A popular topic lately is the discussion of the bull market in US stocks now that the S&P 500 is at 2000. How much further might it go? We have already covered the process we would like to see before we change from bullish to bearish in a previous post about how to identify a trend change. Personally, as a trader I don’t keep my target at the top of my list; the market is going to show us the area where both bulls and bears reject higher prices.
It’s important to note that while a top and turn lower might happen, there is so far no EVIDENCE of that, yet. Although I will share my target numbers with you, please just keep it in the back of your mind, since it’s only part of the Context, which is only 1/3 of our Context, Momentum, Set-Up process here at Trader SkillSet. We discussed how to identify a trend change in this post which is more important than any calculated target. The market has to deliver quite a few checkmarks to validate a level as an actual top.
That being said, here is how I come up with my long term numbers. Whenever I see a strongly trending market I try to identify the area with the highest momentum. In Elliott Wave Principle terms, I am looking for the middle portion of a typical impulse – the third wave of the third wave. It is the “point of recognition” or sometimes referred to as the “Prechter-point,” when the trend becomes apparent for a large majority of the participants.
To confirm the central trend leg I simply use the RSI. The wave that has the smoothest run or the steepest angle, and therefore the highest momentum reading, is the one I am looking for. In a clear trending environment – like the weekly or the monthly time frame now – the market will repeat the same number of corrections that it performed prior to our peak momentum area. And, what is more, it usually travels the same distance that it travelled from the starting point of the trend.
Therefore, the “point of symmetry” of the whole structure is potentially going to be somewhere along the Prechter-point wave. We can’t be certain about the exact spot but the position of the wave still gives us an idea of where the market will want to balance itself.
There are at least two spots that I use as the most likely “point of symmetry.” In the case of the S&P 500 index they are 1,512 and 1,535. If we do our measurements assuming that one of these spots are going to be the actual center of the trending phase from the 2011 October low, we end up with 1,949 and 1,995 respectively.
At this point in time we don’t need to look further back in time, like back to the 2009 low. It would not be necessarily relevant, and there is a very simple reason for that. Based on the even larger degree context, the market will either totally reverse when the large up leg from the 2011 October low ends, or will correct at least 300 points like it did on the way down to the 2011 bottom.
One of my targets has been clearly exceeded. The other at 1,995 is just a couple of points below the most recent high so it could stand as a correct estimate. Only, keep in mind, that there is absolutely no sign of reversal yet. The market just likely entered a trading range with the July 24 reversal. Probably the last sideways correction in this bull phase since October 2011.
I can’t stress enough, simply attaining a target itself, when we go by any measurement target in an established trend, is not enough reason to turn counter to the trend. Maybe, in this specific case, it could be a reason to close a long trade for a weekly bull when a strong reversal appears in the close proximity of a target. For example, our assessment about the “point of symmetry” within the third wave may be correct, but the impulsive trend structure could contain a fifth wave extension. That would make the overall picture grow lopsided with the the XL size wave five. That is a different lesson to be covered in another post though.
Have you noticed that we are using Elliott’s wonderful discovery but without actually labelling charts? The market needs to close every previously opened layer of the trend. But oftentimes it is nearly impossible to count how many trend degrees are on the move and how many closing legs (wave fives) are still ahead of us. Finding the point of symmetry and performing the projections accordingly is a practical way of eliminating the hassle and the risk of missing a trend layer. In other words it might just save you money by not “calling a top” ahead of time.
The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.