Sentiment Speaks: Are We Still Waiting For The Crash?

For those that have read me over the last year, you know that I was quite bullish for all of 2021. Yet, as we were approaching the end of 2021, I began to warn that we have to prepare for what will likely be “the largest pullback since we bottomed in March of 2020.” And, boy did we ever get that pullback.

Now, to be honest, my minimum target for that pullback was the 4400SPX region, and I really did not expect, at the time, that we would break the 4000SPX region. Yet, it is quite clear that the market had other intentions.

But, as I repeated many times to the members of ElliottWaveTrader, I do not think the bull market is done yet, even though we saw a much deeper than expected pullback. (If you are questioning my views of what is considered a “bull market,” feel free to read this article).

As we were bottoming in June and those bearishly inclined were calling for a continued crash to 3200 and even below, I put out a target for our members based upon my expectations, which you can see in this chart:

As you can see, we bottomed in our target box on the downside, and are now in our target zone on the upside.

When looking at the chart above, you may be asking yourself what the “raise cash” notations were? Well, when the market bottomed in the 4000/4100 support region at the end of February, I had initially thought that the entire correction had completed. And, when the market rallied up to the 4600SPX region, I initially advised my members to raise cash.

You see, the market had provided us with a 3-wave rally to that point. And, if a bottom had truly been struck, then we would have seen a 4^th wave pullback, followed by a higher high to complete 5-waves up off the low, and telling us that we would get a pullback thereafter, and then head to new all-time highs.

However, after that 3^rd wave completed, I explained that there was no guarantee that the market would provide us with those 4^th and 5^th waves. Therefore, there was no reason to take any risk until the market provided that confirmation. So, it was advisable to raise cash in case that was only a corrective rally, which would point us to lower lows down in the 3700SPX secondary downside target that I had on my charts. And, if we did complete 5 waves up, we would then get a pullback below the 4600SPX region before we ran to new all-time highs, and we would be able to deploy the cash we raised at that point. Again, the market structure told us that there was no reason to accept any aggressively long risk. And, as we now know, the market took the downside path.

Moreover, along the way, I had identified the bounce levels to raise additional cash for those that desired to do so. At the time, those regions were identified by smaller blue boxes entitled “danger zone” for our members.

Ultimately, once we got down to the secondary downside target region, I was looking for the market to provide us a more sustained rally. In fact, as I wrote in my short update published on Seeking Alpha on July 3^rd:

“But, for now, as long as we hold the 3620SPX support, I am looking for a rally to develop over the coming weeks to take us north of 4200SPX.”

So, as we now know, the market has taken us to the target I had set over a month ago. The question now is if we are setting up to head to new all-time highs or not? And, I do not have a confident answer yet.

While we have now reached my minimum target for this rally, we still do not have a clearly completed 5-wave rally structure off the low. Should we get that in the coming weeks, then I will be much more confident that we are ready to rally to new all-time highs, with an ideal target in the 5500SPX region. However, as of now, we are in the same posture as we were back at 4600SPX – that is, we only have 3 waves up off the low.

So, as I said at that time, it is a good time to de-risk, and allow the market to provide us with the set up that will point to 5500SPX. For if we do not get that set up, then we could very well see another significant decline take us down to the 3200-3500SPX region. Unfortunately, I do not have enough information yet to determine between these two paths, so it is an opportune time to de-risk. However, at least for now, I am leaning towards the more immediate bullish outcome. But, without having a 5-wave rally off the low in place, I cannot state so confidently.