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Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part III


  • This is a presentation of my general theories of market analysis culled from my articles and presentations throughout the years.
  • Clearly, I'm a big believer in market sentiment as a primary driver for market direction.
  • I outline my views of a recession at the end of this article.
  • This idea was discussed in more depth with members of my private investing community, The Market Pinball Wizard. Learn More »
Businessman Looking Up At a Chart That Indicates A Falling U.S. Dollar

DNY59/E+ via Getty Images

The first two articles in this series can be read here:

Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part I

Sentiment Speaks: What If They Held A Recession And No One Showed Up? - Part II


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This article was written by

Avi Gilburt profile picture
Avi Gilburt, CPA., is an accountant and lawyer by training and the founder of Elliot Wave Trader, where along with his team of analysts, he specializes in identifying the major turning points and market trends so you can invest more confidently while applying appropriate risk management. Avi is the leader of the investing group The Market Pinball Wizard where they help members gain a more real-time understanding of where the market is likely heading. Features of the group include: daily S&P 500 directional analysis, intraweek metals analysis, weekly expanded analysis on the S&P 500, metals, USO, and USD, weekly live webinars where we walk you through the charts we are tracking, and community chat with direct access to Avi and his team of analysts to ask questions. Learn More.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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Comments (241)

BigMichael profile picture
I agree. And one must include those buyers who need to buy as a matter of course. For instance new families buying a house or obtain a new job at 22 years old or demographics.
So it looks like we are getting closer and closer to a recession then a rally?
Dr.DaveR profile picture
@Daniel Dorigiola I would say so. Have to respect that Avi admitted he was incorrect in his latest article.
GameBuzz profile picture
@Daniel Dorigiola Recessions only happen with rising unemployment (at least since 1950, though I imagine others were the same). We aren’t close to that yet. fred.stlouisfed.org/...
@GameBuzz that’s an interesting point. I guess that’s a huge positive that the labour force is strong
John D. Edwards CFA profile picture
And what if the recession does show up? GDP contracted in Q1 at -1.4%. Granted a lot of one time items such as decline in inventories and trade subtraction.
Avi Gilburt profile picture
@John D. Edwards CFA

Well, since the economists declared us to be in recession while the market was rocketing up 1000 points from 2200 to 3200+ in March 2020. . . do you think the market cares what economists say?

In fact, just ignore the market . . we are up 1.3% despite the news after it came out lol
@John D. Edwards CFA the market will react, but with a lag. It can defy gravity only for so long, not longer.
Avi Gilburt profile picture

But, we continued on from 2200-4800 after they declared us in recession. lol
mstrtrdr profile picture
Looks like Avi hit it out of the park again, it appears the $SPX will hold the 4400 support level. As I stated some time back, the $SPY and $QQQ have both formed inverse head and shoulder patterns on the daily chart. If the inverse H&S patterns do play out, target prices for the $SPY would be around 500, and in the $QQQ around 420. I don't think it's going to be straight up though, it bother me that the $QQQ never reached its important support level of 339.75-340 yesterday, while the $SPY did touch it's major support at 440. We could see another dip going forward as $TLT finishes it bounce and possibly heads down to the 121.75 area. If we do see another pullback in the indices, I don't believe price will undercut yesterday's lows by much, after which a strong move higher would be expected. Once again, best of luck to all.
@mstrtrdr its currently below 4400 is at 4390
Samiamaustin profile picture
@mstrtrdr - still holding my XBI. Is it possible it will reach 107 by the end of this year? You were bullish. Currently it has 4B in assets and is at a low to almost equal March 2020. Since this is an index fund, I'm accepting the fact that All significant Biotech companies are also in the toilet. Does that mean no biotech has anything good in the hopper??
Thank You, Samiamaustin
@Samiamaustin No idea on long term behavior, but I won't touch XBI until a confirmation of a higher low (potentially happening today), and a higher high (need to exceed 77.85).
Dr.DaveR profile picture
Why are comments off on your latest article? Hope you are doing well...like to read the voodoo you do.
@DaveBest Avi said he won't be able to answer due to traveling. Thus off.
mstrtrdr profile picture
With the RSI 3 in the Q's quickly approaching the 10 level, we are beginning to prepare to switch from short to long in both the Q's and $SPY. The $VIX is having trouble trading above it's initial resistance level at 23.70. We're looking for the Q's to possibly bottom in the 340 area and the $SPY around 440.10. It's important to be cautious here, thus we'll be starting with 1/3 positions in both the Q's and $SPY. There's still a chance the $VIX can move higher as the 3 period RSI is only just above 80. The next important resistance level for the $VIX is 24.62 if it does break trough 23.70. We're likely getting close to a reversal higher, Avi's 4400 area for the $SPX looks like it could hold based on our internal metrics. Best of luck to all.
@mstrtrdr , thank you, let's hope it does!
@mstrtrdr How does the old saying go? From your lips to God's ears?

