This Market Is Going To Crash - Up

August 25, 2020
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

For those that do not know what FOMO is, it stands for Fear Of Missing Out, which is what has now gripped our market. And I find that absolutely fascinating.

In fact, this comment on one of my last articles pretty much sums up the way everyone seems to be “feeling” right now:

“[The Fed] will do whatever it takes to keep markets "working properly". Because of that, no one fears a dip, because the market is supported by a money bazooka with infinite ammo. Since no one fears a dip, no one wants to "take profits" and mis-time it. This is FOMO. There is nothing to fear. The underlying financial system is so shaky, the Fed must support it, by creating a wealth affect. If you wait for even a 10% pullback, you'll miss the next 20% bull run.”

Think about it. When we were down in the 2200SPX region and everyone was freaking out about the market, it was then that we began one of the strongest rallies in history and surprised everyone. Well, almost everyone (smile).

And now, a mere 5 months later, retail investors do one not believe that the market can ever pull back again. I think the comment quoted above presented the general market perspective at this time quite well.

Isn’t it amazing how market sentiment takes us from one extreme to the other!? Yet, very few are able to remain objective enough at the extremes to identify these major turning points in the market. Rather, most of you get emotionally overwhelmed by the pervasive mass sentiment and are driven to follow the herd.

I think Alan Greenspan summed up this phenomenon quite accurately when he testified in front of the Joint Economic Committee and noted that markets are driven by “human psychology” and “waves of optimism and pessimism.”

Yet, many of you still believe (as the commenter noted above) that the Fed controls the market. So, despite this almost unanimous belief in the Fed’s omnipotence, consider how the Fed was unable to stem the tide of the negative market sentiment during the 35% market crash we experienced earlier this year notwithstanding all its attempts:

And Chairman Greenspan understood this quite well too when he explained why the market really bottomed:

“It's only when the markets are perceived to have exhausted themselves on the downside that they turn.”

You see, Chairman Greenspan understood how the stock market works. Unfortunately, most Fed followers do not. They believe in an “omnipotent Fed,” which is something even Chairman Greenspan did not believe:

“The cause of economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.”

So, when I read the comment posted above from one of my recent articles, it just makes me chuckle and view it as evidence of extreme market sentiment, suggesting that we are likely ripe for a pullback.

Yet, when I peruse the articles on Seeking Alpha, I note the extreme bearish tone which is still quite evident from the article writers. So, that does make me question the market’s ability to pull back, especially with so many expecting it. However, since their tone has not changed for this entire rally, I think we can simply discount this factor and classify their perspective as the broken clock syndrome.

Moving back to the market, consider that at the time when most everyone was selling and feeding into the fear frenzy, I tried to calm investors down in a public article I wrote on March 15, when the market was trading around 2400SPX.

You see, most people assumed that a bear market had only just begun with the drop we experienced in March. This mistaken assumption has led many to inappropriately call this the “shortest bear market of all time.” Unfortunately, they lack an understanding of the market context provided to us by a much stronger and deeper market analysis methodology. As you may know, my analysis was pointing not to the start of a bear market in 2020, but rather to the approaching completion of a correction that began in 2018, with the market presenting us with a major buying opportunity in March 2020:

“Rather, an objective view of this decline should view it as part of a larger correction within the larger bull market off the 2009 lows. Just pull up a daily chart of IWM and you will a 2-year sideways consolidation similar to what the SPX experienced during 2000-2009. And, while many cannot see this potential through the recent carnage experienced by most investors, I still think this decline is offering investors an opportunity, not too different than the opportunity we had in 2009, but at a smaller degree.

Our long-term targets are still 4000+ in the SPX. And, thus far, I have not seen anything to dispel us of this notion. From our perspective, this was the 4th wave decline I had actually expected to see last year. But, it certainly took its sweet time to show up. Yet, that does not change the fact that it is likely a 4th wave. And, since Elliott’s structures are 5-wave structures, it still leaves me expecting a 5th wave in the coming years which should take us at least to 4000, with potential to move as high as 6000. Unfortunately, I will not have a more accurate target until we see the 1st and 2nd waves of that move complete, so we can set up our Fibonacci Pinball projections. Until then, enjoy the “correction,” as we likely have lower levels to still be seen based upon quite a number of charts.”

