I have been getting such a chuckle from the market of late.
As the market made its way down to our 2600 target region towards the end of October, more and more market participants and analysts became more and more bearish. In fact, the bearishness was palpable as we approached 2600SPX.
However, our analysis suggested that the market should bottom in the 2600SPX region, and begin a corrective rally, which then topped at 2815SPX.
But, the day after the market began a strong rally off the 2603SPX level, many were quite fearful that Oct. 31 would provide us with a market crash. You see, that was the day that a quantitative tightening was scheduled by the Federal Reserve.
Yet, that day provided us with a 50-point rally. Yes, you heard me right. And, again, market participants and analysts were looking the wrong way in a big way due to their fundamental beliefs about what drives the stock market.
But, do they learn their lesson? Absolutely not.
Fast forward to Nov. 15, and we are presented with the next quantitative tightening day. And, again, most believed it would cause a big down day. However, again, the market ended the day in the green by almost 30 points.
With action like this, I hope the Fed continues to tighten all the time.
What made me chuckle even more was the fact that there were discussions about further trade war escalations with China on Nov. 15 as the market rallied almost 30 points. So, while you scratch your head at this fact, do you know what the market did during the trade war escalations with China between June and September of 2018? Yup – we rallied 9%. And, the funny thing is that the market topped on the good news of the trade deal with Canada, which then began the 10% decline to 2600SPX.
Based upon these facts, rather than the common fears and supposition, what we really need is more quantitative tightening by the Federal Reserve and trade war escalations with China in order to get this market to rally strongly.
I also heard Larry Kudlow note, “recession is so far in the distance, I can’t see it.” Well, maybe he should be watching the stock market a bit closer. You see, many appropriately view the stock market as a “leading indicator” for the economy. While some view it as representing some form of omniscience by the stock market, there really is no voodoo to this expectation if you understand the market.
You see, the same thing that drives the stock market is what drives the economy: market sentiment. However, market sentiment is more quickly affected by buying and selling of stocks, whereas the same market sentiment has a much more delayed effect upon the fundamentals of the economy. I wrote about this in more detail in this article, so feel free to read it if you want to understand this perspective a bit better.
Within the market, I still think we are working our way down to the 2100/2200 region in 2019. However, I don’t think it will be in a straight line.
In the coming weeks, I am still expecting more potential whipsaw. While the detail behind my expectations have been outlined to the members of ElliottWaveTrader.net, I can still provide general guidelines for you to follow.
Most specifically, should we hold over 2585/2600 support in the coming week, and then break back out over 2660SPX, the market can develop another rally back over 2800 again before the next decline phase takes hold.
However, should we see a direct breakdown below 2585SPX in the coming week, I am going to expect that any corrective rally will likely remain below 2660SPX. And I would anticipate working our way down to the 2450-2490SPX region before we are able to set up another larger “bounce” back towards the 2800 region or higher.
Before you begin to trade these parameters aggressively, I have to issue a stern warning to you. One of the most powerful aspects of Elliott Wave analysis is that it provides context for the market in a way no other analysis I know of is able to provide. You see, once we broke down below the 2880SPX region, the market gave us a signal that we were going to enter a very complex and difficult trading environment. This environment is known as a 4thwave within Elliott’s 5-wave structure. This wave is the most variable within the 5-wave structure, which is why we experience so much whipsaw while moving through a 4th wave.
Moreover, as I constantly warn my members, unless you understand that the market environment has changed, most people will lose a significant amount of their profits made during the preceding 3rd wave during this 4th wave whipsaw. And, one of the most powerful aspects of Elliott Wave analysis is that it provided us the warning that the market environment has changed once we broke down below 2880SPX. That means your approach to the market must also change.
As we continue to move through this 4th wave, I am quite certain that all of us will continue to experience much more whipsaw, with strong moves to be seen in both directions in the coming weeks. So, a major suggestion I have strongly provided to subscribers is to reduce the size of your positions and use stops if you are going to trade within this environment. Since most people should view this environment as a time to focus on capital preservation, most should likely not be trying to aggressively trade within this environment. Rather, you should be maintaining a higher cash balance so you can redeploy that cash at much lower levels and bargain prices in 2019.