LT treasuries have really been pounded with the 3 period RSI under 4 if I'm looking at things correctly.
mstrtrdr profile picture
@KS_Rider No doubt $TLT has gotten pounded into the dirt. We're looking for the low to be in the 121.75-122.50 area. Once the price reverses a move back to 132 is possible. The best possible long scenario is for a bounce off the 122.50 support, then a lower low to 121.75 with the RSI 3 forming a higher low and a positive divergence. If that occurs then a move back to 132 becomes more likely. As an aside, the RSI 3 for individual issues can go below 1 on occasion, that's why it's important to know where the solid support levels are located when looking for an oversold reversal.
The market went down 54% in 2008/09! I would bet there were low readings for bullish sentiment (which is bullish) when the market was down 25%, when it was down 35%, when it was down 45%, and when it was down 54%. So, sentiment readings can work well until they don't.
Avi Gilburt profile picture

That is why it is so important to understand not just the sentiment readings . . but it is more important where we are in the sentiment TREND!!
Z-alpha Trading System profile picture
Be cautious with the VIX®.

Just because the VIX® has dropped from a 36-handle to a 19-handle rounded on a closing basis in the last few weeks and has an etch-a-sketch chart history, it has absolutely no value when foretelling the direction of the S&P 500®. None.

We like to trade the futures on this instrument (strictly) for its daily volatility, as it's a lagging second-tier market indicator or follower, to be more specific, and this characteristic delivers opportunity.

The machines also like to exploit this characteristic of the VIX® in their low-hanging fruit subroutines.

The only indicator that we follow for foretelling the direction of the primary indices is term structure order flow.

We hope this adds value.
mstrtrdr profile picture
@Z-alpha Trading System Sorry but I disagree 100%. I previously posted that the $VIX had very strong resistance at 24.62, it topped last week at 24.78. The $VIX trades like everything else, based on support/resistance and overbought/oversold oscillators,(we prefer to use the 3 period RSI). Because the $VIX formed a positive RSI divergence at its recent low, we expect the $VIX to move higher this week. We’ll see what happens, my group has been using the $VIX as one of our main indicators when trading index futures and index ETF’s since the early 2000’s with very positive results. Best of luck to you.
GameBuzz profile picture
I like the VIX indicators used by Larry McMillan — term structure, trend (over/under its 20- and 200dmas, and if one is over/under the other) and spike peaks. They are used in conjunction with his other indicators but their signals have proven quite useful and accurate over the years.

Many different ways and methodologies are available; the trick is learning and applying them properly and consistently. Obviously what you folks do works well for you and that’s what matters.
GameBuzz profile picture
“[C]ontrarian investor David Dreman found that most (59%) of Wall Street consensus forecasts miss their targets by gaps so large as to make the results unusable…”
Not to be confused with David Draiman, lead singer of Disturbed, who is apparently silent on the matter. www.youtube.com/...
I see it highly unlikely that VIX goes to 26 from current levels, certainly not 29 again right now but next 2 weeks will tell, it’s pretty much 50:50 imho
How do you get to 5500? You have rates increasing and quantitative tightening, I am just trying to understand that
Avi Gilburt profile picture
@Daniel Dorigiola

How do you get to 4000+ when we were at 2200, and the country was starting economic lockdowns, the economists were saying we were going into recession, companies were drastically dropping their earnings estimates, we were seeing the worst of the Covid deaths rates, and we were hitting record unemployment!?!??!!?

