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China Trade Dispute Assumptions Are Risky: It's the Technicals Stupid!

06/05/2019 3:55 pm EST

Focus: GLOBAL

Avi Gilburt, Esq

Founder, ElliottWaveTrader.net

Assumptions on US-China trade war has clouded market analysis, reports Avi Gilburt.

While I will let the “real” analysts debate about how we should handle trade negotiations with China, let’s discuss the sentiment around the China deal.

This past week, I have seen many posts like this one:

“We wouldn't be down at these relatively low levels had China settled with Trump. Guaranteed.”

The posters’ logic works like this: The market has been dropping ever since the China deal fell apart. So, it is clear that the cause of the market drop is the China deal debacle. And I am quite certain that this serves as the prevailing wisdom in the market. It so logical, right?

Well, it sounds logical only if you ignore facts that blow this logic out of the water. Consider that the S&P 500 rallied 9% in 2018 during the heart of the trade war with China. With each escalation, we saw the markets continue higher and higher. How could that even be possible based upon the logic everyone seems to espouse today?

Now, I am quite certain there will be some that will try to explain away this clear lack of consistency. But, how can a person who is viewing the market through the lens of intellectual honesty come to such a conclusion?

If the China trade war clearly causes declines in the market, then this would be true all the time. And, the fact that we saw a 9% rally (which, at the time, had many scratching their heads) should make everyone question the basis for such an assumption.

Back in 1940, Ralph Nelson Elliott noted the following about causation for market moves:

The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long-term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed.

In fact, he went so far as to state that: At best, news is the tardy recognition of forces that have already been at work for some time and is startling only to those unaware of the trend.

And this China trade war is providing factual support for Elliott’s understanding of markets.

As I have been outlining over the last few weeks, the market has a set up in place that is similar to what we experienced in the fall of 2018, in January 2016, in August of 2015 and in August of 2011; it most resembles the market action of late 2015 into early 2016. And, this past week, the market stepped through that trap door.

Now, this does not mean I am guaranteeing you a market crash. Rather, this simply suggests that the conditions are in place for one to occur. And, should the S&P 500 continue down through the 2720-35 region early in the coming week, we are well on our way for such an event.

You see, as I try to explain to those willing to listen, there is nothing definite in life. Well, as a former tax attorney, I recall an old joke: There are three things that are definite in life – death, taxes, and tax reform. But I digress.

Since there is nothing truly definite in life, we have to view markets through the lens of probabilities. This means that while I have a pattern that is currently following through based upon its initial set up, I have to be mindful that this can change. So, I need to know what signals to look for to provide me with a warning that the market will not follow through in the current set up.

As I write this article late Saturday night as a bit of a diversion for myself, I simply want to provide goalposts for you to follow in the coming week; 2735/40 in SPX is our support just below where we closed on Friday. We next need to see the market break strongly through that support to maintain our crash scenario.

However, if the market is unable to do so, and rallies back through the market pivot (2770-2800) we outlined to our members, then it tell us that the immediate crash set up has been postponed, and the market will see another higher retracement before we see another downside set up take hold in the coming weeks/months.

But, overall, my expectations remain that the market will likely see lower levels in the coming months before we are ready for the rally, I expect to take us to the 3500-4000 by the 2022/23 time frame.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.  He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.

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