A Review Of The Last Nine Months

Many view “black swans” as unavoidable times within financial markets wherein the markets can move in larger degrees without any forewarning.  I would take issue with that.  I have not yet seen a time when the market did not offer a warning before a major move happened.  While the extensions the market strikes may be beyond standards, at least the set up is often in place before such larger moves occur.  So, while one may view a “black swan” as a surprise event from a news perspective, I have never seen a “black swan” from a market structure perspective.

To take this one step further, there have even been studies that have shown that if someone knew the news ahead of time, one would still not be able to trade the market based upon such news.

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news.  Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

Allow me to show you examples of such moves that we have seen over the last 9 months. 

While the decline in the fall of 2018 took many by surprise, we were warning our members that the break of the 2880SPX level opened the door to the 20-30% decline we expected for a 4th wave pullback.  Again, many in the market were taken by surprise by the pullback to the point that I saw one analyst who was bearish for all of 2016-2017 suggest that once the market pulled back 4-5% off those highs, it was time for him to turn bullish.   And then many were again taken by surprise by the decline in December, while we were fully expecting it.

First, I want to show you the set up I outlined to our members for the bigger drop we experienced in December of 2018 (which many of us shorted).  Again, for those of you that were following my analysis at the time, you know I expected to see a 20-30% decline once we broke 2880SPX, with an ideal target of 2200SPX.  However, in early December, I revised my immediate downside bottoming target from 2200 to 2250-2335 – which is the green a-wave primary target you see on this chart:

As we now know, the market bottomed when the futures struck a low of 2316.  As you can also see from the attached chart above, we expected the market to rally from that bottoming target back to at least the 2800 region, with the overhead target box providing an ideal target of 2865-3011.  And, please take note, this target box was put on the chart not only before the market bottomed, but even before the market declined to that bottoming target.

I know of no other analysis methodology that can provide that type of predictive value. Nor have I seen any other analysis that was able to identify the action we have seen since October of 2018 as well as our larger degree charting. 

Now, to be completely honest and transparent, this was not a “perfect” analysis.  Rather, I had expected to see a pullback on the way up to the 2800+ region.  In fact, based upon our analysis, we would see that type of pullback 8 times out of 10 with such a rally.  But, this time, we did not get that pullback.  So, like I said, we were not absolutely perfect in this analysis.  And, because I tried to get too cute with my trading, I was not able to garner all the points this rally had to offer.

Also, please take note that none of this was supported by any narrative of what China would do, or what Trump would do, or what the Fed would do, etc.  This analysis was purely based upon the sentiment patterns we identify within the market.  Eerily accurate (but not 100% perfect) for someone who does not care about the news, no?  It almost makes you believe the substance of any news really does not matter. (smile)

Now, let’s move on to what we did with most of the cash we raised back in the early fall of 2018. (Keep in mind, I left some of the cash I raised out of the TLT trade to be able to trade the downside and upside in the market during the drop to 2316 and back up again). 

As you can see in this chart of TLT, once we broke down into our “bottoming target,” I noted to our members that I was going long TLT.  Moreover, I also outlined the target for the rally I expected by the blue box in the upper right-hand corner of the chart.  I was specifically looking for a minimum target of 131 from the 113 region, with an ideal target of 135/136. 

Again, please take note that I placed the upside target on the chart before we even bottomed.  Not only did the news not matter to me, but I was suggesting a long position in bonds while the Fed was still raising rates.  So, again, eerily accurate even though there was no narrative of “news” or Fed action which supported my expectation for the rally to our target.  Does it not make you wonder whether any of it really matters? (smile)

For those that have followed my work over the last months, even though I was not able to garner all the points the market had to offer on the upside, we certainly were not headstrong long and buying the dips as some were during a 20% market decline.  Rather, I had raised cash near the highs, placed most of the cash I raised in TLT, and have earned over 17% since that time.  Clearly, we have outperformed buy and hold investors.  And, that does not even take into account the trades that we had set up for both long and short side trading during the last 9 months. 

Now, over the last several months, the market was tracing out a set up which would provide us with a potential “crash-type” of decline.  As the market was tracing out the downside structure, there were several opportunities we outlined for members to enter short positions over the 2880SPX region.  Again, please note that the market was providing us with a “set-up” for a major decline.  And, we also provided very specific regions that the market had to break to see the follow through for that set up. 

As I noted during the progression of my analysis, the market opened a “trap door” when it again broke down below the 2870/80SPX region. The last support region the market had to break to trigger the major decline was the 1.00 downside extension region in the 2720-35SPX region.  As I noted at the time, we needed to strongly break that support early in the first week of June or else the market may be warning that something else was in play (which was the alternative count I had pointing to 2900+).  And, in this type of downside set up, the market should have sliced through the 1.00 extension on its way to at least the 1.236 extension further below.

However, when the market held the 1.00 extension region, and then came back over the .618 extension in the 2800SPX region, which I outlined as our upper pivot region for the Fibonacci Pinball downside set up, it was an early indication that the downside pattern in the impulsive “crash-like” set up was not likely going to follow through anymore.  And, many of you were able to stop out with profits at that point in time.

While some of you may view this as a “flaw” in the Elliott Wave analysis, I view it as one of the major strengths in our development of Elliott Wave analysis through our Fibonacci Pinball methodology.  It provides an objective framework for an impulsive market structure, which also provides early warning when an impulsive structure can invalidate and suggest only a corrective structure has taken shape.  That is where the move through the .618 extension plays an important and “pivotal” role in the Fibonacci Pinball structure.

So, while the market did not provide us with the downside follow through for which the set up suggested could play out, that does not mean that I would automatically turn bullish of the stock market.  Rather, when the majority of the underlying stocks in the stock market are not suggesting the heart of a 3rd wave higher is about to take shape, I have a hard time being immediately uber-bullish even though a downside set up invalidated. 

At this point in time, I intend to allow the market to develop within the 2800-3000 region and how the structure develops over the coming weeks will tell us a lot of what the market intends to do through the summer months, and even potentially into the end of the year and beyond.

But, please do not assume I am an uber-bear when it comes to the stock market.  Ultimately, as I have reiterated MANY times – especially when the market was breaking down in December and I warned members not to get too bearish –  I see this bull market still taking us much higher in the coming years.  In fact, I still see strong potential for the market to take us to the 3800-4100 region by 2022/23.  But, that does not mean I see a strong case for it to rally directly to that region from here.  Many of the underlying stocks we track which drive this market suggest much lower levels will be seen as we look towards the last half of 2019.  And, I have a hard time seeing the market breaking out in a bullish 3rd wave while so many of those major stocks head lower. 

So, of course, I will continue to follow the market structure as we progress into July.  And, should the market tell me that I am wrong, I will immediately let you know.  In fact, even before the market breaks out, I am quite sure we will see the set up developing, as we have so many times in the past.  My perspective is that I care more about your money than I do about my ego.  And, those that have been with us for many years know very well that we do not hold fast to a position which the market clearly proves is wrong – I adjust rather quickly.  Moreover, there is still plenty of upside to garner from 3000 to 4100.  However, I still think we can see lower levels from which to develop long positions before that rally to 3800-4100.

But, at this point in time, I simply have to go with what the underlying analysis tells me.  While I may be wrong in my assessment at this time, those that have been with us for many years know that the great majority of the time we go against the “feelings” of those in the market turn out to often be the correct call.  Yet, again, should the market prove otherwise, I will never be holding fast to a wrong perspective.

Avi Gilburt is founder of ElliottWaveTrader.net.