To “b” Or Not To “b?”

While the analysts on ElliottWaveTrader seem pretty much in alignment regarding the b-wave count, many of our members have presented various arguments to suggest otherwise.  So, I wanted to again lay out why I still view this as a b-wave rally, and how the market would force my hand otherwise. 

Again, I have outlined these reasons many times before, but I want to outline it again in light of the discussions I have been seeing of late, some of which have gotten quite heated.

Now, before I begin, I want to reiterate that we want to encourage collegial and respectful discussions regarding analysis.  However, there has been a bit too much emotion in some of the arguments presented.  In fact, some of the bullish posts may even be viewed as mocking any other perspectives, with some even posting perspectives akin to certainty.   So, I want everyone to consider the tone of your posts before you present your positions, as we often see higher levels of emotion being displayed at major market inflection points.  And, this time is certainly no different.

Let’s start with the bottoming structure into the December low.  A 4th wave should have an a-b-c structure which is commensurate in size and time relative to the 3rd wave rally from which it is correcting, not to mention when taking into account the theory of alternation.  For those that do not know, the theory of alternation suggests that if the 2nd wave was small, then the 4th wave would be large.  It would suggest that if the 2nd wave was a sharp correction to the downside, then the 4th wave would be much more drawn out.  It would also suggest that if the 2nd wave was relatively shallow, the 4th wave would likely be more deep.

Taking into account the theory of alternation, it would suggest that this 4th wave would likely be a drawn out event which would take us down to at least the .382 retracement of the 3rd wave based upon how wave 2 was short, sharp and shallow.

Moreover, the 3rd wave rally of which we are speaking started in the middle of 2010 and lasted the better part of 8 years.  However, the drop we experienced in the last quarter of 2018 lasted approximately 2 months and retraced just slightly more than .236 of the 3rd wave rally.  Based upon the standards we follow, there is no way I can reasonably consider this all of the 4th wave which is correcting the prior 8 year 3rd wave.   It almost sounds ridiculous to suggest.   Rather, this is most often how the a-wave of a 4th wave reacts.  A-waves are often initial sharp declines which target the .236 retracement of the 3rd wave. 

Clearly, the theory of alternation would suggest that all of the 4th wave has not yet completed.  Otherwise, we would have to assume that after an 8 year 3rd wave, the 4th wave lasted 2 months and corrected to just beyond .236 of that 3rd wave.  While it is certainly possible, it is clearly well outside of the standards and norms we follow in the market.

Also, for those that are troubled with the fact that this b-wave can make a higher all-time high, I have addressed this concern many times in the past as well.  You see, when the market fails to strike its ideal target in the prior bull rally, we oftentimes see the b-wave of the ensuing correction strike that target.  In our case, I wanted to see the top to the market strike at least the 3011 level.  And, if the market follows through on its current alternative count presented in yellow on my charts, then that is exactly where we have a 5-wave [c] wave structure pointing towards, which complete the b-wave right into the prior bull market target from which we came short in 2018.  Moreover, I have been warning of this potential even well before we began this b-wave rally, so none of this potential should come as a surprise to anyone that has read our analysis carefully over the last six months.

Alternatively, if you assume that the 3rd wave actually topped at the end of January of 2018, we have further complications to address.  Again, it would suggest that we only retraced .236 of the 3rd wave, which is well short of what we would normally see, especially based upon the theory of alternation. 

Furthermore, even within this alternative structure, we would normally see an a-b-c structure for this 4th wave, with the c-wave being a 5-wave structure.  The drop during the last two months of 2018 would have then been the c-wave of that 4th wave structure.   However, that drop was clearly a 3-wave structure, which is not what we would see in a standard c-wave.  So, not only would we have to adopt a count that came quite short of its target, we would have to adopt one that was also a much more rare w-x-y pattern.

