Opinion: Euphoria is extending the US stock market's gains – MarketWatch

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The small-cap Russell 2000 ETF continued its rally off the mid-November low, gaining about 7% since that time. The large-cap S&P 500 broke through resistance of 2,611 points last week while trying to catch up to the IWM, and has now risen almost 4% off its November lows.

In fact, the S&P 500 SPX, -0.37% has now extended itself beyond my 2015 expectations for wave (3) of v of 3. So, while we set our expectations in 2015 for a rally from the 1,800 region to an ideal target between 2,537-2,611, this is where a certain amount of euphoria takes the stock market beyond extensions we normally see in these types of 3rd waves. In fact, the SPX has now gone beyond about 2% of the target we expected to strike several years ago.

But we may still not have completed the current upside move that began mid-November. I have said since mid-November that I don’t think we can have a top in place until the Russell 2000 ETF IWM, -1.00% confirms that it completed its 5th wave up off the mid-November lows. And this is why I was looking to the long side in the IWM in mid-November.

As I noted near the lows during Friday’s pullback, the drop was likely a bit of an emotional overreaction, which spiked and reversed just below our support for a wave iv in the current uptrend of the IWM. Moreover, as I also noted, the next time we break below the low we struck on Friday will be the initial signal of the larger degree wave (4) pullback I am still expecting. Yet, I still think we need to complete this 5th wave before that occurs.

While I do not often track the Nasdaq, I have to note that it too presents itself in the same fashion. As I posted this past week, the rally we saw on Thursday was expected to be a corrective b-wave rally in the E-Mini Nasdaq 100 NQZ7, -0.52% which had me expecting a c-wave down to complete its 4th wave off its September lows. And Friday provided us with our expected c-wave down. So in the E-Mini Nasdaq 100 NQZ7, -0.52% it would take a break below Friday’s low to begin to suggest we will not strike the blue box target I have now placed on the attached chart between 6,481 (as a minimum target) and 6,592.

So, as long as all the SPX, IWM and NQ all remain over Friday’s low, I am looking for the completion of a 5th wave higher before we can finally begin to look for that larger-degree 4th wave pullback. For this reason, I noted on Friday not to get too bearish just yet, as bull markets love to extend themselves, especially since we have longer-term targets for the SPX that take us to 3,000-plus, as you have seen from my monthly chart on the SPX, which has been pointing there for years.

And, as I constantly try to remind our members throughout the week, we are dealing with a bull market that likely still has a number of years to run. For this reason, I have advised most of our members, who are more long-term focused, to avoid aggressively shorting the market, at least until the market proves that the larger-degree pullback is in progress. And, thus far, we have not been given any indication yet that it has begun. Rather, I would need to see us break below the mid-November lows to strongly suggest that we are in the heart of wave (4), which will likely be another buying opportunity for a continued rally in 2018.

In fact, if we are able to complete this immediate rally within the coming week or two, it would suggest that 2018 may be setting up in the same manner that we saw for 2016. That would mean we would see the next phase of the “global melt-up” we correctly called for at the start of 2016, where emerging markets, U.S. equity indices and the metals complex all rally together. While it is still a bit premature to see that as a high probability just yet, I am seeing the initial signs of that setup again.

See charts illustrating the wave counts on the IWM, NQ and S&P 500.

The writer has no holdings in any securities mentioned.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net, a live trading room featuring intraday market analysis on U.S. indices, stocks, precious metals, energy, forex, and more, along with an interactive member-analyst forum and detailed library of Elliott Wave education.