S&P 500 Elliott Wave Theory Technical Analysis

This time it’s different

Will you get out of the stock markets before everyone else, this time?

The tremendous rise in the global stock markets over the last 9 years, has largely come about due to financial engineering, such as the ‘Quantitative Easing’ (QE) programmes undertaken by Western and Asian central banks, and suspension of Mark-to-Market rules for Western banks.

The major effects of QE have been rising global stock markets and a concentration of wealth and assets amongst those closest to the emitting CB’s – in other words, connected bankers and moneyed elites owning most of the equities and the CXO plus board member levels of large corporations.

QE was of course not officially undertaken with such a goal of wealth concentration in mind, rather, the minions lobbying for the socialization of private losses through the mechanism of transfer of public assets to private hands to cover said losses, were blathering on about how it would benefit the general public, nay not only that, rather, how these radical QE-type measures were necessary to “save not only the financial system but mostly Main Street from a financial implosion”.

But the actual effects of the malevolent QE undertakings were naturally what had initially been intended, and they amount to nothing other than a transfer of wealth from the poor and middle class people to the aforementioned connected elites.

Ditto for ‘Mark-to-Market suspension’ policies of various sorts. What such policies accomplished was nothing else than necromantically resurrecting failed private enterprises that were large and connected enough to escape their rightful death, a death they had recklessly crafted for themselves by wide-spread (and ultimately admitted to) serious wrongdoings and malfeasance in the process of credit operations in the years leading up to the GFC.

The bankers co-involved in creating the GFC were – through the ‘Mark to Market suspension’ – saved at the expense of the remains of the middle classes and the real economy which suffered and continues to suffer under the burden of impaired and un-defaulted zombie credit.

Addtionally – the dark arts of resurrection applied to the Western banking system and then through QE to the large banks and corporations, has stifled economic development considerably, 1) by allowing stupid business ideas and ventures to be financed through the non-free and non-effective capital markets where stupid “investors” throw money at  the most dimwitted ideas, 2) criminal behaviour including violations of monopoly laws both in the US and Europe which illegally drowns out smaller businesses and prevents/hampers them from defeating their larger and ineffective competitors to go unpunished and 3) the economies as a whole have been misdirected and misguided by the excess capital set free by the central banks in a roundabout theft from the workers.

(This is not to mention the profligacy enabled in the US and Western Europe through the Federal Reserve and the ECB – two reckless institutions that have effectively convinced the socialist regimes in the US and Western Europe that socialism is okay, that high taxes are okay, and that an ever-expanding bureaucracy which strangles what remains of private business on the continent is somehow “affordable”.)

On top of that, the US medical monopoly juggernaut has expanded tremendously, thus hollowing out the US poor and middle classes further, and pushing down their disposable income to low levels. (The same has largely occured in Western Europe, through sky-high effective taxes and high living expenses, although the mechanisms are slightly different in W.E. than in the US.)

Interestingly – this has created a set of conditions that are certainly different from those present at previous market peaks:

  • The top 10% of US households have benefitted the most from the QE operations because they own around 90% of all US stocks.
  • Because of the fact that the poor and middle classes in the US and Western Europe are more-or-less penniless and already deep in debt – they will not be able to meaningfully step in as stock market bagholders this time around. They simply do not have the money to do so.

Many stock market analysts and stock market bubble participants are now speculating about the financial markets being in the ‘bubble phase’ – and apparently, all the bull market “geniuses” whose major market analysis acumen is simply deciding to jump into a huge bubble of CB-enabled malfeasance, believe that they will be able to detect the bubble bursting before it does so, or in the initial phases of the collapse.

One thing commonly bandied about as a necessary prerequisite for a stock market top, is the need for what is known as “negative technical indicator divergences to price” at the market peak. In the US, the overvalued stock market indices are displaying super-high indicator readings especially on monthly and weekly time frames. And so, many would argue that the next decline will only be a minor correction, setting up the indexes for a final advance later this year, which will mark “the top”.

Negative indicator divergences at market peaks (and vice versa at market bottoms) are actually a fairly common phenomena (but certainly not necessary), due to the fact that usually it’s the 3rd wave of an Elliott Wave impulse which extends, and thus produces the highest momentum and strongest indicator readouts.

However – there is a lesser known 5th-Extension Impulse, which tends to produce the strongest indicator readout towards the third subwave of the final extended 5th wave which is the longest. Such an impulse will probably not provide a final top/bottom with indicator divergences.

And there’s also the more-rare Double Extension, which produces a strong acceleration and extension of the 3rd wave and then even more so in the final 5th wave. The Double Extension is of course even more likely to end at maxed-out indicator readings, because the really strong momentum of the 3rd wave is then outdone by the final 5th wave which tends to end at almost-maximum strength.

And the S&P 500 is actually showing substantial evidence that a Double Extension is forming off the Trump lows (to see said evidence with charts and Elliott Wave markup, go to the S&P 500 Elliott Wave analysis section).

The last few weeks of manic panic-buying of stocks and chatter about bubble participants anxiously asking “how much further the bubble has yet to go” (that is, they seek psychological comfort and validation of their actions) provides the sentiment evidence, which together with the wave structure suggests that a Double Extension has formed from the Trump lows in November 2016. It also suggests that the participants are by and large all-in and are now locked in a dangerous game of chicken amongst themselves – while not realizing that there are far fewer potential bagholders available this time around to sell to when the bubble bursts.

The most myopic or perhaps over-confident  participants are expecting that they will see the final sign of a bubble top approaching in good time, which is usually the general public going heavily into the stock market.

But, as I previously laid out, the general public in the West has been hollowed out by the QE and ‘Mark-to-Market suspension’ disasters and their knock-on effects, which means they lack the capital to meaningfully absorb the stocks for sale when the top classes en masse will wish to liquidate some of their holdings.

What we have now is a situation where there are few “greater fools” left to prop up the equity markets – and this combined with the latest panic-buying seems to have created a treacherous Double Extension impulse pattern in the S&P 500 from the November 2016 lows, which if true and valid, will top out at maxed out indicator levels (such as they are now…) and then be retraced in a fairly deep correction as more and more “investors” and traders realized “the normal signs of a top” didn’t show up this time, and that they missed the top which they thought they had the skills to spot.

Oh, and there’s no need for there to be signs of a bad economy at the top. After all, if the stock market is said to be forward looking… why should it not precede any coming bad times by starting an idiosynchratic decline? Furthermore, declining asset prices produce reflexive knock-on effects on the rest of the economy. Another thing to keep in mind for those thinking they will escape the bubble in time and not be the bagholders.

So this time it certainly is different compared to the recent-most market peaks of 2000 and 2007/2008.

Interest in pay-for-serious-market-analysis such as this one, is at an all-time record low (while crypto-and-small-cap pump-&-dumpers probably have a good time due to the excess supply of liquidity and lack of sophistication of the average trader out there…), and I don’t expect the reader of this article to have enough sense to sign up for this analysis service. Interestingly, market analysis services are the most popular at market bottoms, when the remaining investors need them the least, and the least popular at tops where they are the most needed.

Good luck. You will need it.

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Carl Malmberg
Carl Malmberg
Technical Analyst at EWT Investing
Carl has analyzed and traded the financial markets 13+ years.
Developer of the Extended Elliott Wave Theory, an extension made to the original Elliott Wave Theory.