The Bull Commands It All For Now

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
February 6, 2024

After writing publicly for over 13 years, I have come to notice that the landscape has very much changed. There were many through the years that have attempted to take me to task for my differing perspective on the market. Many simply could not understand how I am able to ignore exogenous factors, yet still be able to accurately identify turning points in the market while staying on the correct side of the market the great majority of the time.

When I look around now, many of them are no longer around. Yet, we are still here guiding investors through the turbulence of the various market machinations we have experienced over the last 13 years.

The one issue that most have a hard time accepting is that one does not need to know the news in order to successfully navigate the stock market. This perspective is completely foreign to most, as it is so counter-intuitive to what most "know" about the market.

But, there are two studies which I cite quite often that hit this point home. The first is from a paper entitled "Large Financial Crashes," published in 1997 in Physica A., wherein the authors present a nice summation of what drives the overall herding phenomena within financial markets:

"Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an "emergent" behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in animal populations such as ant colonies or in connection with the emergence of consciousness."

Even more mind-blowing is a study that suggests the market would move as we normally see it move, even without any news or fundamentals at all. In 1997, the Europhysics Letters published a study conducted by Caldarelli, Marsili, and Zhang, in which subjects simulated trading currencies. However, there were no exogenous factors that were involved in potentially affecting the trading pattern. Their specific goal was to observe financial market psychology "in the absence of external factors."

One of the noted findings was that the trading behavior of the participants was "very similar to that observed in the real economy." This is just one of many studies which support the proposition that fundamentals are not nearly as important for market direction as many currently believe, as markets would work in the same manner with them or without them.

And, this is something that Ralph Nelson Elliott stated many years ago:

"The causes of these cyclical changes seem clearly to have their origin in the immutable natural law that governs all things, including the various moods of human behavior. Causes, therefore, tend to become relatively unimportant in the long-term progress of the cycle. This fundamental law cannot be subverted or set aside by statutes or restrictions. Current news and political developments are of only incidental importance, soon forgotten; their presumed influence on market trends is not as weighty as is commonly believed."

Interestingly, I challenge all my clients to turn off the television and stop reading much of what is written about the market, and just focus on price patterns, as per our analysis. And, these are the typical comments I get from those who take me up on that challenge:

"As a new member, you challenged us to turn off the news for 2 weeks. I decided to do it though it was actually pretty hard to do. But with my emotions no longer in control, I managed to focus on the wave counts, increase my education, and IMPROVE. I learned I can do better without all that noise. Relying on the talking heads for trading was like cheating off the stupid kids at school!"

"Thank you all so much, you have completely rewired my brain. I've never been so calm in my trading for my clients or my own accounts and I owe it all to you."

As a recent example, many view that the current rally is due to the common belief that the Fed is going to lower interest rates sooner rather than later. So, when the Fed announced this past week that it is not going to do so, clearly, the market must have tanked. Well, not exactly. While it did initially drop, please take note that the drop began well before the Fed announcement. Moreover, the rest of the week saw a strong rally of over 100 points in the S&P500 from the low struck on Wednesday. I guess investors thought about it overnight and decided that it really is not bad news after all. And, if you believe that, I have a bridge to sell you.

But, the news I found most interesting this past week is that Mike Wilson has stepped down from his position as Chairman of Morgan Stanley's Global Investment Committee. For those that do not know of him, Mr. Wilson has been a very loud bear for many years now. The reason I find this interesting is that I view this as a resounding statement of the overall bullish sentiment within the market, which is pushing out the bears in a big way. While this is clearly anecdotal in nature, it does support my bigger perspective view of the market making its way to what I think maybe a major top in 2024. And, no one wants to hear from any bears due to the strong and pervasive confidence in the current bullish trend.

Meanwhile, even though the Fed provided news to the market which many viewed as likely topping us out, the market still moved higher to the target region I set last week. That now means that I am maintaining an expectation for a pullback over the coming weeks, that will point us back down towards the 4800SPX region.

So, I want to conclude this update with a few points I made to my clients this past weekend:

"I want to again caution everyone about shorting or turning bearish too early in this market, which is something I have repeatedly done since we began this rally in October of 2022 - during which time everyone and their mother was bearish. We have all seen what has happened to those that have retained a bearish bias during the last year and a half. While it is one thing to be cautious at certain times during this rally (as we have done at appropriate times), it is another thing to attempt to short this market before it provides us with an indication that the upside is done. . .

So, while I have now turned quite cautious, and even raised cash this past week (as I have personally turned quite conservative at this point in my investing career), I am not yet convinced that we are yet done with this topping process. Rather, I am still seeking that 4-5 outlined on my charts. However, should the market break-down below the main support outlined between 4740-4800SPX, then I would have to consider the potential we have topped, but it will likely depend on the velocity of the reversal. . .

So, in summary, I think we can see the market topping out in the near term. And, while we can debate whether that top will be an extension in wave 3 or a b-wave top, it really does not change my expectations. I believe we will see a return towards the 4800SPX region in the coming weeks [before heading higher again].

But, please do not attempt to prematurely short the market in an aggressive fashion, at least not until we see a break of support. Remember, you do not have to garner every single point the market has to offer in each direction. Your goal should be to trade the most reliable and probable set-ups. And, if you are trying to garner every point the market has to offer, then you are being driven by your ego rather than by appropriate risk management principles. And, that is how you lose money in the market."

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Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education. You can contact Avi at: [email protected].


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