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Recent price action
Back in 2015, we set our targets for the stock market to rally to 2537-2611SPX. While my initial expectation was that this region would trigger a 15-20% correction, that may not be the case.
Anecdotal and other sentiment indications
I know many have been scratching their heads over the stock market for the last year and a half. Nothing seems to phase it. While we have had dozens of reasons paraded before investors as to why this market will not go higher, the market does not seem to be listening to these reports. Nor does it care about local or geopolitical news either.
In fact, I have read financial writers who claim that “one simply cannot fully comprehend market movements without a thorough understanding of concurrent political outcomes.” In all honesty, anyone attempting to “comprehend market movements” through the prism of politics has been looking the wrong way for years. So, I think it would be more accurate to say “one simply cannot fully comprehend market movements through understanding of concurrent political outcomes.”
I ask you all to put on your “honesty glasses” and ask yourself if ANY negative geopolitical factors have had an affect on the stock market for the last year and a half? And, we have certainly seen our share of major negative geopolitical and local news. Have we not? Yet, the stock market simply does not care.
You see, many believe that the financial world reacts to news or fundamentals based upon Newtonian laws of science. Most believe in the exogenous causation theory of markets, yet history does not support their perspective. Time and again we see how markets move exactly opposite to what we would “logically” believe would be the normal reaction the market should have to a terrorist attack or to North Korea firing a rocket over Japan. Yet, we still maintain the same beliefs despite being shown quite often how wrong those beliefs to be.
In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker’s study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.
In 2008, another study was conducted, in which they reviewed more than 90,000 news items relevant to hundreds of stocks over a two-year period. They concluded that large movements in the stocks were NOT linked to any news items:
“Most such jumps weren’t directly associated with any news at all, and most news items didn’t cause any jumps.”
Bernard Baruch, an exceptionally successful American financier and stock market speculator who lived from 1870– 1965, identified the following long ago:
All economic movements, by their very nature, are motivated by crowd psychology. Without due recognition of crowd-thinking … our theories of economics leave much to be desired. … It has always seemed to me that the periodic madness which afflicts mankind must reflect some deeply rooted trait in human nature — a trait akin to the force that motivates the migration of birds or the rush of lemmings to the sea … It is a force wholly impalpable … yet, knowledge of it is necessary to right judgments on passing events.
During his tenure as chairman of the Federal Reserve, Alan Greenspan testified many times before various committees of Congress. In front of the Joint Economic Committee, Green- span noted that markets are driven by “human psychology” and “waves of optimism and pessimism.” Ultimately, as Greenspan correctly recognized, it is social mood and sentiment that moves markets.
So, until this positive market sentiment runs its course, the market will continue to shrug off all the negative news. But, I can assure you that as soon as the market turns down, all those who have been claiming that the market is affected by geopolitics or other forms of exogenous factors will be shaking their fingers at you while claiming “I told you so.” But, hopefully you won’t lose sight of how ineffective their perspectives about their exogenous factors have been during this last 700+ point rally in the S&P500. Unfortunately, many will still fall into their trap.
Price pattern sentiment indications and upcoming expectations
Several years ago, we set our target for the S&P500 between 2537-2611. While it may not seem like such a stretch of the imagination right now, consider that the market was in the 1800 region at the time we set this target, and most market participants were awaiting the certain market crash just around the corner.
However, I expected that this region would mark the top to the market for all 5 waves off the February 2016 lows. Rather, it seems that it will only mark the top to the 3rd wave off the February 2015 lows. Therefore, the extensions we have been experiencing since the September 25th low struck in the S&P500 is likely only part of a more extended 3rd wave than I expected several years ago.
Ultimately, this means that the market will likely strike the top to this 3rd wave by the end of 2017, and then provide us with a multi-month pullback in a 4th wave, which will likely set up the next rally starting in 2018 that can propel us beyond the 2800SPX before all five waves off the February 2016 lows complete. And, the lower support for that expectation resides around 2300SPX.
Therefore, my expectation is that a pullback seen in early 2018 should hold support between the 2300-2400SPX region, and set us up for a rally taking us over 2800SPX before we see a 15-20% correction in our stock market. We will hone in on the levels we expect that pullback to complete once the pullback begins and the market provides us more details and clues as to where the next rally phase may begin.
Currently, support in the SPX resides at 2511SPX, with a break down below 2496SPX suggesting that the 4th wave has begun. And, should the market continue to rise into year end, we will continue to raise those support levels.
The Market Pinball Wizard
As many of you may know, I am the founder of Elliottwavetrader, a well-known trading room approaching its 6th anniversary. Over the years we’ve heard from readers who are looking for a lighter, more focused version of our trading room. So, we have now opened a service within the SA Marketplace offerings entitled “The Market Pinball Wizard.”
This service provides my directional bias on the S&P500 on a daily basis, along with several updates a week on the metals complex. I will also be providing my analysis on the USD and USO on the weekends, in addition to a metals and SPX update. This service is designed for readers who want a streamlined approach to staying a step ahead of the market, based upon our insights that have been honed over the years.
Since we opened our doors two months ago, we have become the 10th largest service out of the 147 Marketplace offerings. And, as some of our initial subscribers have noted:
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For those looking for accurate insight into various markets, including VIX/VXX, FOREX, Dow Jones, etc., I also HIGHLY suggest you read Michael Golembesky’s work on Seeking Alpha.
Lastly, it seems that Seeking Alpha has changed the way they tag articles. So, while my articles used to be sent out as an email to those that follow the metals complex, they are now only being sent out to those that have chosen to “follow” me. So, if you would like notification as to when my articles are published, please hit the button at the top to “follow” me. Thank you.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.