U.S. stocks may fall as much as 12 percent in the next four to five months after the Standard & Poor’s 500 Index (SPX) surpassed 1,800 during trading hours earlier this week, according to Societe Generale SA.
The benchmark index has reached the fifth and final stage of the Elliott Wave Theory and may retreat to about 1,570 by March or April, said Loic De Galzain, an equity-technical analyst at the French bank. The method analyzes price trends in a five-stage structure of three steps forward, two steps back. The S&P 500 topped 1,800 on Nov. 18 for the first time ever.
“The Elliott Wave count looks more complete as the move under way seems to be a wave five, a final wave,” De Galzain wrote in an e-mail. “The momentum indicators are posting negative divergences both daily and weekly while forming that final wave five.”
The S&P 500 rose to 1,802.33 on Nov. 18 before ending the day down 0.4 percent at 1,791.53. The gauge of U.S. stocks has rallied 25 percent this year through yesterday, on pace for its biggest annual jump since 2003. It closed at an all-time high of 1,798.18 on Nov. 15.
The first warning sign of a short-term retreat will be if the index reaches about 1,725, De Galzain said. The S&P 500 closed at about that level on Sept. 18, when it started to fall as part of the third wave of the model. It dropped 4.1 percent to 1,655.45 Oct. 8, the lowest level in a month.
The Elliott Wave Theory was originally developed by accountant Ralph Nelson Elliott during the Great Depression. He concluded that market swings, or waves, follow a predictable structure. Technical analysts study charts of trading patterns and prices to predict changes in a commodity, currency or index.
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