S&P500: Is It 2011 All Over Again?

Ten days ago, see here, I showed, using the Elliott Wave Principle (EWP) and technical analysis (TA), the S&P500 (SPX) was at a crossroads.

“the SPX can still try for a last stab lower to SPX4150+/-50 to complete a more significant 4th wave, but it will have to drop below SPX4300 to confirm this option, with a severe warning below SPX4400. On the other hand, a direct rally over this week’s high [SPX 4595] will mean five waves up from the January low, and the more significant 5th wave to ideally SPX5500+ is then confirmed.”

Three days later, the index reached SPX 4590, declined to SPX 4365 on February 14, and currently sits at SPX4435, as of writing. Thus, the breakout above SPX 4595 was close, but close is no cigar. And the index gave its first warning as it dropped below SPX 4400. As such, the Bulls are put on watch because it appears a possible fractal between now and the “sovereign-debt” induced correction in 2011 is developing. So let’s have a look.

Figure 1. S&P500 daily candlestick charts with detailed EWP count

History never repeats itself, but it does often rhyme.

That is what Mark Twain wrote. Although it is more related to “Those who cannot remember the past are condemned to repeat it,” (George Santayana), it is a good lead into the fractal nature of the financial markets. Fractals are self-similar patterns across different scales, created by repeating a simple process repeatedly in an ongoing feedback loop in dynamic systems.

The financial markets are dynamic systems based on feedback loops, and the EWP captures these self-similar and repeating patterns through its set of motive and corrective waves. Thus, if we compare previous price action with today’s, we may have a fractal on our hands.

The best and most recent analogy with today that I can find is the correction during the summer and fall of 2011, aka the sovereign debt crisis. The current situation is primarily related to rapidly rising inflation, with the United States Federal Reserve Bank unable or unwilling to control it.

As you can see in figure 1, since late 2021, the SPX has progressed like 2011. The blue arrows show similar highs and lows. Now the timing might not be the same, but the “it does not repeat, but it often rhymes” part comes into play. The green arrow shows where the index is today, and it has yet to break free from this fractal pattern. As long the fractal remains in play, it means we should continue to expect high volatility and a more lasting bottom in a few weeks from now.

As outlined in my previous update, it will require a break back above SPX4595 to end the fractal and suggest the index is ready to rally. Until then, the fractal remains in play.

Bottom line: From an EWP perspective, the SPX is in lockstep with the 2011 correction. Not until the index breaks above SPX 4595 must we assume that the fractal is playing out between then and now. Back then, it took another three weeks before a long-lasting bottom was struck. The fractal suggests we can still see SPX 4150+/50 within a few weeks. Since I presented this analogy to my premium major market members already on Monday, I will keep them updated on how it is unfolding.