Evidence is mounting to suggest that the initial leg down of the intermediate-term correction is in the books.

Though my 1,298 target was satisfied on Friday, I had been expecting a rally to at least 1,313, followed by a decline to a new low. I thought this price action would give the chart pattern more of what Bob Prechter has referred to as the right look. However, there are enough wiggles on the chart of the downdraft, as it exists currently, to count the pattern complete.

Nonetheless, from an Elliott Wave perspective, the prospect of another thrust lower remains possible as long as the SPX trades south of the May 14th low at 1336.61. Action at or above this level negates this potential.

Non-Elliott Wave technical evidence, though, suggests more definitively that a larger degree short-term advance has began. For one, if the S&P 500 closes above about 1,318, the daily Coppock Guide measure of momentum will bottom today (an SPX close above this threshold looks likely, since the index has held the 1320’s quite easily so far this morning, after gapping into this zone early in the session). After troughing, the short-term Coppock oscillator appears positioned to improve into June.

Exhibit 1: S&P 500 Coppock Guides (Momentum)

Also, there are numerous indications that intermediate-term excesses, from the perspective of sentiment, have been alleviated. The Smart Money / Dumb Money Spread provides one such example. This indicator measures the difference in perspective between good market timers (the ‘Smart Money’ cohort) and poor market timers (deemed ‘Dumb Money’). This spread between the expectations of these groups reaches extremes when opinions are very divergent. 

Exhibit 2: Smart Money / Dumb Money Spread

Currently, Smart Money is resoundingly optimistic while the Dumb Money crowd is emphatically dour. As Exhibit 2 demonstrates, historically this condition has marked good equity market entry points.And there are plenty of other sentiment measures, such as the percentage of S&P 500 stocks trading above their 50-day moving average or the de-trended equity put/call ratio, which corroborate the conclusion that flows from an examination of the Smart Money / Dumb Money Spread.

In closing, based on factors such as the strength and structure of the unfolding rally off the 1,292 low, my conviction is increasing that the decline that has gripped equities since May 1st has completely run its course as of Friday’s low. Nonetheless, price action above 1,337 is needed to decisively confirm this view.

In any case, it probably makes sense to start thinking ahead from current levels, as I expect that the next big move (i.e. the next 90-100 S&P points) will be to the upside. Specifically, my expectation is that the next leg of the S&P’s corrective sequence (whether in process already, or to commence in days just ahead) entails a rally back to, or perhaps marginally beyond 1,415.

(I am then looking for a final leg lower that tests or slightly breaches recent lows to complete the intermediate-degree pattern and set the stage for a multi-month advance. But there is sufficient haze regarding more immediate goings on to warrant not getting too far ahead of myself.)

Until next time, stay nimble and trade safe!