This Market Makes No Sense, says Avi Gilburt, but Elliott Wave analysis does and following it can be profitable.
As worse economic news comes out, somehow, the market just keeps grinding higher.
Doesn’t the market understand what everyone else clearly “knows:” we are heading into the next Great Depression?
It’s important to remember that the stock market and the economy are not one and the same. Rather, there is a reason that the stock market is considered the best “leading indicator” for the economy. And, it is purely because market sentiment (the true underlying driver of the stock market) is seen in action much quicker within the stock market as relative to the fundamentals within the economy, which take time to catch up to the market action.
To put it simply, consider how long it takes you to effectuate growth in a business when sentiment turns bullish (obtaining funds, placing those funds to work in producing goods and services, marketing and selling those goods and services, earning profits, etc.) as compared to how long it takes to press the button on a computer to buy a stock. It is simply much faster to effectuate a turn in sentiment in the stock market than in the economy. And this lag explains why the stock market always bottoms well before you see a turn in the economy.
It is quite clear that many have missed this rally in the S&P 500 off the 2191 bottom and are in complete disbelief due to their lack of understanding of what I just outlined above.
Here are a few comments readers have sent: “Highest unemployment in decades and the market roars back faster than it ever has in over 80 years,” and “buying in to this rally is absolute suicide,” and “This bear market is just getting started.”
While most investors have reacted quite emotionally to the events of recent days, that is often the worst way to approach the market. So, let’s take a step back and review where we have been and then we can look to where we are likely going.
I was building a short position in the iShares MSCI Emerging Markets ETF (EEM) back in January, as it was presenting the clearest break down pattern, along with providing us with a very low risk set-up with wonderfully defined parameters. Moreover, if the market was going to break down below 3100, it would open the door to take us back down to 2200.
And the S&P 500 approached 2200 in March, I expected the SPX would bottom around 2187 and rally back up towards 2600. The SPX bottomed at 2191 and rallied back to our original 2600-2725 target.
This is simply our Fibonacci Pinball system of Elliott Wave analysis, which provides us with these high probability targets on both the upside and downside as the market acts as a pinball through these Fibonacci extensions and retracements we track in the standard structures we see commonly in the market.
When the market is acting in a standard manner, then it moves through these targets in an almost perfect pinball-like manner. However, if the market reacts in a manner outside of these standards, it provides us an early warning that something else is playing out and allows us to move into our alternative plans, which have been outlined well before the diversion from the standard occurs.
So, what does our methodology suggest now? This is where our method of Elliott Wave analysis provides us even more insight. Even if the market provides us with the most bullish scenario of a rally to 3200-3300, I expect a pullback to 2600-2800. So, considering we caught the rally from 2191 to 2950, and we will likely come back down to levels lower than that later this year, I questioned if it was worth the risk for the remaining 30% overhead?
So, the easy money on the long side has been made, and now the market is going to tell us in the coming two months whether it will continue higher to complete 5-waves off the 2191 level.
If we do complete those 5 waves into the 3200-3300 region, then I am going to buy-the-dip into the 2600-2800 region. However, if the market is unable to complete this 5-wave rally structure off the 2191 low, then it will open the door to a drop to the 2060 region in the coming months.
Risks have risen to the point where one must question if they are worth the rewards on the long side of the market at this time.
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.
