Sentiment Speaks: The Bears Are Coming Out Of Hibernation

The cheerleaders are always on the field.

When the market is rallying, the bulls are usually the loudest in the articles section, as well as in the comments section. Yet, when the market is declining, the bears are usually the loudest in the articles section, as well as in the comments section.

Most articles and comments are based upon a pre-determined bias, with the volume level of the opinion section being based upon the direction of the market. For this reason, I view it as being completely useless in reading most articles that are published.

As for me, I would much rather rely upon a mathematically based assessment of the market. While I will clearly not always be correct in my assessment, at least I am able to use mathematically derived structures and levels as an objective framework to determine whether I should be bearish, bullish, or neutral.

Based upon the current structure that the market seems to be tracing out, I am going to assume that the bears may be coming out of hibernation over the coming weeks. Yet, if they do, it may only be for a snack.

For those that are unfamiliar with my methodology, I wrote this six-part intro series a few years ago, which summarizes both the theoretical basis and the practical application of my methodology.

So, this week, I am simply going to dive into my market perspective.

As I said last week, I wanted to see if the market was going to hold over the 4470SPX support level this past week, or if we were going to break that level to suggest that we are going to drop down to the next support region of 4230-4274SPX before we begin the rally to 4800SPX next. And, based upon the action we saw this past week, we currently have a set-up pointing us down to that lower support region.

This week, I am going to do something I do not often do in my public articles - I am going to explain my perspective based upon the Elliott Wave analysis that guides my market expectations.

First, I will explain that corrective action is structured as a 3-wave structure, and it is labeled as an a-b-c structure. The a-wave and the b-wave are typically 3-wave structures, whereas the c-wave subdivides as a 5-wave structure. If you want to better understand how we make these determinations, and why these determinations are important, I would strongly urge you to read the six-part series I linked above.

Second, I will explain that the initial drop from the 4607SPX top we struck in August best counts as a 3-wave structure. Thereafter, we saw another 3-wave structure in the rally to 4541SPX region high we struck on the first day of September. And, with the breakdown below 4470SPX, it made it unlikely that the market was going to complete a 5-wave structure to the upside. That 5-wave structure would have signaled that the market was setting up to continue towards the 4800SPX region sooner rather than later. But, with the 3-wave structure high at 4541, it suggested that the market is going to drop towards the 4230-4274SPX region in a c-wave before we have another chance at starting the rally to 4800SPX.

To add more evidence that that market may be heading lower in the coming weeks, the market decline that broke the 4470SPX support counts relatively well as a 5-wave structure. If you remember what I noted above, a c-wave decline most often takes shape as a 5-wave structure. Therefore, the initial 5-wave breakdown below 4470SPX can be counted as wave 1 of the 5-wave c-wave structure that is pointing us down towards the 4230-4274SPX region.

As I outlined to members early Thursday morning before we completed that potential 5-wave downside structure:

"For now, ideal support is 4425-35SPX... should we see a lower low today... expect that we hold 4425SPX, and I will be looking for a wave 2 bounce to short"

As we now know, the market bottomed at 4430 and began to bounce. So, let's cut to the chase.

To put it very simply, our resistance is now 4486-4515SPX. As long as this bounce is contained by that resistance, I will then be looking for a breakdown below 4430. Should we see a breakdown below 4430SPX, which then follows through below 4400SPX, that is a strong indication that we are going to be dropping towards the 4230-4274SPX region.