Therefore, in order to assume that all of wave 4 has completed, we would be left with adopting what is normally considered to be a much lower probability structure, no matter where you view wave 3 as having topped.  While it is certainly possible this is what occurred, based upon the other evidence we have been seeing in the underlying stocks within the market, it would suggest it is not a possibility we should be ready to adopt as our primary just yet – even though the rally has seemed quite strong.  (Also, keep in mind that corrective rallies are often much stronger looking and more violent than standard impulsive structures).

When speaking of the underlying stocks within the market, most stocks do not suggest that wave 4 has yet ended.  In fact, I was chatting with Garrett this evening, and he noted to me:

“I have been flipping through tons of charts the past 2-3 weeks and the one conclusion that I am still very confident in is that the Dec low did not complete Primary wave 4, and this is wave 1 of primary 5th.”

So, it would seem that the great majority of the underlying stocks which make up with the stock market do not suggest that wave 4 has yet completed.  Therefore, if the underlying stocks within the market do not have appropriate 4th wave patterns in place, I am not sure how we can assume that the indices as a whole could have completed their 4th waves.  Remember, the indices are simply an amalgamation of the underlying stocks within the market. 

Another factor we consider is that, based upon Bayesian analysis of the underlying options structure within the market, the probabilities that this is a b-wave has been steadily rising and are now calculated at 77%.  While the b-wave can still extend as high as the 3011-40SPX region, this is a very high percentage from a Bayesian perspective.

Finally, after speaking with Garrett, he explained to me that most world market structures also have not likely completed their respective corrections.  While this is clearly not dispositive when dealing with the US markets, it certainly is something to consider.

At the end of the day, it is “possible” that this rally is not a b-wave rally.  However, the weight of evidence suggests that it is probable that this is a b-wave rally. And, I have again outlined the reasons why.

In addition to the foregoing discussion, all these charts of which I am speaking are showing clear signs of divergences which suggest that we are likely topping rather than starting the heart of a 3rd wave higher. 

Yet, the only reasonable way for me to even consider a count that we have begun the 5th wave to 3500-4000 without any further sizeable pullbacks would cause me to view the rally into the end of February as wave i of that 5th wave, with the wave ii being the pullback into the March lows.  This means I would have to adopt a count which suggests that wave ii did not even retrace .236 of wave i. 

And, in order to maintain the bullish perspective we see some of our members adopting, as you can see from my analysis, it would require us to add lower probability counts on top of lower probability counts, which really does not give me confidence at all in relying on such potentials.  And, when we consider how many posts we see that we should not expect any real pullbacks from now on as we are “certainly” heading over 3100SPX in a more direct manner, I would say that bullish sentiment may be affecting more than a handful of people at this time.

The only way for me to even consider such an unusual continuation to this bull market (based upon all the counter-evidence discussed above) would suggest that we continue up towards the 3040SPX region (since wave 1 of iii often targets the .618 extension of waves i and ii which is in the 3040 region), see a corrective pullback as a wave 2 of iii, and then rally over the top of the high we strike over the 3000 region to suggest that wave 3 of iii was taking hold.  Should this occur, I would likely have to adopt this as my primary count, and be looking for the market to rally to 3500+ over the coming several years. 

Again, while that is certainly “possible,” I have a hard time viewing it as probable.  To consider one non-standard, lower probability outcome is tough enough.   But, to continue adding one on top of the other would suggest that the probabilities are not favorable for such a pattern to play out. 

And, since all we can do is approach the market from a perspective of probabilities, I have no choice but to maintain the b-wave perspective until the market proves otherwise.  This leaves me still expecting a sizeable decline into later this year.  But, as I have said quite often, I am always running calculations to see where I can possibly be wrong in my analysis.  You can be certain I will never assume anything about the market unless it is clearly supported by analysis and calculations.  And, should the market provide me with evidence that suggests this is not a b-wave (other than what I have highlighted above), I will certainly notify our members.  But, until such time, the probabilities, as I have outlined them above, are still pointing to this being a b-wave rally, and I have to always side with the greater probabilities as I see them. 

Avi Gilburt is founder of ElliottWaveTrader.net.