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Expect a pullback in U.S. stocks in 2018 before a major rally
By: Avi Gilburt | January 2, 2018

Following the Elliott Wave analysis:

A bigger decline may not occur until the late spring or early summer

While I was strongly bullish on the S&P 500 as 2017 began, the benchmark index has surpassed my target during the past few months by about 4 percentage points.

We were looking for a rally from the 1,800-point region in the S&P 500 SPX, +0.65% to as high as 2,611, which would have provided a 45% gain. The market actually provided closer to a 49% gain from the lows struck in 2016. While I certainly wish we were able to be right on the money, there is no such thing as perfection when dealing with non-linear systems such as the stock market.

Please recognize that by no means are we looking for the end of the bull market, which began in 2009. Rather, we are now within wave (3) of the 5th wave of the larger-degree 3rd wave within a 5-wave Elliott structure off the 2009 lows (as you can see on the monthly SPX chart). And, as I have tried to relate this to baseball terms in the past, it is akin to being in the sixth inning of a baseball game. We likely still have several years to go before we complete this bull market run off the 2009 lows, and we will not likely see the seventh-inning stretch until 2019, after we complete all of wave 3.

Since we use Elliott Wave analysis to “count” how mass sentiment moves through bullish and bearish periods of progression and regression, our perspective is that we are completing a wave (3) in the equity markets, which often ushers in a wave (4), as long as the number 4 comes after the number 3. And, since our numeric system has not changed since I learned it as a child, I am going to expect that we will see wave (4) in 2018.

But, as I have noted in a prior weekend analysis, the market may continue to levitate until March. You see, some indices have potentially completed their respective wave (3), such as the iShares Russell 2000 ETF IWM, +0.71% others suggest that we still need a smaller-degree 4th and 5th wave before all of wave (3) completes, such as the Financial Select Sector SPDR ETF XLF, -0.16%

This would mean that we can see a pullback into early 2018 in all indices, with some counting as a smaller-degree 4th wave (XLF), whereas others would be an (a) wave of their wave (4) already (IWM). Moreover, this would make the expected rally into the March time frame a 5th wave in some indices (XLF), whereas it would be a lagging b-wave in others (IWM). Ultimately, it seems to suggest that the bigger pullback we want to see in a wave (4) may not occur until the late spring or early summer.

As I have noted many times before, the drop I expect will likely be considered the end of the bull market by many. But our analysis suggests it will likely be another buying opportunity for the next phase of the rally which, will likely be targeting the 2,800-3,000 region next. In fact, if we are able to complete the full structure I have outlined on my monthly chart, we will not likely complete this bull market off the 2009 lows until the early 2020s. So if you are going to dust off your bear suit for 2018, please make sure to recognize that it will only be for a short-term engagement.

See charts illustrating the wave counts on the S&P 500, IWM and XLF.

The writer has no holdings in any securities mentioned.

https://www.marketwatch.com/story/expect-a-pullback-in-us-stocks-in-2018-before-a-major-rally-2018-01-02

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