Truncated 5th Wave Interpretation of S&P

Here's a current chart of the SPY (S&P 500 ETF) for discussion:

The chart is very troublesome from an Elliott Wave perspective. Let's break down into what I believe are corrective and motive waves:

It doesn't take a lot of interpretation to come up with this. Wave 1 we've discussed earlier. It could have been counted either way but in retrospect can only be motive. Wave 2 is quite clearly a 3 wave. Wave 3 is obviously a motive wave. Wave 4 can't be anything other than corrective, even if the internals are a tough count. Wave 5 appears to be motive. I generally recognize the golf club or "reverse J" shape to be motive. Wave 6 is obviously a 3 count. Wave 7 turned out to be a 3 count which really surprised and baffled me. Now wave 8 I originally believed to be a corrective wave but it looks motive at this point.

The trouble is that there's no good Elliott Wave pattern to match this. The only thing that would make sense is triangles like such:

There are many problems with this interpretation though. The first is that B and E don't look like corrective waves. One would need to take some liberty with that interpretation. Another problem is the width of the corrective pattern. It just looks too long given the quickness of wave 3. It's all out of proportion. The final problem is that it looks as if wave E is about to curl over. Triangles are usually flat, expanding or contracting. While there is certainly room for some imperfection in the real world one has to question whether this could really be an expanding triangle if the E wave doesn't get all the way up to the 126 range.

So it was while I was looking at the chart for Microsoft that I realized that there is another interpretation:

MSFT is a very different chart but still lends itself to a clean Elliott interpretation. The key thing to notice is that wave 5 dips lower than wave 3. Let's compare head to head:

Essentially MSFT, while initially dipping lower has weathered the correction much better than the broad market (as has the entire Nasdaq composite in fact). What I believe is salient however is that we might want to consider that the SPY has in fact completed a 5 wave but that the fifth wave was truncated:

Aside from the truncation this is an incredibly satisfying wave pattern. First the motive waves all line up where they should be. Secondly the A, B, C pattern is a run of the mill "flat" that is slightly contracting. The bottom of the C wave is slightly above the bottom of the A wave. As that would imply, the top of the C wave is slightly below the top of the A wave.

The implication would be that we are soon to begin another 5 wave down. Here's a possible scenario:

Note how wave 1 and 2 of what is a motive wave would really look like more of an extended sideways correction. I have to stick with a bounce off of 106 as the end of wave 3 although that wouldn't give us much of a wave 4 and 5. There are no guidelines in a 5/3/5 as to how long the ending 5th wave should be. Our original 5 wave is about 24 points from the top to the bottom of the truncated 5th wave. Assuming the same magnitude drop from our current point of 122 would get us around 100 or so.

From there I believe that this is just part of a much larger corrective pattern that will play out for months but might play out for as long as a year or two. The historical record certainly shows extended sideways markets for long periods at this point in the cycle.

The biggest problem I have with this interpretation is from looking at the S&P futures charts which are 24 hour continuous (except weekends). As I've noted previously in this blog, the futures often give cleaner Elliott patterns than the SPY:

The most troubling thing is that the futures dipped as low as 107.7 in the after hours of the final day of the crash. A truncated 5th wave then is really truncated. The interpretation looks a little fishy from this angle. Yet the same interpretive problems remain regarding motive waves and the very clear 3 wave patterns for A and B.

I believe that the behavior in this corrective pattern can almost entirely be chalked up to technical traders:

Almost everyone has had a say in this correction! The main question is when larger forces enter the market to push it in one direction or another. Right now I think things look very good for a short. Stochastics are still running so we may have another few days to the upside but this current wave is curling over and as you can see from the chart has been choppy rather than a straight shot (compare it to the rally on the far top left of this chart to see what I believe is the difference between a one sided rally and one that is being fought all the way up). I don't think technical traders are yet willing to capitulate a market running lower than 110, and so we'll get our 2nd wave bounce at that point, but if this next move down appears to be motive then I think it will add weight to my interpretation.