“Buy” in May and Go Away – S&P 500 Targets and Timing

Posted by Mike Richards on 23/04/2018 0 Comments

The well-known trading adage “Sell in May and Go Away” warns investors to sell equities in May to avoid seasonal declines, but not in 2018.  This year, according to our Elliott Wave and Hurst Cycles analysis, investors and traders alike should prepare a shopping list of individual stocks to go long in the coming weeks – we have!

Before getting into the technical aspects of the Elliott Wave and Hurst Cycles structure, allow me to provide “just the facts ma’am”!  After a potential move higher in the coming week into the 2,739 – 2,780 region, we’re expecting a fast and furious move down to the 2,480 – 2,424 to occur into late April to early May, with an outside chance as low 2,333.  Following this decline, we expect a large rise in the S&P to 2,933 – 3,383 by late 2018, and possibly early 2019.   This scenario offers investors an opportunity to allocate capital for a 17% - 35% rise into later this year. 

Many Elliott Wave analysts are tracking the possibility of a large triangle in the S&P, where the level of 2,553 would hold all downside, resulting in the next move lower to complete the triangle, followed by a move into the higher targets that I described above.  At this point, while this is perfectly credible, it is more of an academic question than one trader’s or investors should be seriously concerned about.  From a practical standpoint, if a triangle is the active pattern, one would await the pullback into early May, and assuming the 2,553 level does indeed hold as support, simply position your portfolio long when the S&P would then take out to the upside level reached prior to the drop into early May. That said, most individual stocks we track are still highly suggestive of the lower levels sited above coming to fruition in the coming few weeks.

Now, let’s get into the nuts and bolts, from an Elliott Wave perspective.  Much like a Matryoshka doll stacks one inside another; we must first take a bird’s eye view of the larger pattern in the S&P off the 2009 low to provide confirmation and confidence in our analysis.  To do so, follow along on the attached weekly chart.  On this chart, the green nomenclature, which is the Primary Degree wave structure off the 2009 low, matches the green Fibonacci extension levels and has adhered in an absolute textbook fashion.  We would expect the Intermediate Degree wave (3) (blue nomenclature) to advance to the 1.236 extension, where the 1.0 extension would then become support and hold all retracements, which it perfectly adhered to in February, 2016 when the wave (4) held support.  Presently, the S&P is attempting to conclude the Miner degree wave 4 (blue wave 4).  A typical expectation is for wave (3) to complete to the 1.618, 1.764, or 1.764.  Since it moved adequately over the 1.618, we then focus on the 1.764 at 2,933, or our ideal target of the 2.0 at 3,383.

Let’s now take a look at the daily S&P chart for the smaller time frame.  A triangle would hold 2,553, but the c-wave of a typical (a)(b)(c) corrective move lower would target 2,480 – 2,424, with the possibility of a move as low as 2,333.  C-waves can be extremely violent moves, and thus cause investors to use words like “market crash” when they occur on a larger degree scale.  C-waves many times result in a V-shaped recovery, where most that had planned to go long to get spooked out of taking their long positions by the violent drop that occurs, thus missing the initial move back up, and cause short sellers to glean confidence and add further to incorrect short holdings.  The result is longs that missed their entry chase the move up by piling in long at the precise moment that shorts who incorrectly added to their short holdings begin to offset those position by covering their shorts (buying back long), creating a massive initial move higher, or short squeeze, in what is often referred to as a V-shaped recovery. 

Warren Buffet’s well known adage – “Investors pay a dear price for a cheery consensus” speaks plainly to those who intended to go long but became frightened to do so by the violent move down.  The only way for one to discourage such an outcome is to have a plan, and know exactly what individual stocks or positions they intend to purchase when the violent drop occurs, and at exactly what levels they intend purchase those positions.  For our subscribers, we have identified 10-12 individual stocks that – based on our analysis – will provide substantially greater returns in the forthcoming rally than the S&P 500 index.   I will post articles on several of these individual stocks in the coming days.

Stay tuned! 

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