There Is Still More Room To The Downside In The Coming Weeks

September 22, 2020

Please note:  This article was posted Sunday night on Seeking Alpha, and a earlier version was first published on Friday Sep 18 after the close on ElliottWaveTrader.net

With the market dropping two days in a row at the end of this past week, many were scratching their heads as to the reason for the decline. Yet, no clear reason was to be found.

In fact, this past week, the Fed just came out with yet another pronouncement as to how they intend to hold rates at near zero for the next three years.

Did you hear that folks? They intend to hold rates near zero for the next three years, especially as the stock market has recently struck new all-time highs. So, there is absolutely no question in my mind that the Fed is placing itself into a hole from which it will never be able to climb out. But, I will leave that topic for a different article.

In the meantime, for all of you Fed-followers, not only did they state their intentions to keep rates near zero for the next three years, but they even significantly increased their buying this past week to $68 billion in open market operations.

So, of course, with all this great news and the Fed standing behind the market with all that additional liquidity, what did the market do? Yup, you guessed it – the S&P500 dropped 140 points right after the Fed announcement. I bet you did not think that would happen since most of you still believe the Fed is all-powerful and controls our market. And this is why many have been scratching their heads at the end of last week.

While I have outlined so many times how your belief in the Fed will eventually be your undoing as an investor, many of you simply refuse to listen. You can read some of my musings regarding this issue in the following recently published article on Seeking Alpha: Sentiment Speaks: I Fought The Fed... And I Won.

I sincerely hope you begin to actually view the facts of the market as they are rather than how you believe them to be before it is too late for you to protect your financial future.

But, I digress.

While the stock market dropped over this past week, those that follow me know that I expect the market to test the 3200SPX region in the coming weeks. And, I even reiterated that at the market highs, when most were looking for an imminent attack of 4000.

But, isn’t that how it always works? When the market is at a top, most people are always looking higher. And, it is no different when we were bottoming in March, when most were still thinking the market was going to crash further, with many still looking for another crash during the entire 1400-point rally (64%) off the March lows. And, then as we were hitting those highs last month, many of those bears turned bullish, just before the market finally turned back down.

Again, this is simply how sentiment often works to get most looking the wrong way at the turns in the market. In fact, many are still scratching their heads as to how the market was able to rally 64% during the worst of the Covid news. Well, if you know where to look to better understand how the market works, you would not be scratching your head. Rather, you would be smiling at the profits in your account.

Ultimately, I see the market’s next higher target in the 4000-4250SPX region in 2021 (with further highs likely to be seen into 2022). But, I still think this pullback has more room to run before we begin the next phase of this rally in earnest. Yet, that does not mean it will happen in a straight line. That is not how markets work the great majority of the time.

In the coming week, much will depend on whether the market is able to hold Friday’s low or not. If we are able to hold Friday’s low, the market will likely rally over the coming week before we are ready to attack the 3200SPX region. However, if Friday’s low breaks, then we may be in for a more immediate test of the 3200SPX region. As it stands right now, a break of Friday’s low early in the coming week could even project below the 3200SPX region, with the 3170SPX region being a reasonable target at this time.

But, for those looking at the big picture, you can simply focus on my expectations for a test of the 3200SPX region in the coming weeks as my next expectation – whether we see a rally before then or not. How the market rallies after the expected test of the 3200SPX region will tell us if we are ready to begin the next larger degree rally phase to 4000-4250, or if we still have one more bout of weakness to be seen in the fall to test the 2900-3000 region before we begin that rally to 4000-4250. In truth, a test of the 2900/3000 region is my preferred path at this point in time.

Now, after reading my alternative considerations for the market’s path over the coming week, I sometimes see a comment I want to address. Sometimes, I see about a comment about my analysis from people that think I am telling them that the market is either going to go up or going to go down. Unfortunately, those commenters really do not understand how the market works. You see, markets are not linear environments. That means that the market does not move in a straight line, but rather can take many different paths. And, Elliott Wave analysis is the only methodology that I have ever come across that can place the overall market into a larger degree context based upon mathematical standards which orders probabilistic expectations.

So, when you engage within an financial environment that can potentially present us with endless possibilities as to how it can move at any given time, the fact that we can often narrow those endless possibilities down to several potential paths with strong targets, which we often hit to the penny, provides us with a very powerful tool within our investment tool box. As the members of ours have noted:

“What Avi never pointed out in this article is that he called (sometimes to the penny/dollar) many of the craziest twists and turns up and down in the market last week on the IWM which he has been closely tracking for 6 months. It would have taken your breath away if you had been watching. Or, you would have thought it was some kind of voodoo. Actually, it was his Fibonacci Pinball method at work.”

Our Fibonacci Pinball method of Elliott Wave analysis suggests that we are within a corrective pullback. Moreover, our methodology understands that corrective structures are the most variable forms within the 5-wave Elliott Wave structure. Therefore, they are less predictable at times. For this reason, we utilize our mathematically calculated goalposts to identify how the market can potentially move within these corrective structures.

So, going back to the current market position, the structure tells us that if Friday’s low holds, we could see a rally over the coming week before we drop again to test the 3200SPX region. However, if Friday’s low breaks early in the week, then we can potentially see that test of the 3200SPX region sooner rather than later.

In conclusion, I still expect the market to test the 3200SPX region in the coming weeks. For now, the question is about the path we take to get there. Moreover, as we move through this corrective structure in the coming months, it will provide us a buying opportunity before we begin the next rally phase to the 4000-4250SPX region into 2021.

In the meantime, our StockWaves analysts have identified a list of 300 stocks which they consider best positioned to take advantage of the rally I expect into 2021. And, in going through that list, there are quite a few that will likely lead the next rally over the coming months, with many potentially even beginning before the overall market follows along. So, I strongly suggest you have your shopping list ready to go, even though we still have many months left until Christmas.

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

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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. See: https://www.elliottwavetrader.net

Man has had the ability to separate silver from lead for as far back as 4000 B.C.

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