This Market Stinks - But Not Why You May Think

July 20, 2020
Elliot Wave Technical Analyst & author @ Elliott Wave Trader

I have been on vacation this last week, and when I had some downtime and the family was asleep, one of the activities in which I engaged was to peruse the articles written over the last week on the market. (Yea, I know... call me a nerd if you like). And, during my reading, I came to the realization that there is certainly a lot of manure being flung around of late.

Ultimately, I am just shocked that there are so many perspectives being presented as support for a bearish or bullish position that make it so clear that the author is not burdened by the facts.

Let’s take Covid for example. So many are so certain that Covid is what elicited selling in the market. Yet, the worst news about Covid was seen during the massive 50% rally in the market. In fact, the highest death rates were being reported daily during that rally. Moreover, when the infection rate started spiking over the last several weeks, did the stock market not rally during that same time? So, let’s be intellectually honest about the how Covid has affected the stock market.

Yet, pointing out these facts does not support the common narrative, so we will simply have to ignore the facts in order to support what most “believe” about the market.

Then there are those who truly believe that the Fed is the cause for this rally, whereas Covid would have certainly tanked us. I addressed this fallacy in one of my recent articles, so I won’t bother addressing it again. (I Fought The Fed...And I Won )

And, as we saw news about how the Fed has been pulling back their liquidity over the last few weeks, the market has continued higher. So, again, the facts do not support most people’s “belief” about the Fed driving this rally.

Moreover, there are those who still think the ‘economy’ and the market are one and the same. And, since the economy is not doing well in their eyes, then the stock market must be wrong. Are you amongst this often-wrong group? Just about every week, we see at least one article like this one: “The Real Economy Has A Message For Stocks - And It's Not Bullish.” Yet, the market really has not cared. And, if you do not understand why, I suggest you read this article I wrote two weeks ago addressing this issue:  Stop Believing The 'Economy' Is The Same As The Stock Market

Now, we are starting to hear about how the election will affect the market. This is another beauty. It was only four years ago when everyone was so certain that a Trump win would crash the market. Yet, I was pounding the table in November of 2016 that the market was projecting to 2600+ (on the way to 3000) “no matter who wins the election.”

While there are questions as to whether it was actually said by Einstein, I think we can all recognize that doing the same thing over and over but expecting a different result can be viewed as evidence of insanity. And, by this standard, do you want to be considered insane?

Lastly, one of the perspectives I love the most are from those that are trying to glean what the stock market is going to do based upon gold. Remember that old saying that “gold is a hedge for equity market weakness?” Well, forget it. It is yet another fallacy which is not supported by the facts of history. I mean, just look at gold in 2020 as one example. And, in past articles, I have outlined many more times frames throughout history which blow this fallacy out of the water.

Yet, if you believe this nonsense about gold, you need to follow Yoda:

While there are certainly a lot of perspectives being presented about the market, it really is amazing how the authors of those perspectives are not burdened by any of the actual facts. Have you not yet come to the realization that these are the wrong perspectives to take about the market if you want to be on the correct side of the market trend?

So, allow me to present to you my perspective and I can assure you that it is not based upon alternative facts, nor do I ignore the actual facts about the market. 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, even though I am seeing the set up for that weakness over the coming months, I am still quite certain many will point to the most popular reason of the day to suggest it “caused” that market weakness. For now, who knows what that news will be!? Maybe it will be another wave of Covid. Maybe it will be a political issue. Maybe it will be an international issue. It is impossible to tell you what it will be. But, I can assure you the media and pundits will certainly point to negative news during a market decline and present it as the “certain” cause of the decline.

So, while I cannot predict what the news will be, and after being correctly bullish these last few months, I can tell you that I see a strong probability for market weakness over the coming months. But, if the set up for market weakness is developing, does the underlying news really matter?

Unfortunately, you are so used to seeing market action attributed to the news of the day that it is the only thing that makes sense to you. You are led to believe that the news of the day comes out and the market responds in kind. To be honest, the great majority of the time the market makes its move, and the news of the day is fit to the market action retrospectively. Good luck trying to invest on that basis.

But, what does it mean when the market provides us a strong indication for a market decline without knowing the news in advance? Does it not highlight how superficial the news of the day really is in the grand scheme of events? In fact, it is quite a superficial perspective on the market, yet, this is what is taken as market analysis today. Sad, really.

Two weeks ago, I outlined to the members of ElliottWaveTrader that I expected a rally that was going to at least test the 3188SPX resistance. Later that week, the market struck a high of 3184SPX and proceeded to pullback. Yes, I was off by a whole 4 points.

I was then pounding the table that the 3115SPX level was the most important level of support to guide us as to whether the market has indeed topped at 3233SPX, or if we would attempt a run at the all-time high before we see the larger degree bout of weakness I am still expecting. The market then proceeded to pullback and strike a low of 3115.70. Since then, we have made a marginally higher high over 3233SPX, but we still do not look done to the upside.

So, in the coming week, as the market presents today, I expect that the next minimum target of 3260SPX will be struck as long as the market does not break below 3115SPX. And, should we strike that 3260SPX minimum next target, then support will be moved up during the week. As long as support continues to hold, I will continue to raise support to our next Fibonacci Pinball structure levels until we reach the prior all-time highs.

Alternatively, a sustained break of the 3115SPX level in the coming week would have me looking down to the 2900SPX region sooner rather than later. (If you want to understand why alternative plans are important, ask yourself what army general ever goes into battle without a contingency plan.)

The next week or two will likely provide us with more whipsaw, even if we do hit our next higher target region. So, I suggest you strap yourself in as it will likely continue to be a wild ride. But, be patient. If you did not take advantage of the buying opportunity at the 2200SPX region I was expecting last year, we will likely be presented with another buying opportunity over the coming months before we begin our rally into 2021 over the 4000 region.

Consider how crazy you thought I was when I was suggesting we were going to rally over 4000 when we were down in the 2200SPX region. Does not sound so crazy anymore (smile)!

If you want to read a bit more about why our methodology is often so accurate, feel free to read these prior articles explaining our methodology:

https://www.elliottwavetrader.net/marketupdate/Elliott-Wave-Series-Part-1-201808184848063.html

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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.

According to the Talmud you should keep one-third of your assets each in land, business interests, and gold.

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