Can Friday's NFP report crash the market?

We track the S&P 500 (SPX) using the Elliott Wave Principle (EWP), which allows us to identify the potential paths the market can take based on known patterns that must conform to certain price-based rules.

Since we cannot predict the future, the EWP can help us determine the most likely path. Furthermore, since financial markets are non-linear, stochastic and probabilistic, like any other discipline that predicts complex systems, we must always “Anticipate, monitor and adjust as necessary.”

With this in mind, in our last update (see here) before the Fed's rate decision, we were of the view that the announcement would not crash the market as our preferred forecast is a complex, overlapping terminal diagonal (ED) to SPX6000+. We assume that

“The green Wa/1 of the red W-iii/c should be completed soon, and the green Wb/2 at ideally 5525+/$25 should be underway, from where the green W-3/c at ideally 5950+/ -$25 can increase in.”

Fast forward and all we got was $5,615, a mere 23.60% retracement of the rally that began on September 6th. See Figure 1 below. The shallow retracement fell short of the typical 50.0-76.0% retracement on which we based our forecast, but unusual does not mean impossible. However, the index has risen since then, which our “ED-to-$6000+” Thesis. Therefore, let's now take a look at the current price chart to see if Friday's important US Nonfarm Payroll (NFP) report can send the stock market crashing. See Figure 1 below.

Figure 1. Daily SPX chart with detailed EWP count and technical indicators

Our preferred assessment of price action (since the infamous October 2022 low) remains that the index completed the main (black) W-3 and W-4 this summer and is now working towards the black W-5. The latter appears to form a (contracting) ending diagonal (ED) pattern.

EDs consist of a 3-3-3-3-3 pattern and are therefore initially indistinguishable from a correction: a 3-3-3 pattern. Therefore, it takes time to be sure that the SPX is in an emergency room.

The index also formed an ED during the February-March rally. Look at the blue box in Figure 1, which nicely illustrates the overlapping ABCs. We should therefore expect something similar in the next few months, albeit on a larger scale, as it was a (green) Minor 5 wave and the current rally is likely to be a Major wave two degrees larger.

With this in mind, we assume that the green Wa/1 and b/2 of the red W-iii/c are completed and the green W-3/c are in progress until, ideally, SPX5950+/-25. The latter can be subdivided, as shown in the gray tones Wa, -b and -c, which are one degree lower. The bears managed to push the price below the continuously raised (blue) warning level for the bulls, but so far they have stopped at the gray 2^nd Warning level.

The story continues

If there is a break below this level and especially below the orange 3, the bulls will have bigger problems^approx Warning: Level at the Fed Wednesday low of $5,615 as this increases the likelihood that the market may fall below the September 6 low of $5,402. Since markets are – as I said – complex systems, we must always be aware that our assessment could be wrong. Thus, the recovery from the August 5 low could also be a protracted three-wave rally – a corrective B wave. See Figure 2 below.

Figure 2. Daily SPX chart with detailed EWP count and technical indicators

Our last update showed that “the black W-4 [can] turns into a flat correction. A flat correction often has a=b=c; Thus, the red toilet may fall back to the $5,100 level.“We still cannot rule out this possibility as the index has reached the typical target range for the B wave of an (irregular) flat: b=a to b=1.236x a. Therefore, a lengthy 5-3-5 abc pattern may have completed last week's high.

However, it will take a break below the September 6 low with a serious warning below $5,490 to tell us that this will be the case. From there the black W-5 can take off. However, this remains our alternative “insurance policy” view as the index continues to trend upwards.

In our last update we concluded: “…Unless we are completely mistaken one way or another, we will not expect the Fed's interest rate decision to crash the market“which was the right foresight. Thanks to the EWP we know that after W-4 comes W-5, so we still see the worst case scenario as a correction back to ~$5100+/-$200.

In contrast, the expected decline is on ideal $5,525+/$25 remained at $5,615. Nonetheless, the forecast subsequent rally to potentially as high as $6,000 is likely to be underway, assuming price is sustained above the September 6 low of $5,402.

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