S&P 500 Index extending?

Median Line Analytics of the S&P 500 Index infers that price is likely to extend further. Here’s why.

S&P 500

Look at the Weekly Chart of S&P 500 (above).

The S&P 500 weekly chart gives important clues that price might extend higher. Median Line Analytics detects changes in price behavior that pre-warns when a trend is about to end. Price is king & there are no adverse behavior changes visible on the weekly chart yet. Price has climbed above the Median Line Parallel. While this holds as support, TradingMotives favors the upside.

The momentum signature on weekly (RSI) is also currently not consistent with a significant top. Momentum divergences are generally evident on weekly at a significant top (like 2007 – see green highlights in the chart above) and there is no divergence yet. Momentum readings are at levels not commonly seen. It is important to monitor corrections and look for bearish divergences as successive new highs are made.

Extension analysis can also be applied using guidelines from the Elliott Wave Principle. Price is approaching 0.618 extension of waves 1 through 3, [Pivot 0 (Mar 2009) to Pivot 3 (May 2015)]. When wave 5 extends, it is often in Fibonacci proportion to the net travel of waves 1 through 3 [reference Prechter Jr., Robert R.; Frost, A.J. Elliott Wave Principle: Key To Market Behavior]. The next extension ratio for S&P 500 is 0.618 at 2717, then 0.786 at 2963.

What do Previous Extensions Look Like?

DJIA
Here is a weekly chart of the $DJIA Index from the 1932 lows. The green highlight is the 0.618 extension of waves waves 1 through 3 (from wave 4). This zone (as an extension) is equivalent to where the S&P 500 Index price is at Dec 2017. Note the lack of bearish divergence on momentum at that zone. This final extension in the $DJIA was almost 1.618 * (wave 1+3). It is too early to say whether the S&P 500 will achieve anything like that ahead of Dec 2017.

Note how $DJIA price was making higher highs at the 0.618 extension. The single Median Line also defined a “Road-map” for price. There was a clear change of behavior and bearish divergence as price approached the end of wave 5. This is more pronounced on lower time frames. Extension analysis is a useful guideline. Median Line Analytics is more objective and clearly identifies when trends are about to end. This is the type of analysis covered in TradingMotives weekly reports and intraweek updates. 

Look at the Daily Chart of the S&P 500 Index.

Adverse behavior changes become visible on lower time frames first. There are still none evident on the daily chart posted below. A significant adverse change in behavior would be shown by breaks of historical support. Any significant correction could also cross below the Median Line.

S&P 500
The validation on this Median Line is excellent. This is determined by the numerous price actions & reactions to it (and to the sliding parallels associated with it). Price is attempting to find support on the upper parallel and make new highs.

Is the S&P 500 Index likely to extend further?

Yes, there is potential for this to occur. Historical patterns keep repeating in the future. Median Line Analytics on the weekly and daily charts infers there is more upside and no strong evidence of adverse behavior changes that confirm a meaningful top yet. If support remains intact as price reaches the 0.618 extension, then TradingMotives will monitor progress towards the next projected target of 0.786 (2963). There are likely to be price corrections along the way. Provided key support levels hold, corrections can be used to enter long with lower risk.

Could the analytics be wrong?

Median Line Analytics does not guarantee projection targets. That is why it is important to use effective risk management and stop losses for trading. Median Line Analytics has been in use since the early 1900’s and has really proven itself as one of the more objective methods in the marketplace. It is easy to see when Median Line Analytics starts to fail. Pre-warning signals alert when positions should be closed out.

How Good is Extension Analysis?

TradingMotives uses Elliott Wave Guidelines for extension analysis. This takes second priority to Median Line Analytics. The Elliott Wave Principle is a detailed description of how markets behave and provides a market context. It can be used as a forecasting tool.

Median Line Analytics identifies changes in price behavior and can also be used as a forecasting tool. That’s why the two methods are compatible and help to enhance each other.

As price approaches significant extensions, TradingMotives uses Median Lines to objectively check for behavioural changes. If not evident, assume continuation of the trend until the behaviour changes appear. 

While the S&P 500 is close to the 0.618 extension, the sector ETF, XLK is among the strongest and it has just exceeded the 1.0 extension. TradingMotives monitors these entities in the “Indices and Equities Group”. You can keep ahead of the herd with these important reports.

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