-- Published: Thursday, 30 May 2019 | Print | Disqus
By: Avi Gilburt
I have now been writing for Seeking Alpha for approximately 6 years. And, I can honestly say that not much has changed in the readership base. Yes, that means you.
You see, the same folks that have commented on my articles that Elliott Wave analysis is akin to voodoo are still making the exact same comments they made years ago.
Do you think that the accuracy of our underlying analysis would open their eyes? Nope. They have one way of thinking, and have not changed in years. Moreover, when some of these commenters offer an opinion about a specific methodology, do you think they have the in-depth knowledge or understanding of that methodology in order to provide a reasonable and informed opinion? Again – nope!
When someone comments negatively about Elliott Wave analysis, my first challenge to them is to enquire about how deep their knowledge of Elliott Wave runs. And, the significant amount of time they offer no answer, which means it is likely as deep as a cereal bowl (and I am still probably giving them too much credit). For this reason, I was asked by the editors at Seeking Alpha to write the following six-part series about market sentiment and Elliott Wave analysis to pull back the curtain to explain our methodology:
This leads me to a question for all of you who choose to comment on articles: Are you here to learn and expand your thinking and understanding of markets, or are you here simply for confirmation bias?
While my analysis will not always be correct, as that would simply be an impossible level to achieve, our members and followers have clearly recognized that we are right a heck of a lot more than we are wrong. That is why within the last seven years we have almost 5000 total members in our services (with over 500 money manager clients), and over 39,000 followers on Seeking Alpha alone. Moreover, our Fibonacci Pinball methodology, which I personally developed years ago, provides for a much more objective framework around the traditional Elliott Wave analysis, which allows us to, rather quickly, identify when the market is not moving within our primary expectation and appropriately adjust. In fact, our members have told us it is the most powerful tool they have used for correct market direction analysis. Yet, one has to understand that the market is non-linear, and understand how to apply a non-linear methodology within market analysis.
This brings me to my final point. Back in 2015, we were quite bullish, until the market reached the 2100 region. We then turned somewhat bearish, expecting the market to drop down to the 1750-1800 region, to be followed by what we termed a “global melt-up” to complete the 3rd wave off the 2009 lows. Our minimum target was in the 2600SPX region for that rally from 1800, and we pounded the table during the fall of 2016 that it did not matter who was elected, as our target and expectation remained the same.
As we now know, the market followed through quite well on our expectations. And, while many of you will come up with “reasons” for what occurred, we did not care about reasons in the same way we did not care about the election results.
If you understand what Alan Greenspan and Bernard Baruch knew quite well, you would understand how simple the market really is at its core. 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, Greenspan noted that markets are driven by “human psychology” and “waves of optimism and pessimism.”
To further expound upon Mr. Greenspan’s understanding of the markets, allow me to present a few more of his quotes:
"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.
I always believed in animal spirits. It's not their existence that is new. It's the fact that they are not random events, but actually replicate in-bred qualities of human nature which create those animal spirits.
It's only when the markets are perceived to have exhausted themselves on the downside that they turn. Trying to prevent them from going down just merely prolongs the agony."
To the same end, Mr. Bernard Baruch said:
"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."
Are you starting to see the main point? Markets have a mind of their own that is not driven by exogenous events. While I know many of you will never be able to accept this proposition since it flies in the face of everything you have learned all your life, I will tell you that it explains all the anomalies you come across about why markets decline on good news or rally on bad news.
So, as Yoda wisely said, “you have to unlearn what you have learned.”
And, yes, I went through this same process before I was able to develop a better understanding of markets.
In fact, I have often cited many studies that prove this point. As one example, in a paper entitled “Large Financial Crashes,” published in 1997 in Physica A., a publication of the European Physical Society, the authors, within their conclusions, present a nice summation for the overall herding phenomena within financial markets:
"Stock markets are fascinating structures with analogies to what is arguably the most complex dynamical system found in natural sciences, i.e., the human mind. Instead of the usual interpretation of the Efficient Market Hypothesis in which traders extract and incorporate consciously (by their action) all information contained in market prices, we propose that the market as a whole can exhibit an “emergent” behavior not shared by any of its constituents. In other words, we have in mind the process of the emergence of intelligent behavior at a macroscopic scale that individuals at the microscopic scales have no idea of. This process has been discussed in biology for instance in the animal populations such as ant colonies or in connection with the emergence of consciousness."
Yet, when I warned back in the fall of 2018 that the market was setting up for a 20-30% correction, many again scoffed. Well, the market pulled back exactly 20%. While it did not yet reach the “ideal” target (2200) we presented BEFORE the market even began to drop, in the middle of December of 2018, we adjusted our bottoming target to the 2250-2335 region, with the futures bottoming at 2316 near year end. And, again, many still scoff since we did not hit the 2200 ideal target.
So, when I wrote a recent article regarding the set-up we now have to drop strongly in the coming weeks, many other analysts and commenters are again claiming I am just too bearish. Well, they may be right.
You see, our analysis deals in probabilities. My expectations are based upon how I see the market playing out from a higher probability standpoint. But, inherent in that is the potential for the market to divert from my primary expectations. And, the most amazing thing is that our objective analysis methodology – Fibonacci Pinball – will be able to pick up on this from the market action alone, rather than some exogenous event or story. So, when you post comments to me about China, or North Korea, or whatever else you deem important, I will say to you that none of these were important when the market rallied over 40% from the 2016 lows and they will not be important today.
As for me, there is no greater truth in the stock market than price. Price tells me whether I need to be bullish or bearish. Price tells me whether I need to reduce my exposure or raise my exposure. And, we do so based upon probabilistic analysis.
That is why I personally raised cash when the market broke my signal point of 2880SPX back in the fall of 2018, and moved most of that money into TLT, which has rallied over 13% since that time, whereas the market still sits below the level at which I initially raised cash. And, at this time, I am not ready to put that money back in the market, as I still see TLT heading higher. And, as they say, a bird in the hand is worth more than two in the bush.
So, as the market sets up for the decline we foresee in the coming weeks, the structure of the expected drop in price in the market will tell us when we should turn more bullish. And, yes, that remains my bigger expectation. Even though I expect to see red in the next few weeks, that does not make me a bear. Rather, I see this as simply another regression in the stock market which will likely set up the final rally into the 2022/23 time frame before we complete the bull market begun in 2009.
So, before you continue to read any more of my analysis in the future, or before you even comment, ask yourself: Am I reading to gain a clearer understanding of the market, or am I reading for confirmation bias? I only offer the former, and have no interest in the latter.
Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.
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-- Published: Thursday, 30 May 2019 | E-Mail | Print | Source: GoldSeek.com
