High Fives For Da Bears

Well, after calling for market tops weekly for the last three years while the market rallied from 1800 to 2940 (that is a 64% gain), the bears are now high-fiving themselves for “catching the top.”

Yes, many of them certainly caught the top with their weekly top calls after having missed the last 64% rally. But who’s counting?

In fact, I saw reports of how emergency rooms nationwide have experienced a rise in shoulder injuries due to all the high-fives and self-back-patting we are now seeing throughout the analyst world.

But may I remind you about my children again?

This reminds me of when my children were 3 years old, and we were stopped at a traffic light. They look at the traffic light, and say “now,” as they try to time the light changing back to green. And, if it does not change, they again say “now.” And, this goes on for maybe another 10 to 15 times, depending on how long the light takes to change. Yet, when the light finally changes at one of their “now’s,” they proudly assume that they caught that timing ever so perfectly.

This sure sounds like most of the pundits we read and listen to, does it not? So, yes, when I read these pundits providing us reason after reason as to why the market will top, I view it as akin to my 3-year-old child saying “now.” Eventually, the market will turn just like the traffic light will eventually turn and they will react just as proudly as my 3-year-old, assuming they caught that timing ever so perfectly. But, clearly there is no prescience to their abilities to identify the cause of that turn, just like my 3-year-old.

You see, just like my 3-year-old does not comprehend that there is something internal to the traffic light that causes the light to change, the pundits do not comprehend that there is something internal to the stock market that will eventually make it turn down. This is clearly evidenced by the fact that none of the exogenous events to which they have been pointing for years have been able to cause the turn to the stock market every time they say “now.” My 3-year-old and the market pundit simply do not comprehend the true driver of that which they are attempting to time.

So, the big question on everyone’s mind is whether we have finally topped and have begun the 30% correction I expect.

My members of ElliottWaveTrader would tell you that for the entire month before we topped, I had been urging them to consider their positioning in the market in light of the increased risks that I saw as we approached our long-term targets. And, in the weekend report posted on the 6th of October, I wrote:

But, this is where trying to trade for the last segment of an ending diagonal gets very tricky. Even though the ideal target is 3011-3040SPX for this ending diagonal, sometimes they do not reach their ultimate conclusion. Moreover, sometimes they even top where one would expect only wave (III) to top . . .. In other words, when dealing with ending diagonals, you have to understand you are in a treacherous market environment which provides significant volatility in both directions.

To add to the treacherous nature of the environment, when an ending diagonal completes, the reversal is quite strong. In fact, we usually see the market drop quite quickly back to the point of origin of the ending diagonal. In our case, that is the 2500-2600 SPX region, and that would likely only be the a-wave of wave 4, as shown on the daily chart.

So, as we move into a much more likely ending diagonal scenario, please recognize that risks have increased significantly on the long side.

And those who have read my analysis over the last several weeks would know that the breakdown below 2880SPX was a strong warning to the long side of the market. So, how many of you heeded that warning?

Yet can the market still head to 3000+?

The answer is, it most certainly "can" do so.

There are actually two ways it can reach the 3000 region, but I would not consider either to be of high probability just yet.

The first path would be a rally up towards the 2865SPX region, a corrective pullback, and then a rally through the 2865SPX level. While that could give us an initial indication that the market wants to complete a 5th wave in an ending diagonal to the 3011-3050SPX region, it still has a lot to prove in order to do so. And, even if it does, it will continue to do so in a very choppy manner and will likely result in a strong reversal, taking us back down towards the 2600SPX quite rapidly once the ending diagonal completes.

The other manner in which it may choose to strike that 3011 region is through a b-wave rally, after the a-wave completes down in the 2600SPX region. You see, when an impulsive structure fails to attain its ideal target, the ensuing b-wave of the correction can see a higher high, and will sometimes target the level that the primary impulsive structure failed to strike. In our case, that is the 3011 region.

At the end of the day, this still means that we have likely entered a very treacherous market, and I would expect wild swings to be the nature of the market in the foreseeable future. Moreover, it will likely take many months before the market is ready to develop the pattern that will point it down to its ultimate target in the 2100/2200SPX region. And until such time, it will continue to whipsaw bulls and bears alike. Understanding the nature of the market at this time will be quite valuable to those who are attempting to preserve capital.

Therefore, should I see a structure that presents a low-risk setup to the 3000 region in the coming week or two, I will alert subscribers. Otherwise, I do not see an appropriate long entry until we drop down towards the 2600SPX region.

Lastly, as I mentioned last time, Garrett Patten, one of our lead analysts at Elliottwavetrader, posted analysis for approximately 50 stocks that seem best positioned to rally higher into the end of the year. So, for anyone still interested in any remaining upside in the market, I view that as a much safer and higher-probability manner in which you can attempt to play the market on the long side into the end of the year.