Can anything derail this runaway market train? «

    Can anything derail this runaway market train?

    As each week goes by, more and more bears turn to bulls. More of those that have been calling for a correction have now joined the upside on the runaway train we call the stock market, or, as some lovingly call it, the “stock casino.”

    Even in our trading room, it has almost become comical that everyone simply believes you can just buy any dip, and the market will simply reward you. Too many have posted that this is a “no-brainer,” and it is just “easy money.” I have even seen some posts that say that “it does not get easier than this.” It has become so en vogue to be bullish that those who have a bearish view actually apologize for the bearish perspective in their post. So, it is official; almost all the bears are dead. And those who are not are apologizing for not being bulls.

    But those of us who have seen this before know that, like all parties, this one will come to an end, as well, and possibly more abruptly than we have ever seen before. So, of course, everyone asks “when?” That is the million dollar question, and, to some, it can be worth many multiples of that. But with exceptionally low put/call ratios, some sentiment charts showing bullishness at levels even beyond 2000 and 2007 levels, all-time-high margin levels of debt, record-low relative levels of cash in money-market accounts, along with evidence of institutions selling into this rally, partygoers may be escorted out faster than they may want to leave.

    What is also interesting is that Garrett Patten, who is the head analysts for World Markets at and a contributing writer to MarketWatch, has been pointing to the fact that many worldwide markets are now heading into topping regions as well. While this is clearly not dispositive for the U.S. equity markets, it is interesting to note the potential alignment across world markets.

    Last week, I noted that there is an uber-bullish pattern I may be willing to adopt over the next few months if the market will prove it to me. Such a count takes us to the 2500-3000 region in the S&P500 by the year 2016. But, clearly, the market will not be simply going straight up to tag that region without corrections along the way.

    But I will simply not enter any longer-term long positions in our current region. If corrections maintain over the 1740ES region, then I will have no choice but to board that bull train. Yet, as I have said so often, I am not as confident as the rest of the market that this will prove to be true, and the market is going to have to prove this to me over the next few months. And no, I will not likely be missing the ride to 2500, for even in the very bullish pattern, the market will come back to test the 1740/1770 region at least one more time, and potentially twice more.

    However, I still see a significant probability that the market will break down below that region within the first half of 2014. Yes, I know this is contrary to almost everyone else at this point in time, as almost everyone seems to have surrendered to the bull, but that’s what makes this a dangerous market, indeed, and one in which l only short-term trade the upside when presented with the opportunity, rather than invest.

    Along those lines, we have had some simply huge returns from the stocks we have been buying since November in Stock Waves with Zac Mannes at And as some of our more astute members have pointed out, 2014 will likely be a stock-pickers market, rather than the continued broad-based stock moves we witnessed through most of 2013.

    Our ideal target for wave (4) last weekend was the 1814 region on the E-Mini S&P 500 futures /quotes/zigman/20258903/realtime ESH4 +0.08% . This past week, the market found support at 1817ES, and began what can only be described as an ending diagonal wave (5), assuming that this will complete all 5 waves in the ending diagonal beyond the 1847ES level. The reason I say this is because this past November, we saw a potentially very similar 4th wave pattern, which took us back up to the prior highs in a b-wave, only to see the bottom fall out fast and hard in a c-wave down.

    For right now, if we are going to continue forming an ending diagonal, then 1830ES is the immediate support that the market must maintain in order to continue up in a c-wave of wave iii of the ending diagonal with a target in the 1847S region. However, if we break that level before we attain our target, then the market will likely head down to at least the 1814ES region, and potentially down as deep as the 1803/06ES region if it is going to find support for a wave (4).

    If the market does reach the 1847ES region to complete wave iii in the ending diagonal, then wave iv will likely target the 1833ES region, but should not break down below the 1826ES region. Assuming we hold that support, then we should see a wave v taking us to the 1853-55ES region (1.618-1.764 extensions), with a potential spike up to the 1859ES region (2.00 extension) to complete all of wave (5) of 5.

    However, if the market does break down below the 1826ES level from the 1847ES region, then we will be targeting the 1814ES region, and potentially as deep as the 1803/06ES region for wave (4) support, and that top would count as a b-wave high within wave (4).

    I know that following the machinations of an ending diagonal or what may still be a 4th wave is difficult, but I am trying to be as specific as I possibly can in what you may expect over the next week. In fact, one of the most difficult patterns to deal with is an ending diagonal for a 5th wave, as it is so difficult to be certain where the 4th wave has completed and the ending diagonal has begun, since all the waves of both are overlapping. Ultimately, it will be whether we maintain support over 1826ES in this upcoming week which will determine the difference between a drop to the lower 1800 region to complete a larger wave (4), or if we will complete the ending diagonal to the 1850-1860ES region.

    But remember, when an ending diagonal does complete, the reversal from such a pattern is swift and strong. However, that would not likely be set up to complete until the later part of the upcoming week, and it would offer a potentially nice short trade opportunity for those brave enough to enter those waters. And based upon how we decline from this topping pattern, I think that February may present the market with a downtrend, which many do not seem to think is even possible in this market. So, let’s see how this develops over the upcoming week.