Are You an Investor Being Set up for the Slaughter?

Elliott Wave Trader  |


For many years, I have been a staunch bull. In fact, many commenters and contributors on Seeking Alpha and MarketWatch were quite vocal regarding how they thought I was crazy back in 2016 for expecting the market to go from 1800 to over 2600SPX, and potentially up through 3000. Needless to say, many of them remained bearish throughout that rally.

When many were extremely bearish in early 2016, I was pounding the table about a global melt up. When many were saying before the election that you should "sell everything if Trump gets elected," we were again pounding the table for a rally over 2600SPX "no matter who got elected."

And, now that I am taking off my bull-suit, and have sent out my bear suit to be cleaned and pressed, these former bears are claiming that they "learned their lesson" and are now strongly urging investors to buy the dip.

One of the noted indications that a major top is being struck is when formerly bearish analysts and market participants begin to suggest buying the dip. And, amazingly, analysts that I have watched be consistently bearish for at least the last three years are now providing us with reasons as to why we should be buying this dip.

Many are pointing to how strong the economy seems, and are quite certain the market has much further to go on the upside because of how strong the economy is currently. Yet, they seem to be forgetting that the market leads the economy, and not the other way around.

As I noted in my last article on the market, I saw this comment being posted by a reader and I think it presents the common bullish thinking today quite succinctly:

NFIB reports small business optimism shatters record set 35 years ago. S&P 500 companies are reporting record profit margins and the highest earnings growth in 7 years. The US economy shows no sign of recession and forecast is for continued growth. Forecasting a continued bull market is very reasonable assumption.

Now, juxtapose that with the following quote:

...financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons. Despite these failures, indeed despite repeating almost precisely those failures, economists have continued to pore over the same macroeconomic fundamentals for clues to the future. If the conventional macroeconomic approach is useless even in retrospect, if it cannot explain or understand an outcome when we know what it is, has it a prayer of doing so when the goal is assessing the future?

This quote was taken from a paper written by Professor Hernan Cortes Douglas, former Luksic Scholar at Harvard University, former Deputy Research Administrator at the World Bank, and former Senior Economist at the IMF. The paper discusses those engaged in “fundamental” analysis for predictive purposes at market turns.

For years, we have had a minimum target of 3011SPX, with an ideal target of 3225SPX. Yet, after we struck the 2940SPX region, I warned that a break down below 2880SPX from that point would likely limit the upside we could see in the market. And, that break down below 2880SPX certainly opened a trap door last week.

However, there is a much larger trap door awaiting us at lower levels, which will likely not be triggered until 2019. But, that does not mean the market is a safe place to put your money before 2019. Rather, the break down below 2880SPX should make you recognize that, for the first time in several years, the market is finally setting up to strike a major top.

After the rally we experienced earlier today, the market has retained some potential to still attain that 3011SPX target. But, based upon the structure of the market at this time, I have to be honest in telling you that I do not view trying to play the market for such “potential” as a wise decision when it comes to a risk/reward assessment. While the next two weeks will likely tell us if we can still grind up to the 3011 region as we look towards the end of 2019, it will likely be a volatile-type of rally, even if we are able to get to that target region.

Rather than taking needless risk in the overall index, If any investors are looking to play the long side of the market into the end of the year, I would strongly urge you to pick specific stocks that have much better setups to take us higher into the end of the year rather than play the index to the long side.

Most specifically, Garrett Patten, one of our lead analysts in our Stockwaves service at Elliottwavetrader.net, just posted analysis this evening for approximately 50 stocks which seem best positioned to rally higher into the end of the year. 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.

But, as far as the SPX is concerned, I am now expecting the SPX to drop down towards the 2600SPX region. Again, I think it is going to take us another week or two to know if the market may still try to stretch to that 3011SPX region before we drop down to the 2600SPX region. And, I do not think it to be worth the risk to attempt to trade aggressively for that potential in the index. Rather, I would suggest you play individual stocks for any further upside potential in the market.

But, my warning to investors is that once you see us drop down to the 2600SPX region, you will likely only have one more opportunity (on a rally back to the 2800-2880SPX region) to reduce your long positions before the major trap door opens and takes us down to the 2100SPX region in the later part of 2019.

So, while I do not think that a drop to the 2100SPX region is imminent, I want to at least begin to alert you as to what you should be looking for to know when that trap door is setting up to give us that 30% market correction we expect for 2019.

See chart illustrating the wave count on the S&P 500.

Avi Gilburt is a widely followed Elliott Wave technical analyst and founder of ElliottWaveTrader.net, a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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