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S&P 500 Elliott Wave Analysis (June 2025)
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S&P 500 Elliott Wave Analysis (June 2025)

Elliott Wave Theory for Beginners: Deciphering the S&P 500's Current Trajectory at a Key Juncture.

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CapitalA’s Research
Jun 01, 2025
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S&P 500 Elliott Wave Analysis (June 2025)
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Elliott Wave Theory: A Beginner's Guide

Elliott Wave Theory is a fascinating and often challenging form of technical analysis. It suggests that financial markets move in predictable patterns, driven by recurring cycles of investor psychology. While it doesn't offer certainty, it provides a framework for understanding market structure and anticipating future moves with a higher probability.

The Core Idea: Fractals and Market Psychology

Ralph Nelson Elliott, in the 1930s, observed that market prices don't move randomly but in repetitive patterns, or "waves," reflecting collective human psychology (fear and greed). He noticed that these patterns are "fractal" in nature, meaning they appear at all scales – from minute-by-minute charts to monthly and yearly charts. A wave pattern seen on a daily chart can be a sub-wave of a larger pattern on a weekly chart, and so on.

The Two Main Types of Waves

Elliott identified two fundamental types of waves that combine to form all market movements:

  1. Impulse Waves (Motive Waves): These are 5-wave patterns that move in the direction of the larger trend. They represent the main thrust of the market.

    • Structure: They are labeled 1, 2, 3, 4, 5.

    • Characteristics:

      • Wave 1: Often hard to recognize at the start of a new trend.

      • Wave 2: A correction of Wave 1, but it never retraces more than 100% of Wave 1 (i.e., it doesn't go below the start of Wave 1).

      • Wave 3: Usually the longest and strongest wave, marking significant price movement. It's often where the "news" catches up to the trend.

      • Wave 4: A correction of Wave 3, but it never overlaps with the price territory of Wave 1 (except in rare cases of diagonal triangles).

      • Wave 5: The final leg in the direction of the trend, often less powerful than Wave 3 and sometimes accompanied by divergence in indicators.

  2. Corrective Waves: These are 3-wave patterns that move against the direction of the larger trend. They are corrections or consolidations of the impulse waves.

    • Structure: They are labeled A, B, C.

    • Characteristics:

      • Wave A: The first move against the trend.

      • Wave B: A bounce or rally against Wave A, often fooling people into thinking the trend is resuming.

      • Wave C: The final leg of the correction, typically strong and often reaching new lows (or highs, in a corrective rally).

The 5-3 Wave Pattern

The basic cycle of Elliott Wave theory is a 5-3 wave pattern. This means:

  • A 5-wave impulse move (1-2-3-4-5)

  • Is followed by a 3-wave corrective move (A-B-C) This completes one full cycle of a larger degree wave. These 5-3 patterns then combine to form waves of even larger degrees, demonstrating the fractal nature of the market.

Key Rules

While there are many guidelines in Elliott Wave, a few strict rules must be adhered to for a valid wave count:

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