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Trade Idea: Avoid Aggressive Long Positions Approaching SPX 3000

10/16/2018 1:06 pm EST

Focus: STOCKS

Avi Gilburt, Esq

Founder, ElliottWaveTrader.net

I am certain of death. I am certain of taxes. And, I am certain of tax reform. (Sorry, that was an old tax attorney joke.) Yet, non-linear financial markets never lend themselves to certainty, writes Avi Gilburt Monday. He's presenting at TradersExpo Las Vegas Nov. 13.

Rather, the best we can do is look for clues that provide us with high-probability perspectives. That is what I use Elliott Wave analysis to do, in addition to supporting sentiment readings.

One of the noted indications that a major top is being struck is when formerly bearish analysts and market participants begin to suggest buying the dip. And, amazingly, analysts that I have watched be consistently bearish for at least the last three years are now providing us with reasons as to why we should be buying this dip.

In fact, I saw this comment on one of the articles, and I think it presents the common bullish thinking today quite succinctly: “NFIB reports small business optimism shatters record set 35 years ago. S&P 500 (SPX) companies are reporting record profit margins and the highest earnings growth in 7 years. The US economy shows no sign of recession and forecast is for continued growth. Forecasting a continued bull market is very reasonable assumption.”

Now, juxtapose that comment with the following quote: “...financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?”

This quote was taken from a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF. The paper discusses those engaged in “fundamental” analysis for predictive purposes at market turns.

So, while I will try to provide an update on my near-term perspective on the S&P 500 later this week (after all, I have to be fair to our members), I wanted to at least pen a note to readers in general about the risks about that I tried to warn about as we were nearing the all-time highs, and especially upon the breakdown below 2880 SPX.

My long-term target for the correction that I have expected upon completion of this wave 3 off the 2009 lows has been in the 2100 SPX region. And, while you may feel as though we may go down there directly, I can assure you that such fears are likely unwarranted. Rather, there will be one more rally to suck investors back in before we see that drop develop to the 2100 SPX region.

I think the likelihood of that rally making new all-time highs has significantly diminished. And, even if we do see a new all-time high just over the 3000 mark, I think the risks have risen to the point of making it unwise to remain in aggressive long positions for that potential.

Those who have been reading my work for years know that I have been consistently and staunchly bullish despite all the reasons to be bearish.

Cautious tone: And, if you have been reading my work for the last month or two, you may have noted the change in tone to extreme cautiousness, especially once we broke below 2880 SPX. I think that would remain a fair assessment for the coming months, unless something drastically changes.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

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