Sentiment Speaks: Navigating What Could Turn Into A Treacherous Market
After writing public articles for the last 13 years, this is the first year in which I strongly believe that a major long-term market top can be struck. And, as I get more and more concerned, it seems more and more investors and analysts are getting entrenched in their bullish perspectives. But, I guess that is what we need to see in order for a major market top to be struck.
In very simple terms, markets top when participants are too bullish, and it bottoms when participants are too bearish. And, I believe we are approaching a time when people have turned exceptionally bullish for many reasons.
Now, over the years, I have provided many prognostications. And, while I have not always been right, many have noted that we are right a heck of a lot more than we are wrong. As this reader wrote just this past week:
“I have followed Avi for quite a while here in Seeking Alpha, he has been without a doubt the most accurate shot caller.”
To be honest, while I am quite proud of our track record of high percentage correct market calls, I am equally proud of being able to outline to you when we are wrong well before it occurs. You see, this is what we call our “alternative wave count.” If the market reacts in a manner in which is not in alignment with our primary expectation, we are alerted rather quickly that we have to abandon our initial expectation and move into our alternative one.
So, while our analysis does provide a high percentage of correct market calls, it also tells us rather quickly when it will be wrong. Having an alternative perspective allows us to change positioning so as to avoid a large draw-down. This adds a layer of risk management which is sorely lacking in most analysis or investment plans which you will read.
As I have noted many times before, this is no different than if an army general were to draw up his primary battle plans, and, at the same time, also draws up a contingency plan in the event that his initial battle plans do not work in his favor. It is simply the manner in which the general prepares for battle. We prepare for market battle in the same manner.
As Ryan Wilday (lead analyst of Crypto-Waves) noted this past week in a response he provided to one of our subscribers:
“The 'predictions' can be wrong, the tactics will not be. Too many of you rely on the prediction over sound tactics.”
In other words, what he is saying is that risk management must be part of every investment plan. And, most investors lack this important aspect to their long term plans. So, while many have dismissed my view presented in recent articles of a potential long-term bear market approaching, I can bet that very few of them have an action plan as to how to handle their investment account should it in fact occur.
So, this week, I am going to outline the short-term “plan” we are working with so that you can get a bit of practice as to how to apply it in real time.
Immediate resistance is in the 5057SPX region. As long as the market respects that resistance I am looking for a pullback over the coming weeks. Upper support is in the 4980-4997SPX region, which if broken, will likely suggest that the pullback has begun, and I believe it will point us down to the 4802-4862SPX region.
However, if the market sees a sustained break out through the 5057SPX region, then it points us to a more direct move towards the next resistance region in the 5155SPX region. Now, here is the kicker. If we see that more direct move towards that region before a bigger pullback is seen, then the market could complete a blow-off top on that rally and actually form the long-term top I am expecting a lot sooner than I currently expect.
In the bigger picture, I have outlined in prior articles the signals for which I will be closely watching to suggest that a long-term bear market is about to take hold. I personally have my plans in place already should we see those indications. I would strongly suggest that each and every investor develop their own plan which suits their investment style, time horizon, and risk profile.
“By failing to prepare, you are preparing to fail.” – Ben Franklin
Avi Gilburt is founder of ElliottWaveTrader.net, a live forum featuring our team of analysts covering a range of markets. Sign up for a Free 15-Day Trial (no credit card required).
On the date of publication, Avi Gilburt did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.