Stock Market Is Terribly Stretched

By: Avi_Gilburt

When the market rallies after bad news hits the wires regarding the vaccine, and when the market rallies after news of lower job growth, well, that is the hallmark of a bull market.

You see, during positive sentiment trends, the market rallies on good news, and the market rallies on bad news. In effect, the news is truly meaningless, as the general market sentiment is all that matters. And, if this has not become abundantly clear to you since the lows in March, then there is no hope for you. In fact, the market rallied 1400 S&P500 points and over 63% during the worst of the Covid news, and during a full country economic shut down. How much more evidence do you need to see that sentiment is the true driver of market price?

But, now, we are seeing put/call ratios at extremes, bullish sentiment polls at extremes, and the S&P500 at record levels over its 200DMA. These are often indications that the market is due for a pullback.

However, in the past, I have outlined how these indicators should be read during bullish trends in the market. You can read that in this article.

The main point is that simply because indicators are overbought does not necessarily mean the market will pullback. Rather, when the market is in the heart of a 3rd wave of an Elliott Wave structure, indicators often become embedded in these overbought readings, and remain so during the heart of the rally phase. So, the question we have to determine is if we are in fact in the heart of that 3rd wave.

As many of you that have followed my analysis may know, I have been expecting the market to rally over 4000, and potentially as high as the 6000 region, and reiterated this expectation when we were at the lows in March. While many thought me to simply be crazy or foolish at the time, many of my 6000+ members followed my lead in buying near the March lows.

As a number of my members have noted:

“This is the best technical analysis service that I have come across in more than 25 years of trading. Avi's calls on the overall market have been nothing short of astounding. Not infrequently, his is the lone contrarian voice out there, as when the SPX fell off the cliff in March of this year to below 2200. Nearly every analyst out there was screaming sell, sell, sell. Avi was screaming buy, buy, buy. SPX then rockets up more than 1300+ points in less than 6 months, a more than 60% move in this time frame. Proof in the pudding, proof in the price. An unbelievable, contrarian, and audacious call, and not his only one, by any means.”

Yet, many did not believe me at the time due to the palpable fear that gripped the market at the time. In fact, when I told my wife to put our children’s money back into the market in their 529 plans once we break down strongly below 2400SPX, she even asked me “are you sure?”

But, now, we are facing another extreme in the market. And, we have to determine whether this is truly an extreme in sentiment which will turn us down for a pullback, or if this extreme in sentiment will “embed,” as the market heads much higher in the coming months.

As I noted last weekend, if the market provided us with a pullback last week, and then rallied strongly off that pullback to new highs, that would be a strong indication that we can potentially break out on our way to much higher levels in a more direct fashion. But, these pullbacks have been very shallow, so it clearly makes me question whether the market can continue higher in a more direct fashion without a reasonable pullback. This is where I have to rely on our Fibonacci Pinball method of applying Elliott Wave analysis.

Rather than providing all the details, I will simply outline the basics within this article.

In an ideal sense, the market really should provide us more of a pullback, as all pullbacks we have seen thus far have been much more shallow than the standards we normally see. But, if the market gaps up over 3700SPX early in the coming week and strikes at least the 3725SPX level, then we have to set our main support to the 3670-3694SPX region. As long as that support is respected on all pullbacks thereafter, then we have an initial indication the market has begun its next rally phase to the 4200/4300 region in the coming months. And, should we see that type of bullish action, then we will continually raise our support levels as the market continues to rally.

However, if the market gaps up and then breaks back below the support cited above, or gaps down early in the coming week, then we have an initial indication that a reasonable pullback may finally be seen.

I also want to take a moment to remind you that the stock market is made up of stocks. And, a significant majority of individual stocks that have been highlighted through our StockWaves service are set up to break out in a major 3rd wave move. In fact, for those of you that have been under-invested, our StockWaves analysts just put out a video outlining 30 stocks which have strong potential to begin their 3rd waves in the near term. So, I would strongly urge you to review their analysis for strong opportunities over the coming months. Most of their stock picks this year are up 70-200%, and they recently hit a 76% win rate on their earnings calls this past earnings season.

Moreover, whereas many of you may be viewing the market similar to what was seen in late 2019 and early 2020 due to how stretched the market is at this point in time, I want to explain that it is not at all the same. You see, I was able to maintain a strong skepticism regarding that rally in the SPX since many charts were clearly trading as a corrective rally, portending the large decline we saw in February and March. In fact, I even put out an article in early February outlining that I was shorting one of those charts right before the major decline.

However, at this time, the laggards are now leading this bullish charge, and they seem to have much higher targets to be seen in the coming years. In other words, we are seeing evidence supporting this bull market move across many areas of the market.

So, if we were to look at the market from a holistic perspective, whether we see a pullback or not, this market seems to be poised to rally to much higher levels in the coming years despite common disbelief. I believe many call that the “wall of worry” that bull markets often climb.

The only question is if the market has any further pullbacks to be seen in the coming weeks, or if we have truly begun the next phase to 4200/4300 already. The analysis provided above should answer that question in the coming weeks. And, if you want more detail and want to see us track this in real time, feel free to join us at ElliottWaveTrader.net.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets. He recently founded FATRADER.com, a live forum featuring some of the top fundamental analysts online today to showcase research and elevate discussion for traders & investors interested in fundamental rather than technical analysis.

© 2020 Copyright Avi Gilburt - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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