Sentiment Speaks: Are We Ready For A Bear Market?


There's almost no good news floating through the airwaves. The Fed is raising rates and starting quantitative tightening. Inflation is out of control. Gas prices are hitting American households hard. Former tech leaders have been taking it on the chin.

There seems to be no good news in the market today. This seems to have everyone now expecting a protracted bear market. And, to be honest, it will be the first bear market in history for which almost all market participants are now prepared. Everyone is hunkering down and preparing for the absolute worst.

But, is that how the market works?

Well, not usually. When everyone maintains the exact same expectation, that's often when the market turns on everyone.

As far as the specifics of the current market action, I want to outline how I have been viewing the market over the last few weeks, and then outline how I have been trading the market and why.

First, my expectation last month was that the market had bottomed on Feb. 24 and that a rally to 5500SPX had potentially begun. But, due to the amorphous nature of the bottom struck in February, I needed to see a 5-wave rally off that low over the 4650SPX level to make that a high probability.

Unfortunately, the market did not provide us with that higher high over 4650, and, as I outlined in my last public article, the market opened the door to the 4000 region when it rallied back up to the 4513 region, and then broke back down below 4385SPX. This told me that I was wrong in my initial assessment that the 4th wave we have been tracking had completed. But, I certainly had very objective standards to follow to know when I was wrong in my initial assessment.

But, now the question revolves around how did I advise my subscribers to trade this, and why?

Well, once the market rallied up to the 4637SPX region and came within 10 points of my target, I suggested to the subscribers of ElliottWaveTrader that day to lighten up on their long positions. Allow me to explain why, as I explained it to them at the time.

As I mentioned earlier, I need to see 5 waves complete to the upside before I could view us having started that rally to 5500SPX with a high probability. Reaching 4637SPX was only the top of the 3rd wave off the Feb. 24low. That means that even in the most bullish case scenario, the market would pullback in a 4th wave, and then rally to the 4700-4750SPX region for a 5th wave off the Feb. 24low. But, here's the kicker. After 5-waves complete, it would only complete a larger first wave within the 5-wave rally to 5500SPX. Thereafter, a 2nd wave retracement would likely have taken us back down to the 4300SPX region before we broke out to new all-time highs, and be on our way to 5500.

Moreover, there was no guarantee that the market would have provided us with that higher high in a 5th wave. And, if it did not, then it would suggest the 3-wave rally was only corrective, and the market would then head down to the 4000SPX region before this 4th wave would complete. Therefore, there was really no reasonable reason to be heavily long in the 4600SPX region. Hence, I strongly urged our members to raise cash or hedge their portfolios.

In fact, this is what I said in one of the updates I sent to the entire membership as we were hitting those highs at the end of March:

“We have now traveled 500 points off the February 24th low. We have gained 10% off the lows. And, the market has been on an absolute tear.

My ideal target for this segment of the rally has been 4650SPX. We have come within spitting distance of that. Can we still extend as high as 4690SPX in this move up? Yes. But, one has to recognize where the risk/reward resides in the market.

You see, my expectation now turns towards greater downside potential than upside potential. My general target for downside in the bullish scenario is the 4460SPX region, which is the 1.00 extension of waves i-ii, and the general target for a 4th wave pullback.

Again, until we actually see a corrective pullback that holds that support, and then get a 5th wave higher high, I cannot be certain that wave [4] has completed. The main reason is that we did not get a standard 5-wave Fibonacci Pinball structure for the c-wave down, which has left me with questions. . . .

But, please again recognize that if we get down there and break down, you won't have the opportunity you now have here near the highs of this rally. The opportunity I speak of is that some of you may want to reduce risk by either raising cash or hedging your positions.

The next few weeks to few months the bulls and bears are going to battle it out. Even in the most bullish case scenario I have on the 60 minute chart, we will likely see buying opportunities well below where we now reside. And, again, that is in the best case bullish scenario, as even wave 2 has potential for a very deep drop.

So, the reason I am writing this to you now is that we are still near the highs and you can make determinations now as to your own risk profile. The market is about to go to battle . . maybe you want to choose to remain outside the battle zone and simply view it as a spectator.”

I have said many times before that there's no method that provides market context as well as our Fibonacci Pinball method of Elliott Wave analysis. And, as you can understand from the reasoning of my analysis above – which I provided in real time to the members of ElliottWaveTrader - even if you are wrong in your primary expectation, it still allows you to know where to reduce risk or hedge your portfolio.

Now, it did not end there. When the market broke down to the 4370/80SPX region, I outlined my expectation for a rally. However, I was again uncertain whether that rally would provide us with a higher high over 4637SPX to give us that 5th wave higher. So, I provided our members with a DANGER ZONE box (yes, that is what I called it in order to highlight my point). I also explained that should the market strike that DANGER ZONE, then you have one last chance to raise cash or hedge your portfolio. This DANGER ZONE was the 4511-75SPX region I highlighted in my last public article to you:

"Resistance is now between 4511SPX-4575SPX. And a drop from that resistance to below 4385SPX opens the door to a test of the 4000SPX region."

And, when the market struck that level, I was on vacation at the time over the Passover holiday, so I ran back to my hotel room and sent out an update to our entire membership again warning that “one may want to consider lightening up on their long positions for risk management purposes until the market provides us with a high over 4637SPX. . . it’s a good time to lighten your risk or hedge your positions.”

Clearly, this was the last chance you had to lighten up or protect your positions before the market began this drop in earnest. And, our members have been quite pleased with our warnings:

“The context of the market that you provide is remarkable.”

“Avi your guidance has been a lifesaver (and a wallet-saver) during these turbulent times.”

Now, admittedly, my primary expectation was not that we would drop to the 4000SPX region before we broke down below 4385SPX. But the market context provided to me by our Fibonacci Pinball method of Elliott Wave analysis outlined two high risk regions at which it was advisable to lighten up on the long positions so that we can let the bulls and bears fight it out.

At this point in time, it does look likely that we will see a test of the 4000SPX region. But I think we can see a bounce back up toward the 4250-4300SPX region before this occurs. And, as long as we hold that as resistance, then I think we see one more drop to complete this correction that has taken us all of 2022 thus far.

Avi Gilburt is founder of ElliottWaveTrader.net.