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Opinion: Expect wild swings in the stock market before new records are broken

If you listen to investing pundits, the U.S. stock market is “not supposed to be this high.”

But, as I have been saying for the past year, if you believe the market is wrong, then you are using the wrong matrix. Some have been fighting this rally for the past 300 points, if not more, and I am only now seeing analysts raising their targets for the SP 500 Index

SPX, -0.20%

for 2017.

However, our long-term target has remained the same for years: 2,537-2,611. (The benchmark index was trading down about half a percent to 2,370 at noon Monday.) While there is potential for a “blow-off” target up toward 2,800 in 2018, we will not be able to say if that might occur until later this year. Recently, the market has marched up to our next target in the 2,410-2,440 region, and we may still see higher stock prices, but with some whipsaw potential.

Two paths for higher stock prices

I want to begin this update by pointing out that last week’s high seems to present us with an incomplete top from a structure, as well as a target, perspective. So I have two possible ways the market can push higher over the next week to month. But I am finally looking for a “sizable” pullback.

As long as the market holds the 2,370 level early this week, we may have an ending diagonal pattern in progress, which is pointing up toward the 2,420-2,440 region. This target can even be struck within the upcoming week, and I have presented this potential on the five-minute chart, below. But I believe the risks are quite high for attempting such a trade in an aggressive fashion, as this is not a highly reliable pattern to trade to the long side. Remember, we have now come within 9 points of the main target region we sought for this segment of the rally, so trying to squeeze more out of this on the upside certainly carries higher risk.

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Another way we may strike that higher target could be through a b-wave rally, as presented on the 60-minute chart, below. You see, when the market does not strike the ideal target within the standard pattern, it often comes back to strike it within the corrective pattern. This also takes many short-selling traders out of the market, yet again, and sets up a very strong drop to make everyone fearful of a “crash,” which then sets up the next 200-point rally.

Volatility ahead

For both of those reasons, I can foresee a significant amount of volatility and whipsaw action taking place over for the last half of March.

But no matter how the micro structures take shape this week, the market has a pattern in place to wipe out the SP 500’s 2017 gains over the next two months. This is what we are presenting as our wave (iv), which is seen on the attached 60-minute and daily charts, below. The target region for that pullback sits between 2,230 and 2,306.

Also read: If uncertainty is so high, why is market volatility so low?

While this target region is relatively large for now, we should be able to narrow that focus as we develop within the pullback structure toward the end of March. The “ideal” target would be the 2,285 level, which is the level of the 2nd wave of the last extended 5th wave. And our next higher target region resides between 2,487 and 2,547 (with an ideal target of 2,487-2,501), as you can see on the daily chart.

See charts illustrating the wave counts on the SP 500.

The writer has no holdings in any securities mentioned.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring intraday market analysis on U.S. indices, stocks, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.

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