Slope of Hope Blog Posts
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Back in the 1930s, an accountant named Ralph Nelson Elliott discovered that financial markets are fractal in nature. This means that they are variably self-similar at different degrees of trend.
To that end, he explained that when a market is trending, it will most often display a rather predictable 5-wave structure. As an example, this structure is what allowed us to predict the rally from the 1800 region on the S&P 500 (SPX) to over 2600 back in 2016, along with our expectation for a “global melt-up,” which we reiterated at election time “no matter who won.” It is what also allowed us to predict the bottoming to the bond market in late 2018, wherein we bought TLT in the 112-113 region, as well as the rally in metals in 2019.
Originally published on Sat Aug 24 for members of ElliottWaveTrader.net: Personally, I love trading metals and have been doing so for quite some time. In fact, the best trade of my entire career was in silver many years ago.
But, the one thing that we commonly see in the complex is that when the market strikes a top, it most often spikes into and then strongly reverses at that top as a culmination signal. Thus far, I have not seen that in the metals.
So, as the bulls pat themselves on the back for holding all the way down last year for a 20% draw down so that they can “enjoy” the rally we got in 2019, I hope they don’t hurt their arms and shoulders from all their back-patting. But, they may be in for a dose of realism when they realize that the market has now been completely flat for the last twelve months.
Allow me to show you a simple fact that should make bulls feel like they have exerted a lot of energy and worry, only to be completely flat over the last year. (And, yes, I am going to use a date from the middle of this past week for a reason). On August 14th of 2018, the SPX closed at 2839.96. And, now, one year later, on August 14th, 2019, the SPX closed at 2840.60.
For weeks, if not months, I have been reading one bearish bond article after another. In fact, many of these same writers have been arguing with me for months about the bond rally I expected back in November of 2018. One suggests that this rally is really a “fake,” whereas another has been strongly suggesting that investors fade this rally, with many more supporting their opinions. The problem is that these analysts have been trying to “fade” this rally for the last 10-15% up. Yet, I will gladly bank my “fake” 20% profits on this trade.
As each week goes by, I continue to chuckle about how many people do not understand the context of the markets upon which they opine. Remember how certain analysts and investors were that rates were only headed higher back in November of 2018?
The Fed gave us exactly what the market expected in a .25% rate cut, and even gave us a “gift” with the early cessation of Quantitative Tightening. Normally, most would view this as a bullish catalyst. However, with market sentiment topping out in a bullish extreme, market participants interpreted the Fed action as bearish (despite its positive substance), and the market sold off this past week.
Based upon my analysis, we now have a top in place, as I have been warning to expect. The question is what will that top represent?