Elliott wave pattern is complete on the S&P 500

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US investors have pushed the S&P 500 to all-time high while playing down the effect of the Coronavirus on the economy. Recently we learned that some of the largest companies in the world are lowering their earnings guidance due to the coronavirus. Burberry said that the coronavirus has wiped out three quarter of its sales in China. Apple said it will not meet its revenue guidance for the March quarter, the coronavirus slowed production and weakened demand in China. HSBC said that the full impact of the coronavirus outbreak has not fully been accounted for in its latest report. HSBC may raise its loan losses and lower revenue. When China sneezes we catch a cold.

How many more companies will warn in the weeks ahead? And investors are buying S&P 500? This is a distraction in my view, I can see markets will go down, but at the same time I can see strength in the S&P, how can I be confident markets will go down when the buying in the US is relentless? I can see equity will go down because the Elliott wave pattern is complete.

The S&P 500 is broken, it no longer responds to the economy and the earnings, however this is not new. Elliott wave is a description of the way people behave, they are driven by emotional states. In fact if the market moves up, sometimes this has nothing to do with the fundamentals, it is simply a reaction caused by positive mood. If you really fear that you will miss the rally then you will buy at any level. If we all behave in the same manner the market won’t go down. We need to be patient, we need to wait until the mood changes, until investors click.

Not easy to time this change of mood, but it will come. History repeats itself because people’s behaviour never changes. Central banks have made mistakes in the past, now they are making another mistake. Providing liquidity at a time when there is no crisis is a mistake. The spread of the coronavirus has not yet become a pandemic, what would happen if it became a global pandemic? Surely central banks should wait until there is an urgency before stimulating the economy.

 


This is why gold is rising, excessive amount of liquidity in the system puts pressure on bond yields and can push inflation up. This combination is bullish for gold. Plus gold is a safe haven. But the surprise will come from the S&P 500, as very few expect a correction I predict one. The probability of a trend reversal is high when the percentage of bears is at record low. And when this condition occurs after five waves up [i,ii,iii,iv,v (circle)], the odds of a trend reversal are high. There is nothing new in the stock market, when an Elliott wave pattern is complete you can expect a correction.

Thierry Laduguie is Trading Strategist at www.e-yield.com

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