- January 7, 2019
- Posted by: Trading
- Category: News
The more people I speak with, the more I find out how surprised most investors were by the S&P 500 Index’s drop down to around 2,300 points at the end of last month.
Yet, those who read our analysis were prepared. As I have said, I know of no other analysis methodology that provides better context to understanding the stock market than Elliott Wave analysis. And the market has made it clear to us that we are in a larger-degree 4th wave, which epitomizes the term “whipsaw.” So none of this action was much of a surprise to us. And it is not yet over.
What Elliott Wave analysis also tells us is that once the a-wave of wave 4 has completed, we should see a b-wave rally to make most market participants believe this correction is over. But, as Robert Prechter noted in “Elliott Wave Principle”:
“B-waves are phonies. They are sucker plays, bull traps, speculators’ paradise, orgies of odd-lotter mentality or expressions of dumb institutional complacency (or both). They often involve a focus on a narrow list of stocks and are often unconfirmed by other averages, are rarely technically strong, and are virtually always doomed to complete retracement by wave C. If the analyst can easily say to himself, ‘There is something wrong with this market,’ chances are it’s a B wave.”
Yet, based on my experience, that does not mean a b-wave cannot even strike a higher all-time high. As we began this 4th wave months ago, I wrote about the b-wave potential back in October in order to begin preparing you well before we had to deal with it:
“Moreover, when the larger degree impulsive structure of the market comes short of its bullish target, we often see the b-wave of the ensuing correction provide us with an expanded corrective structure, wherein it stretches to a higher high to strike the target missed by the impulsive bullish move.”
In our case, our ideal higher target for the S&P 500
began at around 3,011 points, and we came about 70 points shy of that when the market topped. That means I have to at least consider the potential that the coming b-wave can rally that high.
Many are still questioning whether the a-wave of the larger-degree wave 4 has bottomed, and rightfully so since we did not see the full pattern or technical indications normally seen at the bottom of the (c) wave of the a-wave. Yet, with this move through 2,520 points, I have to maintain a primary count that it has completed, despite it not providing the ideal structure or technical setup that we see most of the time. While it is still possible that the market provides us with that lower low, I have to view that as my alternative at this point in time, with my primary count now viewing us as having started the b-wave rally to 2,800-plus points.
If my assessment that the a-wave has completed is correct, then we should now be in the c-wave of the (a) wave of the larger b-wave rally. That means that the market should stretch up to at least the 2,600 region for this c-wave of the (a) wave. Should we come up short, then it would suggest that there is still a door open to a lower low, despite my now viewing that as the lower probability. But since I recognize that this is a larger-degree 4th wave, I don’t take anything for granted in this market.
Should we complete that rally to at least the 2,600 region (a=c) in the coming week, then I am going to expect a (b) wave retracement to ensue in February, even if the market does extend further than the minimal target for this (a) wave. This is all outlined in my 60-minute chart.
The next question many will be asking is: How will we know how high the (c) wave of the b-wave will take us in the coming months? The answer is that will all depend on how large waves 1 and 2 of that (c) wave develop. The larger that structure, the higher it will project. Remember that a 5-wave structure often targets the 2.00 extension of waves 1 and 2. So it will only be after waves 1 and 2 within that (c) wave complete that we can then project whether the market will strike the minimum 2,800 target or if we can stretch as high as 3,011 later this year. But, for now, I have to maintain a rather large target for the b-wave rally, at least until waves 1 and 2 have completed within that (c) wave. Then we can narrow that target down.
I want to conclude this week’s update with what sets us apart from the great majority of the market, and it can be summed up rather well by a quote from Albert Einstein:
“Few people are capable of expressing with equanimity opinions which differ from the prejudices of their social environment. Most people are incapable of forming such opinions.”
When the market rallied in 2016 and 2017 despite bearish factors, we remained staunchly bullish. However, when the market broke 2,880, that was a big warning to us, despite many at the time highlighting how the fundamentals of the U.S. economy looked so good. It was for this reason many others did not see the drop to the 2,300 region coming as we did.
The reason I am bringing this up is that we will need to move to a point in sentiment where investors will view it as an impossibility that the market can rally to 3,200-plus points before that rally can take hold in earnest. While we have seen some record outflows in the market of late, I still think there is potential for it to get worse, especially if the market fulfills its ideal target of the 2,100-2,200 region.
But from a long-term investor’s perspective, keep in mind that the market has given us a 15%-20% sale so far, with some stocks even more than that. With the downside potential being as much as 400 points lower from Friday’s close, the upside potential is at least 700 points higher based on our long-term expectations. So as the market provides opportunity, please consider your longer-term positioning, while ignoring your social environment, as Einstein seems to suggest. At the end of the day, you have to know when it is wise and advisable to follow the herd, and you also have to learn when following the herd at the wrong time will lead you off a cliff.
See additional charts illustrating Avi Gilburt’s wave counts on the S&P 500 across time frames.
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 e-mini S&P 500, metals, oil, dollar and S&P futures), interactive member-analyst forum, and detailed library of Elliott Wave education.