-- Published: Monday, 16 March 2020 | Print | Disqus
By Avi Gilburt
I have to tell you that the last 6 months in this market have been the most unusual of my career as a public analyst. And I tried warning many of you of the potential, yet most chose to deride my perspective, as many got suckered into the biggest fake-out I have ever seen in the market.
In my analysis published on emerging markets back in early February entitled “Sentiment Speaks: Emerging Markets Look Sick,” I warned that EEM presented us with a chart that looked truly bearish for 2020. Moreover, I had been warning members of ElliottWaveTrader.net that IWM has not confirmed the breakout we saw in the SPX for several months. It was for this reason that I was unwilling to aggressively play the long side in the equity market, at least until IWM proved otherwise.
And even when the SPX moved through the 3050 region, I was still unconvinced as I wrote back in November of 2019:
But, I am going to warn you again that the potential for a 30% draw down in the market for 2020 is still not at the level of probability wherein I can comfortably say that we have already begun that rally to 4000. And, I don’t think I will have this issue resolved until the end of the first quarter of 2020.
And, when the market continued through 3100SPX, I had to respect that price action until it broke back down below 3100. As I warned in my last public article on the SPX at the end of January:
if the market is unable to maintain that support (3100SPX) within this pullback, it will again raise the probabilities of seeing the 2200SPX region before we see the 4000 region.
For now, the market has drawn its lines in the sand, and is providing us rather clear guideposts for 2020. As I said last year, the action in the first quarter of 2020 will set the tone for the rest of the year.
And, yes, many scoffed at this perspective. Seeing 2200SPX was an impossibility to most at the time. But, after providing analysis publicly for almost a decade, I am quite used to being called crazy. While I will never be correct all the time, as I am human and quite fallible, I can at least see the risks inherent in market structures, and I do provide you the goalposts for you to be able to recognize them as well. Those adhering to my goalposts for risk management purposes will often be able to exit the market relatively unscathed.
As I have written to the members of ElliottWaveTrader.net in early 2020, the divergence between the SPX pattern and the IWM/EEM patterns caused me great consternation as we moved into 2020. But, until IWM was able to prove a more bullish intent, it was setting up similarly to the EEM bearish posture. (In fact, I was shorting EEM back in January and February of 2020, as it presented the highest probability and lowest risk short set-up). So, until IWM proved a more bullish intent, I continued to reiterate to our members that I was unwilling to place the money we made in TLT into the equity market on the long side, despite the “pressure” to do so by all those watching the SPX melt-up.
As we have now seen, this was the biggest fake-out I have ever seen in the SPX. While we saw something similar back in the early '70s, that fake out was a much smaller percentage move over the prior all-time high than what we experienced in 2020. And, this current fake-out has caused a lot of pain to those holding all the way down during this resulting melt-down. In fact, we have almost retraced the entire rally off the December 2018 low within three weeks. Simply amazing!
As I outlined in many past updates, the bottom struck back in December of 2018 was not a standard bottoming structure for a larger degree 4th wave. Therefore, until I saw more proof from IWM, I viewed the market as having begun a rally off a very weak base. And, the unprecedented 3-week carnage experienced by investors was the result of a rally off a weak base.
My friends, we have seen some absolutely incredible market action over the last year, and the carnage caused by the last 3 weeks is incalculable. While my members have been thanking me for keeping them safe from this carnage, the effects of this decline are being felt throughout the market. In fact, we are seeing many hedge funds blowing up due to the speed of this historic reversal. But, those following our work not only avoided this draw down, they banked their profits from the TLT long trade we began back in November of 2018, and some even shorted EEM with me. And, now they are sitting with an appropriate amount of cash to buy equities at sale prices.
Now, I began writing this article on Thursday afternoon and I wrote that “at this point in time, I think it is reasonable to expect a “bounce” in the coming week in the equity market.” Well, it seems the expected market action began before my publication time frame for Sunday morning. In fact, when we were trading on Thursday night in our chat room, I outlined to our members that I believe we were completing an ending diagonal bottoming structure that night, and that I think we can be up really big in the equity market on Friday, with a confirmation move through the 2470ES level that night.
As we now know, the market moved up 300 points off the low we were expecting in the futures on Thursday night. Yes, that is a 300-point move in the SPX within a 24 hour period. It took months to move that same 300 points last year. We truly live in extraordinary times.
What I find even more amusing is that I have been reading many news headlines this weekend similar to the following: “Stocks Surge As Trump Declares A National Emergency.” Now, if the absurdity of that headline does not make you chuckle and recognize the power of market sentiment as the primary driver of markets, nothing will. But, I digress.
Ultimately, I don’t think the market is done with the downside just yet. But, this is where I am getting some divergences in the charts I am following again.
I have enough waves in place to the downside to consider EEM as completed in its decline, as it has come right into the target region we set for this decline back in early February. In fact, I cashed in all my EEM shorts on Thursday, which were entered in January and February, as I outlined in my last EEM article. And when the downside pattern completed into my target on Thursday, it was time to cash in my chips.
However, both the SPX and IWM seem to need more structure to complete this correction before I can consider this decline as completed. So, the action in the coming week or two will be key to our next move in the market. Moreover, it also points to my desire to short SPX or IWM on the next downside set up rather than EEM, because of its “potential” to have bottomed.
To put it as simply as possible, as long as IWM maintains below the 129 region on a corrective rally, then I am still looking for a 5th wave lower before this decline completes.
This brings me to the point to which I alluded in the title of this article. I know many have been hurt by this decline. Moreover, many investors and pundits are pointing to this drop exceeding 20% and are now proclaiming that we are in a “bear market.”
To show how ridiculous I think this to be, in the decline we saw into the December 2018 low, which was a fraction under that 20%, I saw one analyst pat themselves on the back for holding their longs all the way down because “it was not a bear market” – it was only a decline of 19.8%. Does a 19.8% decline hurt less because it did not have a “bear market” label?
And, now that we have dropped more than 20%, is this a reason to believe we are in a bear market? Is there something special about “20%” that the market is supposed to respect?
I am sorry, folks, but markets are not that simple. I have always viewed that arbitrary label as destructive to objective analysis. There is nothing special about a 20% decline which should label a market as being in a bear market.
Rather, an objective view of this decline should view it as part of a larger correction within the larger bull market off the 2009 lows. Just pull up a daily chart of IWM and you will a 2-year sideways consolidation similar to what the SPX experienced during 2000-2009. And, while many cannot see this potential through the recent carnage experienced by most investors, I still think this decline is offering investors an opportunity, not too different than the opportunity we had in 2009, but at a smaller degree.
Our long-term targets are still 4000+ in the SPX. And, thus far, I have not seen anything to dispel us of this notion. From our perspective, this was the 4th wave decline I had actually expected to see last year. But, it certainly took its sweet time to show up. Yet, that does not change the fact that it is likely a 4th wave. And, since Elliott’s structures are 5-wave structures, it still leaves me expecting a 5th wave in the coming years which should take us at least to 4000, with potential to move as high as 6000. Unfortunately, I will not have a more accurate target until we see the 1st and 2nd waves of that move complete, so we can set up our Fibonacci Pinball projections. Until then, enjoy the “correction,” as we likely have lower levels to still be seen based upon quite a number of charts.
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.