Sentiment Speaks: Next 2 Months Will Separate The Bulls From The Bears

I am going to start this update with a presentation as to how we got here for the benefit of those reading my articles for the first time, and I will then take it forward with parameters as to where I think we are going.

For those that have followed me, you would know what we called the bottom to the SPX back in October 2022, despite most market participants expecting us to have head much lower at the time due to the worse than expected CPI report at the time.

As you can see, we were expecting a bottom in the market, with a further expectation of a rally that would first take us to the 4150/4200SPX region, followed by a pullback towards the 3800/3900 region, ultimately taking us back up towards the 4300+ region. And, that is exactly what we have seen ever since we caught the bottom back in October. But you had to fight your emotions to be able to see this potential at that time.

As one of my members noted:

“Slowly but surely I've become less and less concerned/interested in seeing if other factors align with waves (fundies/techs), and becoming more absorbed simply into the waves. It's been hard, as it's human nature to try to correlate just about anything. When I just follow directions/waves, my success is as good or better than Avi's noted 70% rate.”

Yet, when I published my perspective about my target many months ago, this comment I received seems to represent the general comments from many readers:

“4300 is not happening”

Yet, here we are.

To get into a bit more detail, when the market was many hundreds points lower, I provided a specific target of 4311-4375SPX to the members of ElliottWaveTrader. But, when the market approached the 4300SPX region, the structure was telling me that we would likely reach even higher. So, I modified our target to the 4375-4433SPX region well before we even broke over the 4300SPX region. For those that know of our blue box targets, you can see my recent target set here:

Now that the market has gotten to our ideal target zone, it is time to become a bit more cautious, as I wrote last week:

“The market still has more room for the upside, but I think it is time for everyone to be tightening their risk management. Once this rally completes, I am expecting a sizeable drop in the market. And, as I have outlined many times before, the nature of that drop will tell me if we will continue higher to 4500/4600SPX next, or if the market is starting a drop to 2700/2900SPX.

Yes, I know those are majorly different outcomes, but the market has the potential for either resolution based upon the nature and structure of the rally off the October low. So, until I see how the market drops in the coming months, I intend to tighten up my risk management, so I am not caught holding the bag in the event this rally presents us with the high we see in the market for the next two to three years.”

As the market has developed its structure over the last several weeks, it has certainly provided us with a lot more information that we can use in our positioning.

First, while we have reached our target, the market can certainly still squeeze a bit higher over the coming week or two. So, we have to recognize our upper support is at 4370-4395SPX. And, if we are able to squeeze higher, I will raise that support again. But, once we break support, the MAJOR key region we will have to watch is the 4185-4275SPX region.

You see, if the market pulls back in a corrective fashion into that support region, then we can set up our next rally back to the 4800SPX region. While I know many will be looking at that statement in absolute disbelief due to the “market environment,” do you believe it to be more shocking and impossible than our expectation of 4300+ from the 3500SPX region at a time when everyone was so certain we were heading lower based upon the “market environment” at that time?

So, please allow me to open your mind to the potential for new market highs. While I am not saying this will happen, I am simply saying to keep your mind open to the potential, which will be clarified by the market over the coming several months.

For those that read my work closely, you would know that I have had a big issue with the market top struck at the end of 2021. While I was expecting a large pullback into 2022, I did not think at the time that we would break the 4000SPX region. Moreover, I was also looking for the market to rally to 5000+ before the major bear market I was expecting thereafter would begin in earnest. The main reason was because I was not able to count a solid 5-wave rally completed into that high off the March 2020 low. And, I still have this issue.

For this reason, I noted even back in October of 2022 that I am going to be watching the market structure very carefully, as I am leaving the door open for the market to still be able to rally back to the 5000+ region before a multi-year bear market begins. And, I am still of this opinion.

So, while the market can still push higher in the coming week or two, I have now turned quite cautious. I have raised cash from the various charts that are hitting the targets we set many months ago, and have raised the stops on those positions that still seem like they have further to run.

What will get me to consider deploying the cash that I raised will depend on how the market pulls back to the 4275SPX region in the coming months. If that pullback is clearly corrective, then I will likely be layering into long positions, as I have outlined to the members of ElliottWaveTrader in a detailed three-page report I published this past weekend. However, if that decline is clearly impulsive, then I will be preparing for a decline that can point us as deep as the 2700-2900SPX region over the coming year.

Again, I know these outcomes are completely diametrically opposed. But, that is the posture the market is presenting right now. And, I am going to be viewing the market from as objective a lens as I humanly can, and will wait to see how the next test of the 4275SPX region will take shape before I make any larger degree assessments.