Final Test For The Market Before Year End

December 21, 2020
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

For the almost decade that I have been writing publicly, I have implored you to recognize the importance of market sentiment in determining the direction and turning points in the market.

Yet, I still shake my head when I read articles, or even the comment section to my own articles, as most analysis and comments are so hyper-focused on what the news or other factors will do to the market. And, no matter how many times the market moves opposite to those expectations, the analyst or commenter seems to develop selective amnesia, as they continue on their merry way to yet again analyze the market based upon the same failed perspectives.

Through the years, I have written many articles and have cited many recent studies that explains why those that have followed this “method” may be considered insane based upon Einstein’s proposition that doing the same thing over and over while expecting a different result is the personification of insanity.

When you are finally able to internalize the fact that the limbic system within our brain is driven in the same natural way as seen in other living creatures throughout nature, you will then begin to develop a more mature and accurate understanding of how our stock market works. You see, many recent studies as to how our stock market works have come to the same conclusion presented in “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society:

“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 the animal populations such as ant colonies or in connection with the emergence of consciousness.”

Eighty years ago, Ralph Nelson Elliott explained this perspective quite succinctly when he stated the following:

“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.”

Yet, I am still quite certain that insanity will continue to prevail within the media, whether it be on the airwaves or in print, as well in the comments section below. Most will continue to argue about what effect the next event will have on the market, as that pastime seems to be as ubiquitous as investor’s desire to increase their investment accounts. Yet, so many refuse to utilize more mature and accurate perspectives in order to achieve their goals.

“Anyone reading these articles should really examine the author's track record. I followed his work for about 6 months and although I originally disagreed with his outlook generally, he proved to be right most times and I was wrong. As a result I became a paying subscriber to his service. I voted with my wallet because his advice fattened it up and also prevented me from thinning it out... His public articles are very worthwhile, but you must maintain an open mind and confront the inherent bias that has been instilled in all investors by a financial press full of charlatans when you read them. If you are not willing to take an objective view of his work and put aside that bias, you will not glean the insights which he so generously shares.” (funnydoc)

So, if you would like to begin to develop a better understanding of how markets work, feel free to begin with this series of articles I have written introducing Elliott Wave theory.

Anyone that has followed my analysis in 2020 knows my expectation that the market will likely rally well beyond the 4000 region in the coming years. In fact, I reiterated this perspective while we were hitting the lows back in March. But, at that time, most simply thought me to be crazy Yet, it no longer sounds so crazy.

I want to start by reiterating my expectation that the next higher wave degree target remains in the 4200/4300SPX region. While I am still unsure if we can pullback to the 3400-3500SPX region before we begin that rally, I have no immediate set-up pointing towards that type of pullback right now.

Last week, I noted that the 3695 resistance level should be respected if the market has indeed begun a larger pullback to the 3400-3500SPX region. And, with the break of that resistance, it has opened the door to a more direct move to our next intermediate target in the 3922SPX region in the coming weeks.

But, the market has one more important test to pass in the coming weeks before I will hail the bull and view us as more immediately heading to our next target of 3922SPX in the coming weeks, despite my preference to see more of a pullback before we rallied to 3922SPX. And, should we rally towards 3922SPX in the coming weeks, then we will see a pullback thereafter which should hold the 3765SPX region, as we focus on our next major target in the 4200/4300SPX region.

In the smaller degree wave structure, when the market rallied through 3695SPX resistance last week, we moved our support up to 3680ES (March futures – which is relative to the 3687SPX level). And, on Friday, the market tested and held that support. While it did slightly breach it by 2 points, I posted an intra-day alert to our members noting that “I am doubting that the market is going to break down here with these divergences . . .” Within minutes thereafter, the market began the strong rally we experienced at the end of the day.

Friday’s support is clearly quite important for the upcoming week, and as long as it is held, I am minimally looking towards 3760SPX next.

But, even if we do get to that target, do not get terribly complacent. You see, there is still a structure we are tracking that can top us out after that next rally, and then break back strongly below 3710SPX, which will then point us down towards 3500/3550 in rapid fashion. You see, the overlapping structure we have seen since early November is what we refer to in Elliott Wave parlance as an ending diagonal. The nature of ending diagonals suggest that they spike into their highs, and then see equally powerful reversals. Moreover, the reversals usually point us down strongly towards the region from which the diagonals originated, which, in our case, would be the 3500SPX region.

So, the bulls have been doing a good job of holding support thus far, and as long as they continue to pullback correctively, and hold our respective support levels (which we continually update as the market rallies higher), then they can take us to the next minor target in the 3922SPX region in the coming weeks. However, as noted, there is just one more test the market has to pass in the coming weeks before we view it as a high probability that we are heading towards our next major target in the 4200/4300SPX region sooner rather than later.

I want to add that I am attempting to distill a complex structure within this update. We are at an extremely complex and important juncture in the market wherein it will decide if we have begun the rally to the 4200/4300SPX region without revisiting the 3500SPX region first. The outline above is a simplified distillation of the 3 different Elliott Wave time frames I constantly track for our members, so please try to recognize the differences while you take your time to understand the progression of analysis I am trying to provide. While it would be a lot clearer if I attached the various charts, I do not think that would be fair to my current members who are paying for our ongoing analysis. And, if you do not understand or are not willing to understand if/then logical progressions, then you may as well just stop reading my articles.

Lastly, in case you could not figure it out from the first section of my article, I will not be watching or reading any financial news in order to make my determinations about the market, as the market tells me all I need to know within the truth of the price action.

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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: info@elliottwavetrader.net.

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