by Avi Gilburt
It seems the action seen this past week has bears scratching their collective heads once again. With many viewing the market as certainly “topping” back in March, the market has doused cold water on those expectations, as I had been strongly warning would likely happen.
Since holding the support we noted several weeks ago at 2330SXPX, the market has seen quite a powerful move back up to the target we set between 2380 and 2410SPX. And, most of the rally was seen on the back of short covering of those who jumped the gun on the bearish side of the market.
I know many of you look to various data such as P/E ratios, GDP, employment, interest rates, CPI, etc., in order to glean market direction. And, you are likely quite confounded by the market action as it clearly makes no sense to you based upon the data you follow. So, maybe you are following the wrong data? Maybe that data is really meaningless to the market?
Yes, yes, I know. “Avi, you are talking nonsense.” But, am I really? If none of the data can explain why the market has done what it has done, what does that tell you?
Oh, I am sorry. I forgot. It’s really the central banks that have pushed us up this high. Then, for those of you that are certain of the central bank’s being that powerful, I am quite sure you are heavily long in your investment accounts.
But, what was that? You say you are not? But, why not? If you are so confident in the perspective that central banks are pushing this market higher, then why would you not be going along for the “certain” ride higher? Would that not be the most prudent thing to do to put your money alongside the central banks who are “certainly” driving the market up?
You know why you are not long? Because to the core of your being you really do not believe in the omnipotence of the central bank. And, you would be right. In the back of your minds, you question that if central banks were really so powerful, how could we have ever experienced the 2008-2009 crash? How could we have ever experienced the stock market crash which led to the Great Depression?
I have discussed this at length in prior articles, but it certainly deserves to be repeated since so many wear blinders as it relates to the true power of the government or central banks:
As another example of this perspective, many believe that there is something called the Plunge Protection Team, created as a response to the 1987 crash, which supposedly prevents the market from crashing anymore. And, again, analysts point to this “Team” as the reason they are wrong when they expect a major drop in the markets which does not occur.
If there really is such a team hard at work, with their ever-present finger on the “buy” trigger, then we should not have had any stock market “plunges” since 1987. Rather, the stock market should have only experienced “orderly” declines since that time, and not plunges of 10%, and certainly not over 20%, within a period of a day to a couple of weeks in the same manner as that experienced in 1987. So, the question we now have to look at is if the facts within our markets actually support the existence of such a “Plunge Protection Team” actively at work in protecting us from significant stock market “plunges.”
Since 1987, I don’t think that anyone can fool themselves into believing that we have not experienced periods of significant volatility. In fact, the following instances are just some of the highlights of volatility since the supposed inception of the Plunge Protection Team:
•February of 2001: Equity markets declined 22% within seven weeks;
•September of 2001: Equity markets declined 17% within three weeks;
•July of 2002: Equity markets declined 22% within three weeks;
•September of 2008: Equity markets declined 12% within one week;
•October of 2008: Equity markets declined 30% within two weeks;
•November of 2008: Equity markets declined 25% within three weeks;
•February of 2008: Equity markets declined 23% within three weeks.
•May of 2010: Equity markets experienced a “Flash Crash.” Specifically, the market started out the day down over 30 points in the S&P 500 and proceeded to lose another 70 points within minutes. That is a loss of 9% in one day, but the market did manage to close down only 3.1% in one day!
•July of 2011: Equity markets declined 18% within two weeks
•August 2015: Equity markets decline 11% within one week
•January 2016: Equity markets decline 13% within three weeks
Based upon these facts, you can even argue that significant stock market “plunges” have become more common events since the advent of the Plunge Protection Team, especially since we have experienced more significant “plunges” within the 20 years after the supposed creation of the “Team” than in the 20-year period before.
I have also shown you proof that they are equally powerless in the FOREX world.
At some point, you will hopefully come to the realization that markets are not driven by data, nor is the market controlled by central banks. Deep down, you know this to be true. But, you fear not aligning yourself with the rest of the herd that so confidently believe in these fallacies. You may also feel a loss of a certain amount of control you think you may have if you can’t point to some data point or exogenous factor to supposedly explain a market move “after the fact.”
At some point, you will hopefully come to the realization that explaining a market move “after the fact” will not help you position for that market move before it happens. And, at that point in time, you will embark on your quest for intellectual honesty in the market, which will likely lead you to seek a better understanding of the role of market sentiment in determining market direction. For those brave enough to leave the herd, and wise enough to embark upon this quest, I congratulate you and wish you luck in your journey.
While there is no such thing as a Holy Grail in stock market analysis, we have to base our analysis upon probabilities. And, thus far, the market has been following a pattern we have laid out months ago, which suggests that the probabilities are still on our side for it to continue to follow as outlined.
Back on March 1, I suggested to the members of my trading room that we should now expect a market pullback/consolidation before we set up to head to 2500SPX. That pullback would likely take the structure of an a-b-c corrective decline.
Based upon our Fibonacci Pinball structure, the a-wave of pullback would likely target the .236 retracement of what we counted as wave (III), which was 2326SPX. The low we struck for that a-wave 4 weeks later was 2322SPX. We then began a b-wave rally in another (A)(B)(C) fashion.
For weeks, I noted that if the wave of that b-wave rally holds the 2330SPX region, we should head higher to the 2380-2410SPX region, with the 2410SPX level the ideal target for this b-wave rally. However, the probabilities suggest that this structure, in an ideal sense, is still missing a c-wave down to complete this larger a-b-c corrective structure.
Now, since the minority of times would still provide us with a completed corrective pullback only to the .236 retracement, it is possible that it may have completed already. Again, the greater probabilities still suggest another decline is to come, as long as we remain below resistance of 2410-2425SPX. So, for this reason, it is not wise to aggressively trade for a reversal, until the market provides us with a clear set up for a c-wave decline.
And, again, ultimately, the structure is still strongly suggestive that a rally towards the 2500SPX region will take hold in 2017, and that we are still months, if not a year, away from a top which will usher in a 15-20% correction.