Major Market Move Ahead

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
December 12, 2023

This past week was quite pivotal to the market, at least in my work. But, before I get into the specifics, I want to highlight a comment I saw in a bearish article recently.

While we have all been reading extremely bearish articles over the last year, most of them have been based upon one fundamental perspective of the market or another. Yet, it always seems that the market ignored those factors, as it continued to rally since we struck the low back in October of 2022. And, some investors are starting to realize the reality of the stock market, especially relative to the fantasy world represented by economics.

So, this past week, I saw the following comment in a bearish article:

“If the market traded on fundamentals it would be a lot lower but it doesn't and I don't think it will suddenly start doing so next year.”

While most investors keep their blinders on as they continue to pour over market fundamentals to divine the direction of the stock market, a small number of investors are opening their mind to the truth that economics will not assist them in such an endeavor. You see, as I explain in the following article, economics, as applied to the stock market, are based upon underlying fallacies which are clearly not workable in the real world of finance.

Sentiment Speaks: Aren't We Here To Make Money?

And, I think this old joke makes the point quite well:

Two economists fell into a 20-foot ditch. As they looked around for a way out, they each attempted to climb out of their predicament, but to no avail. After struggling for a way out for about 15 minutes, a newly found excitement regarding a perceived solution came upon the face of one of the economists. He then turned to his compatriot, and proclaimed in excitement: “I figured a way out. Assume a ladder!”

You see, my friends, economics will more often point you in the wrong direction when it comes to the stock market, as I explained in detail in the article I linked above. The main reason is that economic factors do not drive the market. Rather, market sentiment does. And, this psychological study explained it rather well:

“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.”

Yet, article after article that you will read will provide you with prognostications based upon these useless factors. And, the main reason they continue to do so no matter how many times they are proven wrong is because they simply do not have anything better. As I quoted in the article linked above, the January 6, 2011 issue of Oxford Analytica explained:

"Paradigm shift? It is premature to conclude that there is some fundamental change in economic thinking at work. Paradigms are not discarded unless there is another paradigm to replace them. . . Although the crisis has exposed serious weaknesses in the neoclassical synthesis, no alternative paradigm is likely to eclipse it in the short term. Moreover, there are strong intellectual and social pressures at work to hold the paradigm in place."

So, let’s move onto my perspective of the market. On occasion, I will post parts of my analysis that I provide to members. So, this week, I decided to provide to you some of my analysis. But, please do recognize that it involves some detailed Elliott Wave analysis (which is how we track market sentiment), and that I am leaving the chart detail for my members:

If you have ever watched the movie The Pirates of the Caribbean, they often refer to the “Pirates Code,” as written by Bartholomew 'Black Bart' Roberts. And, when Captain Barbosa specifically referred to it, he noted that “[t]he code is more what you’d call ‘guidelines’ than actual rules.”

Similarly, Elliott Wave analysis has its rules and guidelines. In fact, there are very few actual “rules” in Elliott Wave analysis, and most of what we use to direct our analysis are guidelines, in similar fashion to the pirate’s code.

However, one of the rules which remain inviolate to this day is that wave 2 can never retrace more than 100% of wave 1. Should such a retracement occur, this would invalidate any structure as a wave 1, and it clearly tells us that it is something other than a wave 1.

When the market dropped into the 4100SPX region in October, I had a responsibility to outline a potential 5-wave structure decline into that low. However, as I explained, the structure was best counted as a leading diagonal.

Moreover, as I always note, I have little faith and trust in leading diagonals as trading cues, at least not until they give me more evidence upon which I can rely for that count. Such evidence is seeing the next structure – the wave i of 3 – provide us with a clear 5-wave Fibonacci Pinball structure. And, until such time that I see that, I always remain quite skeptical of leading diagonals.

So, when the market presented us with a potential leading diagonal down into the October low, I outlined that view at the time. However, I still did not trust it, and made my perspective quite clear. But, due to the potential risk inherent in that potential wave 1 down being a leading diagonal, I had to view risk management as my primary focus, and allow the market to prove or disprove that potential in one of two ways.

One of the ways that it would have disproven that leading diagonal potential was if – after this rally completed - we had broken support with a corrective decline. This would have told me that the decline was likely a b-wave rather than wave i of wave 3.

So, if you remember, as we were bottoming in the 4100SPX region, I outlined my expectation for a rally back to the 4350-4475SPX region. And, once we reached that target, I turned quite neutral of the SPX, as I wanted to then see the nature of the next decline in the market to provide us guidance for 2024. I thought that to be the prudent view as an investor from a risk management standpoint.

The other way that it would have disproven that leading diagonal potential was if we were to break back out over the start of the leading diagonal at the 4607.07 level, as that would violate the rule that wave 2 cannot retrace more than 100% of wave 1. And, that is what occurred on Friday. This now invalidates the bearish potential we were tracking.

Now, does that mean there is no longer any risk in the market? Absolutely not. You see, I can come up with many arguments for continued risk being inherent within the market. One such argument is that while the SPX has invalidated its leading diagonal structure, the ES (market futures) has not. The high on the ES in the summer was 4736.75, and on Friday the ES struck a high of 4666.50. (Note that I am now on the March 2024 contract, which seems to be approximately 57 points higher than the SPX). That means there is still 70 points overhead in the futures within which we can maintain a leading diagonal structure as a 1-2 downside set up.

