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U.S. Equities - Upside Continuation Unlikely

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by: Brian Fletcher
Brian Fletcher
Gold & precious metals, hedge fund manager, research analyst, long/short equity
Summary

We do not view the new highs made in the S&P 500 as a breakout and run scenario.

Under all circumstance, we expect lower levels to come in all US indices.

We will be watching the next pullback to see if 2,855 can get taken out. If not, it will change our primary view of the overall Elliott Wave count.

There is no doubt this has been a banner year for the bulls. After a v-shaped move up off the late 2018 low, at every opportunity the bears have had to roll markets lower, bulls have handled bears like papier-mache dolls. Still, at each new high, I continue to hear “breakout, breakout, breakout!!!” as though the new high in and of itself is the basis for markets ripping to much higher levels. To be clear, a move to new highs can mean several things, and while quite obviously it’s broken to new highs, the only question is, will it continue upward and onward without so much as looking back, or will it retrace to some lower level below that of the breakout region, and if so, to what level will it pull back to?

In this article, I will address two potentials. For many, just holding positions and riding the larger machinations is a reasonable approach. For others, like us, we are constantly on the lookout for confident opportunities to go long or short. To be clear, we are not perma-bears, but rather opportunists stalking opportunities to go both long and short within the various potential larger EW patterns. For perma-bulls, don’t ignore the fact that equity markets are not a straight line trajectory to the upside.

Now, for those following our analysis, you would know that we have been expecting a much larger move to the downside for an Elliott Wave primary degree wave 4 off the March 2009 low. We still expect this, and we view the several new slight highs as simply extensions of the primary degree wave 3 taking the form of an ending diagonal.

So, let us first start with our primary count for the S&P 500. Again, our view is that the SPX is topping in primary degree wave 3 now, and will initial a primary degree wave 4 shortly that will take the form of an ABC structure do the downside, and will most likely bottom into Q3 2020. See the S&P 500 Weekly Chart below.

S&P 500 Weekly Chart

SPX Weekly Chart

Our alternative count is the Harmonic Elliott Wave count. While I won’t get into the nuances of this count, suffice to say it’s adhered nicely to all the fib levels on the rise up. The very practical and primary distinction between this EW count and our primary count would be a break of the SPX 2,855 level. In this count, we would see a retrace of the move off the 2,855 level, followed by continuation to higher as per the S&P 500 Daily Chart below. In this count, note that if the SPX continues up to the 3,250 region, then the next move down is to 1,800, still quite sizeable.

S&P 500 Daily Chart

spx daily

S&P 500 Weekly Harmonic Elliott Wave Count

spx weekly

So, to keep things simple, we are looking for a pullback from current levels up to as high as the 3,106 region. The defining factor as to which count is active will be whether it can then break the 2,855 level. Break 2,855, then our primary shown above is our expectation. IF it can hold a retrace fib level that reverses to the upside above 2,855, then we will adopt the Harmonic Elliott Wave count as our primary count. In both instances, we’re looking for a pullback, but in the case of the Harmonic Elliott Wave count, said pullback will get bought to higher levels in the SPX.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.