When is a Fifth Wave not a Fifth Wave?

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On Monday, the S&P 500 rallied 0.9% and closed at another new recovery high. Breadth was positive by better than 4:1, but the up/down ratio was positive by a much less robust 7:4 margin. Total volume declined for the second straight day and is back below its 21-dma.

S&P 500 Hourly
In recent comments we have pointed out that, while the daily and hourly charts had been out of sync with one another, they had come back together. Indeed, in this weekend’s Short Term Review, we noted that Friday’s pullback could be counted as a fourth wave. Thus, today’s rally can be counted as a fifth wave. But is it?

As mentioned in Thursday’s post, one of the basic rules of Elliott is that the third wave in a five wave sequence cannot be shorter than the both waves 1 and 5; it can be shorter than either one, but not both. If the rally from Friday’s low continues and carries through 1111 on the S&P (or 10188 on the DJIA), then the current third wave within the rally from the October 2 low will be shorter than both the first and supposed fifth waves. In that case, the current fifth wave would have to be counted as a third wave within a larger October third wave. In “Plain English” that would mean that the rally from the October 2 low is extending, which would allow for higher objectives than might otherwise be the case. At the least, it would make a challenge of 1121-1156 more likely.

From a non-Elliott Wave perspective, it is important to note that the post-March uptrend is still intact (the uptrend line is near 1043) and near term momentum is in position to maintain a bullish bias for another 4-6 days. So, the bottom line is that we cannot rule out a rally through 1111. The 1121-1156 range remains a distinct possibility

With all of the above in mind, first support is now indicated at Friday’s low (1082-1081). Second support remains at 1020-1015. A decline through 992-991 will lock in the July-September rally as a complete Elliott Wave pattern. The July low (869) continues to be tactical support.