Last month stock markets took a nose dive.
After hitting 2400, the S&P 500 and most other indexes fell by almost 3%.
So is the uptrend over? Is this just the beginning of a major drop in stocks?
Not exactly. Take a look at this chart:
Firstly you will see that despite the 3% drop in March, the S&P bounced off a key level called the 50 daily moving average (blue line).
The 50 daily MA is usually a key boundary between bull and bear markets – so I usually keep it on my chart.
The other major indexes also fell down to this key level – and they bounced off it quite nicely. Take a look at this chart of UK stocks and the Dow 30:
So where are we most likely heading next?
One of the best predictive tools I like to use is called Elliott Wave Theory. For a brief and simple explanation of Elliott wave theory click here to watch this video.
Elliott Wave theory (or EWT) tells us that we are currently completing “a wave 4 correction” – see the above first chart of the S&P 500.
Wave 4 corrections are usually composed of 3 sections called “ABC”. As the above first chart shows, we have probably completed this ABC correction in March.
If this is correct, then this uptrend is probably not over yet, and we should be expecting wave 5 – which would be another test of the 2390 to 2415 levels (see green line). To me, this is the more likely scenario.
But here is something we should not forget:
Wave 4 corrections are unfortunately rather messy.
Yes, these wave 4 correction can sometimes be as simple as ABC – but they can also be very messy and complex, making false breakouts and unpredictable sideways moves that go nowhere.
This is why I have drawn a second line in red (see above chart) that shows what might otherwise happen.
If the S&P drops back down to 2320 or lower (down to 2300), this might provide us with an even better buying opportunity.
This would potentially complete wave 4, and start a wave 5 move higher to the +2390 levels (see red line).
Once this wave 5 move (green or red line) is complete, then we should see the start of a major corrective move lower – more on this in the premium video this week.
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