Get my point?
@Avi Gilburt Yes thanks Avi that makes sense. The only difference is we were going into QE not QT. This is the opposite as rates are rising now not decreasing. Wouldn't this be a bit different then?
wew5dfbb profile picture
Impressive article. I think I should add EW into my decision making process. Focus on fundamental and sentiment, ignore the noise!
mstrtrdr profile picture
The pullback that both Avi and our group expected is presently in full swing. Due to the $VIX forming a large positive RSI 3 divergence after the 4/4 low means the $VIX will likely take the 3 period RSI above 90 and possibly to 95, presently at 82.56. There's strong resistance in the $VIX at 24.62 and then at 25.80. Once the RSI 3 breaks above 90, we will be looking to close our short index trades and switch to long. Possible targets in the Q's is the 346 area, and the $SPY in the 435-436 area. The $VIX is key here as it moves from grossly oversold to grossly overbought. Once the main indices reverse, we expect a higher high to ensue in both. Best of luck to all.
Samiamaustin profile picture
@mstrtrdr -- Howdy folks. Still holding XBI and bought twice when fell into the 80s. Sitting now and with great hope for 107 and Avi's YE move to 5500!
Jamie Ellis profile picture
couldn't agree more, the VIX staunchly staying in the low 20's almost no matter what happens is a great tell. There is no real fear of an imminent meltdown. 340-346 of the Q's is a great entry, at least for a trade. Not sure I can see how we eventually get to 5500 on S&P per Avi unless the 10-year never gets above 3.5%... then maybe. I think the big unknown in yields is what the reduction in the FED balance sheet does to longer dated treasuries and MBS's. My main worry is what rates do to the housing market. Unprecedented wealth has been created there. I'm a huge believer in the wealth effect and the negative feedback loop that is created when those type of asset appreciations start to crumble. VIX is telling us not to worry about that... at least for now.
@Jamie Ellis Risk happens fast
educated profile picture
What if we had a run to 5500 and no-one showed up?
c4dancer profile picture
@educated If we have a run to 5500 the entire FOMO crowd will be there.
@c4dancer they will be the ones to push it that high after all. We'll be selling that time, LOL.
c4dancer profile picture
@Fero. We'll be like those two guys hitting the sell button in Trading Places.
DividendNow profile picture
Wow! Information overload. Saved the best for last. I cannot thank you enough for the knowledge that your provide us with each article. Forever indebted.
Jim Wallingford profile picture
Morgan Stanley: "The bear market rally is over," declared U.S. Equity Strategist Michael Wilson. The economy is headed for a sharp slowdown as a "payback in demand from last year's fiscal stimulus, demand destruction from high prices, food and energy price spikes from the war that serve as a tax and inventory builds that have now caught up to demand." Note that Wilson had similar bearish views in 2021, which he later admitted were "wrong" as U.S. benchmark indexes powered to continuous record highs.
Was he suggesting that a "bull market rally" is about to start? Probably not. I wonder how much he' was paid in 2021 to be spectacularly wrong.
Bank of America: bearish citing fundamentals and the Fed
JP Morgan: Bullish based on the strength in the US economy and solid consumer balance sheets
Avi Gilburt: Bullish based on positive sentiment.
I'm going with Avi.
@Jim Wallingford even this guy seems to be lost :-)

Avi Gilburt profile picture
@Jim Wallingford

Wilson has been bearish for 1.5 years now.
Jim Wallingford profile picture
@Avi Gilburt And yet no re-examination of his analytic toolbox. He's going to be right some day. He'll be saluted as a seer extraordinaire. If he still has a job, of course.
Hey Avi, I will try hard to keep my job during the next recession ´cause my dividends won´t likely suffice to pay down my mortgage. I´m almost done with my student loan debt so that´s a positive.
mike ekim profile picture
look out below !!!
Jamie Ellis profile picture
Really really good stuff. Like you I wasted too many years of a bull market listening to analysts, watching valuations, studying various fundamentals. When I finally started to beat the market, I followed a very simply methodology to a growth and value portfolio. On the buy side, buy stocks that should be going down , but dont, ( I think Tesla) On the sell side, sell stocks that should be going up, but don't. I think it was Gartman that always says, "Buy stocks whose chart goes from the bottom left to the upper right. Sell stocks whose chart goes from the upper left to the bottom right." It is uncanny how these chart directions remain pervasive. And to your point.. stocks with the same chart pattern, whether up or down.... what do they have in common on the fundamental side? Very often, not much. You will find debt ratios, P/E's, Peg"s P/S, or any other metric all over the map.
John D. Edwards CFA profile picture
@Jamie Ellis depends a lot on the sectors. Energy had been in a bear market from 2014-2020 before awakening. Why? Too much production as evidenced by global inventories. That has changed dramatically. As a result the bulls have taken charge. For now. Have to keep an eye on ROIC, cap ex, inventories.
Market sentiment is always good when the Fed Funds rate is below 1%.Especially with a 7.5% CPI print . Fed Funds sets the bar for all other very short term lending , such as the margin accounts of big hedge funds, and the floating rate debt of many companies and real estate investors. Regardless of the macro economic back drop, if interest rates on the very short end are this low, while the money supply is expanded as it has in the past 2 years, do you expect borrowers not to take advantage and buy assets? If the Fed announced a emergency 150 basis point rate hike tomorrow, watch how quickly ' sentiment ' changes. Because its not about 'sentiment' . Its about mathematics and financing costs
Avi Gilburt profile picture

So, were you buying all the way down due to the Fed too?

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