Let's face it, bull markets are boring. At least, I think they
are. I miss having a market like we had in 2008 -- but then, I love
volatility. I think there's nothing more exciting than running both
sides of the trade and picking up 50 ES points on a round-trip in
one day. You just can't do that type of thing in a bull market.
For the past few weeks, I've been trying to balance how to discuss
this market at different time frames, so as not to be too premature
in discussing the bearish potential and scare people off from
playing the long side. The bottom line is that the bearish
potential is something I'm
not too far down the road -- but as I
, I'm still not seeing any real signals in the price action about
which to become bearish just yet. Nevertheless, I would be remiss
not to highlight the fact that I believe we're in the fifth and
final wave of the rally -- so today, we'll look at that in a bit
While I don't see anything to be
bearish about, the "good" news (for those of us who love
volatility) is that I think the bears' turn to shine is coming
soon. Back in the beginning of February, I published my preferred
long-term wave count, with a target of 1750 (+/-)
(INDEXSP:.INX) -- and we're finally almost there. I'm still
inclined to believe there's another wave up to come here, but I'm
also inclined to believe that we're going to see a big correction
(or much worse) follow that wave.
One of the fascinating things about Elliott Wave Theory is the
psychological component. Each wave has its own character, and
sometimes we can use sentiment to help locate where we are in a
wave structure. For example, second waves (in bull markets) tend to
be the moment at which everyone is most fearful. Third waves are
the "point of recognition," where the majority finally gets on
board with the right side of the trade. Fifth waves tend to be
times of either "irrational exuberance" or utter complacency -- or
both. I believe we're in a fifth wave now.
Accordingly, I believe we should prepare for some sort of major
news event approaching on the horizon -- quite possibly as soon as
August -- which will start to shift sentiment away from the
Invincible Fed Money Machine to "Hmm, maybe things aren't as solid
as we think." Ultimately, much further down the road, sentiment
will come full circle to "Arrgh, get me out of this market at any
I think we're getting close to beginning that bear cycle.
The long-term chart shows my preferred wave count, and while I
can't rule out the more bullish count, I'm still inclined to favor
the black (
) wave rally, which will reverse (ideally sometime in August), and
ultimately head back to retest the 2009 lows. Of course, that
sounds impossible right now... about as impossible as SPX 1700 did,
back in 2009.
Click to enlarge
On the hourly chart, we can see that the structure still appears to
need another wave up, to yet another new all-time-high.
Click to enlarge
The five-minute chart is my best guess on the near-term wave
structure. The recent action is a bit messy, which is usually
suggestive of a fourth wave correction.
Click to enlarge
In conclusion, I don't think it's time to get uber-bearish just
yet, as I believe the structure is still pointing to higher prices.
But I think we're getting close, and traders with an eye toward the
intermediate and long term may want to consider beginning to
position for a fundamental change in the market's character. Trade