Yet, I have always viewed that “cash is king” when I relate to the SPX chart, as the movements in the ES futures outside of regular market hours does not always have the necessary volume to provide us with an appropriate representation of mass sentiment as does the SPX. So, while there still exists the potential for the leading diagonal in the ES, I am discounting it for that reason, along with the lesser reliability of leading diagonals in general. However, as noted, it does still represent some amount of risk inherent in our market of which I want you to be aware.

Moreover, even though the yellow count pointing us to at least the 4883SPX (I will explain my targeting analysis below) for the next rally is now my primary wave count at this time, I still need a reasonable alternative wave count for the SPX, which I have presented in purple on the 60-minute chart. That structure assumes the decline into the 4100SPX region is an [a] wave (which would also explain the leading diagonal structure), this rally is a [b] wave, and the next decline can be a [c] wave of a larger wave [4] flat. To me, this seems to be the biggest risk that I would view as reasonably probable should the market begin the next decline in a clear 5-wave structure. And, this would point us back down to the 4000-4100SPX region before the wave [5] rally takes hold to 4883SPX. Furthermore, this could also align well with the ES futures issue.

But, that does not change my view that I am now viewing the yellow count as the more probable path forward in 2024. That means that I now expect the market to head to higher highs as the more probable path for 2024.

Again, that does not mean that I see no risk for the next several months. In fact, if we do see a break down below 4546SPX in a CLEAR 5-wave decline, then I will be taking that potential purple count a bit more seriously. So, I am still going to be watching the nature of the next decline carefully. But, I will be focusing more so on the yellow b-wave potential on the next decline unless the market gives me a good reason not to do so. Yet, I want to reiterate that both the yellow and purple counts now point us to 4883SPX or higher. The only difference is that a clear 5-wave decline from the high we strike on this rally will suggest we revisit the 4000-4100 support before we begin that rally to 4883SPX.

This now brings me to the point in the discussion as to how high I see the next rally taking us. Well, since I am now viewing the yellow count as potentially completing an ending diagonal structure, I am going to review the structure of diagonals again.

First, I want to note something that R.N. Elliott explained about ending diagonal structures. He said that they are often found at points where the prior rally took shape in a manner that went “too far too fast.” And, I would say that would aptly describe the nature of the rally off the 2020 low to the early 2022 high. So, this would seem to be an appropriate place to see an ending diagonal structure.

Let’s now review the structure of ending diagonals. Normally a standard impulsive structure takes shape as a 5-wave structure, with the substructures of waves [1], [3] and [5] breaking down further into 5-wave structures as well. However, in an ending diagonal structure, waves [1], [3] and [5] usually break down into 3-wave structures, labeled a-b-c. And, whereas wave [3] in a standard structure often targets the 1.618 extension of wave waves [1] and [2], a diagonal 3rd wave often targets the 1.236-1.382 extension of waves [1] and [2]. In our case, that region was the 4561-4650SPX region, whereas wave [3] in this diagonal off the October 2022 low topped out at 4607, right in the middle of our general diagonal targeting region.

This now brings us to the discussion of the 5th wave in an ending diagonal. And, the most common target seen is the 1.764 extension of waves [1] and [2]. In our case, that is the 4883SPX level, which is just beyond the high struck in early 2022. This would be my minimum target for yellow wave [5].

However, one of the other important features of an ending diagonal is that they often provide us with blow-off tops. Moreover, it is not uncommon to see an ending diagonal blow through the top of the trend channel which contains the rest of the diagonal structure. Furthermore, since this would likely be completing a topping structure of a long-term 3rd wave which began in 1932 (which I have discussed many times in prior updates), I think it is quite reasonable to expect it to complete in grandly bullish fashion. For this reason, you can see my wave [5] box on the daily chart has always been as high as the 5500-6000SPX region for many years, which also represents the standard projected target region off the October 2020 low.

Now, to be honest, I don’t think we extend as high as the 6000SPX region. But, since the c-wave of wave [5] is what will be carrying us higher in this last leg into 2024, and c-waves take shape as 5-wave structures, I think we will have relatively reasonable guidance to be able to determine just how high to expect this wave [5] to take us based upon the internal structure of the 3rd wave in that wave c-wave. It will take us several more months before we will have that information. So, for now, I think a “reasonable” target at this time would be the 4883-5163SPX region.

But, first, I am still of the belief that we can see an intervening b-wave pullback before the fireworks to the upside begin in earnest. And, since we do not yet have a confirmed top to this current rally, I am guesstimating that the b-wave pullback can take us down to the 4300-4400SPX region. Of course, since retracements are based upon a percentage of the rally structure which preceded such retracement, we cannot provide specific guidance to that exact target region until we have a confirmed top in place evidenced by a decline below 4546SPX, the low struck this past week.

Some of you may be asking yourself at this time (as I hear this question a lot) about the fact that the wave [5] will be larger than wave [3]. Well, again, this is where we go back to our rules and guidelines for Elliott Wave analysis. The rule is that the 3rd wave cannot be the shortest wave within the 5-wave structure. But, it certainly does not have to be the longest. So, the path I am setting forth clearly does not break any Elliott Wave rules.

In summary, the move over 4607.07 on Friday confirmed my suspicion that the decline into the 4100SPX region was not the start of a major move lower. Rather, it suggests that there are two paths we will now track which point us north of 4800SPX in 2024. Moreover, we will still be watching the nature of the next pullback to determine if we have to drop to the 4000-4100SPX region again before that rally begins in earnest, or if the next pullback will be corrective, which will likely hold the 4300-4400SPX region, and then point us to 4800+ sooner rather than later.


Avi Gilburt is a widely followed Elliott Wave technical analyst and author of, 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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