Thursday, July 20, 2017

Investors Should Brace Themselves For A Tumultuous ‘Lost Year’

The same indicators that predicted the 2016 low and the post-election rally is cautioning that a tumultuous ‘lost year’ lies ahead.


By Simon Maierhofer
MarketWatch
July 20, 2017

Investors have been spoiled. The last bear market ended over eight years ago, and even the memory of the last 10%-plus correction, in January-February 2016, has been erased by relentless gains since then.

But based on one market-cycle forecasting tool, investors should brace for a tumultuous lost year. This lost year may include a frustrating trading range, another rally higher and a violent reversal.

As implied by the term “lost year,” the net gain over the next roughly 12 months is likely to be zero (or less).

How credible is this prediction? It is made by the same indicator that pinpointed the February 2016 low (when the S&P 500 SPX, +0.54% traded as low as 1,810) and the strong post-election rally.

Exotic But Effective


Few indicators are more polarizing than Elliott Wave Theory. Some love it, others hate. Unlike most indicators, which are lagging, this theory aims to predict. This is a lofty goal, and in recent years it has done well, and deserves investors’ attention going forward.

The Feb. 11, 2016 Profit Radar Report listed six reasons why to buy. One of them was the Elliott Wave Theory.

The Aug. 28, 2016 Profit Radar Report published the two forward projections below and stated:

“The two main reasons we want to buy in the foreseeable future is:

1) The breadth thrust off the June low

2) Bullish Elliott Wave Theory potential

The three most likely Elliott Wave Theory interpretations are all bullish. The question is not if, but how much and for how long.

The first chart below shows conceptually where the S&P 500 is at relative to the three most likely EWT options along with the odds for each scenario.”




The S&P 500 is now in the wave 5 target range projected around 2,400-2,500.

We Are Here

The blue arrows in the updated chart below show where the S&P 500 is currently within the larger bull market cycle.



Here are options for what could happen next:

•The stock market is the end of the bull market. This is unlikely because our major market-top indicator — a liquidity indicator that correctly foreshadowed the 1987, 2000 and 2007 tops — doesn’t show a bearish divergence (more detail about the major market top indicator is available here).

•The market is nearing a correction, followed by a continuation of the bull market. The red “squiggly” (not a technical term, but a good visual) on the left side of the chart outlines a temporary set of corrections, followed by new all-time highs.

• A correction followed by a bear market.
The red “squiggly” on the right side of the chart outlines a temporary correction, followed by a final rally before a bear market takes hold.

Decoding And Simplifying Elliott Wave Theory


Regardless of where exactly the market’s at, a correction is getting closer. The initial correction will likely be a wave 4 correction (see labels). Waves 4 are notoriously choppy and frustrating.

This choppy correction should be followed by another rally (wave 5) and a more pronounced drop (likely late 2017 or early 2018).

In a nutshell, although the S&P 500 is unlikely to make net progress in the coming year, there will be an opportunity for investors to lock in profits (at higher prices) and avoid a significant drawdown.

Elliott Wave Theory is perhaps the most exotic forecasting tool out there, but as a comprehensive S&P 500 analysis shows, it’s message is supported by other key indicators, like money flow, investor sentiment, cycles, and technical analysis.


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