqaute to a new low near 52 in SPY, levels in the S&P 500 going back to 1995.

Considering we have had two 45% plus moves lower in the S&P 500 since the year 2000, I wouldn't say it's out of the question that there isn't another one in store for us.

Be careful out there and remember to use proper position sizing along with stop losses (and follow them).

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