Do Not Feed The Bears - Until 2018

Back on July 15^th, the title to my weekend update to members of my market analysis service was “Market Will Likely Top Within The Next Three Weeks.” My initial target region for this top was between 2487-2500SPX. One of the factors I considered in my timing for this potential top was Luke Miller’s Bayesian Timing model, which was looking for a top to our wave (3) on August 9^th. And, as we know, the market topped on August 8^th at 2491SPX, and we seem to have begun the multi-month pullback/consolidation we have been expecting.

For those old enough to remember, Ranger Smith of the “Yogi Bear” cartoon used to constantly tell visitors at Jellystone Park not to feed bears. So, consider me your Ranger Smith.

You see, people can’t help themselves but be bearish. In fact, it seems we are genetically predisposed to being bearish, as the following article explains: 

Sentiment Speaks: Your Human Brain Makes You Bearish, Not The Market Or News

This is why bearishness sells. As one commenter to a perpetually bearish author recently put it:

The material might not be helpful, and even harmful. But, it gets more clicks, as people are very drawn to scary viewpoints, and many take comfort and consolation in believing that the gains that they have missed by being more cautious will be wiped out when the big crash comes. . . Scary stuff sells. It does not need to stand up to careful examination. Most people will never look carefully at the facts, and will believe what they want to believe.

Read his last two sentences again, as it rings of the sad truth in the market. 

And, Ben Franklin explained why:

“So convenient a thing is it is to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do.”

As I explained in my article above, we are predisposed to bearishness. So, we will ALWAYS find a reason to be bearish. ALWAYS. This is why bearish article writers receive constant praise despite the fact that they have been wrong for years. 

Their supporters heap praise upon them due to the fact that they have “opened their eyes to the reasons why the market will not go any higher.” Yet, amazingly, the market has continued much higher. And, the higher we go, the more they thank the bearish article writers for “saving them from the inevitable crash.” Mind you, they have missed the last 40% rally in order to protect themselves from the next 5-10% downside. 

To be brutally honest, it is much tougher to be a contrarian than it is to be a bear. To be a bear means you are simply following your nature. And, to be a bear in the stock market means that you will likely be wrong the great majority of the time. Moreover, if you follow your nature, it means that you likely have significantly under-performed the market.

Does that mean you should turn bullish right now? No, it does not. But, it does mean that you have to recognize your mistakes over the last several years, and understand why you made those mistakes. I sincerely hope you consider your perspective quite strongly before you are presented with another opportunity to take a long position in the equity market in the coming months. 

Another truth in the market is that many of you will never be able to admit that you were wrong and the market was right. To put it simply, price it truth, and you must learn to accept that. Anything that tries to explain why price is false is, by definition, pure falsehood. Yet, many of you will simply continue to list all the reasons that you are right and the market is wrong. Do you really think that fighting the market is going to help you attain your financial goals?

And, here is one last shocking fact that may make your fur stand on end: It is due to your bearishness that the market has continued higher and higher. Yes, that is the truth. Until the market, as a whole, is convinced that this bull market will never end, the market will continue to climb that wall of worry that each of you bears have helped to build these last 8 years. And, based upon my analysis, we still have several more years until the bears are placed on the extinction watch list, which will then be the time that this bull market that began in 2009 will finally come to an end. So, until that time, us contrarians (along with our investment accounts) sincerely thank you for pushing this market far beyond your expectations.

Again, I want to remind those willing to listen that 4^th wave pullback/consolidations are the most variable of the entire Elliott 5 wave structure. That means the market will continue to whipsaw traders until this 4^th wave has run its course over the next few months.

But, as long as all “bounces” we now experience remain below 2465-80SPX resistance, I view us as being in a whipsaw-type of market, ultimately making our way down to the 2300-2350SPX support region before this pullback/consolidation has completed in the coming months. 

While there is a 15-20% probability that we can still strike the 2500-2520SPX region, even in that lower probability scenario, we will still likely resolve down to the 2300-2350 before we are able to rally to 2600SPX, likely into 2018.

See charts illustrating the wave counts on the S&P 500.

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.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.