Greed is at Extreme Levels
Being a steadfast contrarian if absolutely critical if you’re involved in any capacity in the stock market.
The market swings from fear to greed and if you have a good handle on where we are in the pendulum swing (cycles again!), and commit to staying on the opposite side of the market from the herd, you’ll win.
Here’s the latest on market sentiment from CNN Money. This is free information you can link to and access when you’re expecting a major market turn. At the moment, the indicators are clearly in the greed end of the spectrum. As a result, we’re expecting an imminent downturn. It’s going to be a big one; you can tell that by the size of the rally we’re at the top of. I’m expecting more an a snapback of equal size, as I’ve advocated in previous blog posts.
The put/call ratio is heavily weighted to the call side (almost 40% more calls than puts) – more positively skewed than at any time in the past two years , so the trading herd is expecting a lot more upside.
We’re at extremes; the market is expecting a turn, the herd is not. Time to get ready for a devastating drop in the US indices which should finally stoke the underlying fear I’ve been looking for. At the bottom of this fourth wave, the headlines will all be predicting the end of the stock market.
And then, in the usual market fashion, we’ll turn back up and complete the fifth and final wave. If you think mood is dark now, just wait.
Elliott Wave Basics
Here is a page dedicated to a relatively basic description of the Elliott Wave Principle. You’ll also find a link to the book by Bob Prechter and A. J. Frost.
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US Market Snapshot (based on end-of-week wave structure)
Here's the latest daily chart of ES (emini futures)
Above is the daily chart of ES (click to enlarge, as with any of my charts).
We have a B wave that's now risen over 62% of the of the height of the previous set of waves down from the all-time high. The "greed factor" is at an extreme. It's time to look for a turn down in a continuation of the fourth wave.
The top of this corrective wave up from Dec. 26 appears to have traced out an ending diagonal. The final wave though is not quite complete, so we may see another small up/down pattern, before a turn down.
In any event, the next major move is to the downside. Ending diagonals are ending patterns. They warn of an imminent trend change. We seems to have them now in futures but not necessarily in cash.
The turn at the end of this pattern is dramatic. The first wave in the opposite direction targets the previous fourth wave. In other words, it retraces the entire ending diagonal and then some.
There is also the question of timing. The waves down from the all-time high to the Dec. 26 low took 12 weeks exactly. The B wave up from that low, that we're at the top of now (about a 70% retrace so far), will have taken 8 weeks as of February 20. This is an appropriate length of time for a retrace of this height to end.
Monday is a holiday in the US markets, of course, so the earliest we'll see a resolution is Tuesday. The last two turns have been on Wednesdays, so we'll see if that pattern continues.
There are other asset classes (currencies, oil, silver, and gold) that also suggest a turn is imminent.
Summary: My preference is for a dramatic drop in a C wave to a new low that should begin this week. The culmination of this drop should mark the bottom of large fourth wave in progress since January 29, 2018 - over a full year of Hell. It may be a dramatic drop that lasts multiple months, and will target the previous fourth wave area somewhere under 2100.
Once we've completed the fourth wave down, we'll have a long climb to a final new high in a fifth wave.
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