The S&P 500 ETF, denoted as SPY, recently experienced a technical setup according to the Elliott Wave theory. SPY completed its correction at the Equal Legs zone, also referred to as the Blue Box Area. This pattern includes a 3-wave pullback forming a Double Three, with the crucial range pinpointed at 663.57–652.77.
Technical Analysis of SPY
Following this, long positions were initiated around 663.57, anticipating a three-wave bounce from the Blue Box. Achieving the 50% Fibonacci retracement level in relation to the red X connector allowed for adjustments to make these positions risk-free. The positions’ stop-loss was set at breakeven with partial profits already secured.
After finding buyers at the Blue Box area, SPY exceeded the 50% retracement level from the X red connector. Consequently, long positions became risk-free, with further targets set at 696.53-707.42 as SPY potentially progresses toward new highs. While the price remains above 661.25, wave (5) might continue advancing.
Such strategies exemplify trading setups that meet the Elliott Wave theory criteria, with risk management reflecting the strategy’s application at designated technical points.
Based on the recent price action, we see that the S&P 500 ETF has likely completed its correction, finding solid support around the $661-$663 area. We have already entered long positions from this zone and view this as the beginning of a new upward move. The initial bounce has been strong, allowing us to make our existing trades risk-free by moving stops to our entry point.
Market and Economic Outlook
This market turn coincides with growing certainty in Washington, as a resolution to the recent government funding impasse appears imminent. We have seen the CBOE Volatility Index (VIX) fall from over 20 during the late October uncertainty to below 16 this week, signaling a significant decrease in market fear. This political relief provides a favorable backdrop for equities to climb higher in the coming weeks.
For derivative traders, this environment suggests a shift away from buying downside protection. The CBOE’s total put/call ratio has dropped to 0.70 from a peak of 0.95 two weeks ago, showing that demand for bearish put options is evaporating quickly. Selling cash-secured puts at strike prices below the recent $661 low or initiating bullish call spreads could be effective strategies to capitalize on this renewed upward momentum.
We anticipate this new leg up will target the $696 to $707 price range. The broader economic data supports this view, as the October jobs report showed a cooling labor market, and last week’s CPI data confirmed core inflation is moderating toward 3%. This combination reduces pressure on the Federal Reserve to consider further tightening, creating a tailwind for the market into year-end.
