Nothing Can Stop This Market - Except?
Kitco Commentaries | Opinions, Ideas and Markets Talk
Featuring views and opinions written by market professionals, not staff journalists.
The SPX has continued its rally towards the ideal 2410SPX region this pastweek that we presented to you a month ago. And, it seems we still have a fewsquiggles to the upside left before this pattern is completed, and thentested.
Those with a short bias in this market have not fared very well. At each andevery twist and turn, the market has proved its bullish intent, and continuesto confirm our expectations that our long-term target of 2537-2611SPX will bemet, if not even possibly exceed by next year.
In fact, I have warned for quite some time that we will begin to see formerbears turning quite bullish, and we have seen this occur over the last severalmonths. While I still do not believe we have reached the euphoric levels neededto mark a significant top, many former bears are coming over to the darkside.
In fact, I read a comment to an article this past week which sums up mostpeople's feelings about the stock market:
"At this point, someone could drop a nuke and the markets would barelyflinch."
But, I have addressed this issue many times before. You see, when the marketsentiment remains in an uptrend, whatever news is thrown at the market meansnothing, until the market completes its pattern. That is exactly what isoccurring right now, and explains the frustration represented in the quoteabove. And, for those of us who really understand how the market moves, thismakes all the sense in the world. For us, there have been no surprises.
Up until recently, I have not been able to provide guidance with regard tospecific timing in the market. Rather, our analysis is based upon price. So,while we have identified price turns and targets quite effectively andaccurately through the years, I have not found any timing cycles which haveprovided more than 50% accuracy. Well, until now.
Other than traders of metals, some of the most emotional and angrytraders/investors I have seen in the "blog-o-sphere" are those who solelyfollow timing cycles. While there are many different cycles people follow, mostseem to confound those who attempt to trade them.
While there may be certain segments of time that seem to work, they oftenleave people scratching their heads when the market changes cycles withoutwarning. Well, markets don't warn when they change their timing, do they? And,in fact, I have seen cycles analysts blow up many of their followers'accounts.
Now, as I went through my own search of analysis methodologies early in myinvestment career, I always attempted to maintain an open mind and heavilycontemplated any methodology which seemed to have a following. And, clearly,timing cycles have a strong following. But, intellectual honesty in the marketis what will maintain your account on the correct side of the market, andanything that is unable to pass the test of intellectual honesty should beviewed quite skeptically.
Along those lines, when I contemplated these timing cycles, I had an openquestion which no timing cycles analyst was ever able to answer:
"If markets are non-linear in nature, how can a finite, linear timingwindow accurately prognosticate the market more than 50% of the time?"
You see, when you assume price and time are linear, you're overlooking theclear nonlinear nature of price movement. Traditional cycle analysis assumeslinear and angular movement of price through time. But, if you understand thatsentiment drives asset prices and is non-linear in nature, then does it makesense that the timing of sentiment is linear?
Do the ebbs and flows of human emotion track neatly like the hands of aclock? Of course not. Humans' fears and greed are not set to sixty second andsixty minute increments any more so than rainstorms.
So, there must be a tool available that can see around linear corners oftime. There must be a tool that quantifies human subjectivity as crisply as itanalyzes data. I would argue such a tool has existed for over 100 years and ispresently used in all areas of science and forecasting. That tool is Bayesiananalysis and its specialty is decision making with nonlinear data in anuncertain world.
So how does the application of Bayesian analysis improve investment timingdecisions? Bayesian is, at its best, working with nonlinear data and "learning"the underlying process of the variable of interest.
In the context of this discussion, Bayesian is learning the timing cycles ofasset price movement by studying information found in option prices. Optionscontain many valuable pieces of information; however, the most valuable are theembedded sentiments and beliefs of price and time expectations of marketparticipants. Thus, the Bayesian timing approach probabilistically quantifiesturning points in time for security prices by using conditional informationfound in option prices. The end result is a powerful tool to help answer thequestion "When should I take a security position?" Combining this methodologywith one that is able to track the sentiment affects upon price leads to potent1-2 punch for traders.
To this end, for quite some time, I have been watching the work of LukeMiller. I met him when he became a member of my Trading Room at
Luke has been an active trader for over twenty years and got into swingtrading to finance his undergraduate and masters degrees in industrial &systems engineering and a PhD in financial engineering. In 2003, Luke earnedthe Gilbreth Memorial Fellowship (top PhD student in the nation) and has sincepublished over one dozen peer reviewed journal articles and a book in his areaof expertise - investment timing decisions utilizing a novel technique hedeveloped called Bayesian Learning Option Pricing (BLOP).
Luke's Bayesian timing research has been presented all over the world andmost recently won Best Presentation Award at the 18th International Conferenceon Business & Finance in Paris in 2016. Luke is presently a collegeprofessor and investment consultant to high net worth clients; using hisBayesian timing system to earn 30% per annum since 2007 by trading ETFs inindices, energy, and metals.
Luke will begin writing some articles with me about his Bayesian timingmethodology, so I wanted to offer an introduction to his work this week. Be onthe lookout for further articles explaining Luke's groundbreaking work ontiming, which complements the sentiment analysis we provide.
Since 2015, the market has been providing us with an almost textbook patternto follow, and has led us quite well to maintaining on the proper side of themarket through its twists and turns.
Of late, when we called for a market pullback/consolidation on March 1, the market has complied quite well, and provided us with what I have primarily counted as an a-wave to a wave (iv), which struck its target at the .236 retracement of wave (III).
Moreover, when we called for 2330SPX to hold a month ago and set up a rally to 2410SPX, that too followed the textbook patterns we have been following.
But, now the market has a decision to make. You see, my primary expectation is for the market to now provide us a c-wave drop in the coming weeks to complete a larger degree wave (iv). The resistance for this potential is the 2410-2425SPX region. And, as long as we remain below that resistance, then I am looking for a drop to at least the 2330SPX region, but, more preferably down to the 2285SPX region to complete wave (iv). An impulsive break down below 2381SPX is a strong signal that the c-wave is in progress.
However, if the market is able to break out through resistance before providing us our c-wave down, then it suggests it will be taking the more direct route to the 2500SPX region to complete wave (V) of (3) a lot sooner than I had expected.
And, as I have noted so many times in my trading room at Elliottwavetrader.net, please do not forget that this is a bull market, and it must be respected as such. For this reason, I am not suggesting anyone aggressively trade for a c-wave down. Rather, any c-wave down should be used as an opportunity to add to your long positions.
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.