Now, do you remember how fearful you were when you read my article on March 15th, just a few days before we struck the bottom? So, when I was trying to get you to focus on the approaching buying opportunity, I must have sounded like a raving lunatic with no grounding in reality. Right?

Moreover, members of my services also know that when we broke below 2300SPX, I posted in our chat rooms that I had instructed my wife to deploy the cash we had in 529 plans back into the market for the 3 of our 6 children who had to still go to or complete college (in addition to other purchases I was making at the time for our other portfolios). And since one can only make changes to these accounts twice a year, our members quite clearly understood what I was saying by my actions, despite many of them thinking that I have lost my mind. Even my wife gave me a very uncertain look at that moment and asked me, “Are you sure?”

But our target for a low for this correction was at 2187SPX, with the market striking a low only a few days after I published the note above within 4 points of that target.

While at the time, I was expecting us to rally to the 2650-2725SPX region from that support, the manner in which we moved up to the 2700 region caused me to revise my expectation, and I adjusted my next target for the rally to the 2900SPX region.

As we also now know, the market rallied towards our 2900SPX target before we saw a pullback towards the 2700SPX support region I had outlined in our charts. Moreover, I explained to our members that as long as the 2700SPX region held as support, my next higher-probability target was 3234SPX. The market then proceeded to rally to within 87 cents of that target, before topping out and pulling back to the 2900SPX support region I had been outlining at the time.

Now, at this point in time in June, I was uncertain as to whether that was all of the rally we would get before we would see a pullback below 2900SPX. But as the market developed its consolidation in June, I outlined to our members that the market has left the door open to head back up to the 3400SPX region before we saw a meaningful pullback.

Then, on July 19th, when the market was in the 3200SPX region, I penned the following in a public article:

“However, my perspective is based upon my analysis of market sentiment, which has had me correctly bullish since the end of March. And, that analysis is suggesting that we are going to be seeing a bout of market weakness over the coming months which will likely take us below the level we are at today. While the market may still test the all-time market highs, I think there is downside risk over the coming 3-4 months, and I expect we will see levels lower than where we reside today.”

And guess what? Now that we have struck a new all-time high, my perspective has not changed. While there is still some room left to the upside (if the market so chooses in the coming weeks), I am still of the belief we will see levels below 3200SPX in the coming two months.

With the market taking us back up towards the all-time high, I am now going to revisit my expectation for the rally I see taking shape in the coming years. Whereas before I had expected that the rally would take us to 4000+ in the SPX (which I had outlined as were down in the 2200SPX region), I am now narrowing it down to the 5000SPX-6000SPX region. Unfortunately, I will not be able to narrow it down any further until we move well into 2021. But based upon the current action, it suggests that we should strike a minimum target of 5000 by the 2023 time frame.

Yet, when I wrote that I expected the market to rally over 4000SPX when we were down in the 2200SPX region back in March, many of you told me how crazy I was for even entertaining such a ridiculous expectation. Many of you thought I was quite foolish, or much worse. It does not sound so unreasonable now, does it?

So, in conclusion, I am here to provide you with an advance warning that we are finally approaching a top to the rally we began off the March low. And no matter how fearful the news becomes or how scared you become during the next decline, keep in mind that this next bout of market weakness is going to be a buying opportunity before we begin that rally to 5000+ over the coming years.

And since nothing is certain or written in stone, please realize that I am simply providing you my perspective as to what I view as the greater-probability scenario. You can take it or leave, that is up to you. But the one thing I can say is that I am not driven by the same factors that drive many of you. Rather, I let the market structure drive my decisions. Thus far, that has served me, my family and my members quite well, as not only did we avoid the drawdown of March 2020, we even shorted it through an EEM trade (which I publicly outlined on Seeking Alpha) and then went long near the bottom of the SPX in March.

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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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