Sentiment Speaks: Are We Ready To Drop To 4400SPX?

Elliot Wave Technical Analyst & author @ Elliott Wave Trader
January 11, 2022

With the market breaking the support I noted last week, it has sent a warning shot across the bow of the bulls. But, before I discuss my market view, I want to first address something that you are all thinking: The Fed caused the decline this past week.

Well, before you go off so certain in your theory, consider that when the Fed had the actual meeting a few weeks ago and announced that it was going to tighten, the market rallied 140 points off its low that day. Yes, the market rallied on the tightening announcement. And, when the market dropped when the Fed minutes to that same meeting came out, you want me to accept that the Fed “caused” the drop?

I have said it many times and I will say it again: While a news event can be a catalyst to a market move, the substance of that news is not going to provide you with an indication for the direction of the move. Here we have a clear instance where the market received the same message regarding the Fed’s tightening two weeks apart. One instance saw the market move up strongly by 140 points, and the other saw the market move down by 110 points.

Any person who is viewing these events objectively cannot come to a reasonable conclusion that the exact same substance within a news event “caused” both a rally and a decline two weeks apart. Rather, the reasonable and objective conclusion is not that the news event caused both a rally and a decline, but that market sentiment two weeks ago was positive and placed a positive spin on the news event, whereas the market sentiment was turning negative when the second announcement was made two weeks later.

While you can always close your eyes to the truth, that does not make it any less true. I don’t ask much from you, other than you be honest with yourself.

Geese are but Geese tho’ we may think ‘em Swans; and Truth will be Truth tho’ it sometimes prove mortifying and distasteful.” - Ben Franklin

And, if you want further examples of when the market moved exactly opposite the Fed news or plans, feel free to read this article I wrote some time ago:

Sentiment Speaks: I Fought The Fed... And I Won

As far as the market is concerned, before we broke support, I was expecting two higher highs, with the potential we can even exceed 4900SPX in the 2nd high. However, with support broken, it has become much more precarious.

And, I warned you last week about the higher risk:

But, I want to again highlight my larger degree expectation. I still think we can see a 7-10% pullback in the market in early 2022. While my preference is to begin that pullback from a bit higher region than where we are right now, I do want to note that we have approximately 100-150 points of potential upside, whereas the downside is 300-350 points. So, clearly, risks have now risen and will continue to rise as we move towards the 4900SPX region.”

While I am not quite as confident that we can get one more higher high before we begin the decline towards the 4400SPX region, I would say that as long as we hold the 4635SPX support region, then I can still look for one more rally towards the 4860-82SPX region to top us off before we turn down to the 4400SPX region. However, if we break that support, and continue down below 4600SPX, it opens the door to a direct move down to the 4400SPX region sooner rather than later.

Ultimately, the current environment has become much more precarious and I think it is a high probability that we will see 4400SPX in the coming months. The only question that I still have is if the market can strike a higher high in the 4860-4882SPX region before we begin that drop to 4400SPX. And as long as we hold 4635SPX, I will be looking for that rally to a higher high.

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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].

The average human body contains 0.2 mg of gold with the bone containing .016 ppm and the liver .0004 ppm.

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