In the past when I said that the stock market would crash, I was referring to the Elliott wave pattern. If you study this pattern you will know that a major correction is due. I don't know with certainty that the current correction is the start of the crash, we will see. However because this crash is due, it is possible that the coronavirus was the catalyst.
Studying Elliott wave is a big advantage, when an impulse wave up is complete you know something bad is about to happen. After an impulse wave the next move is a correction. The thing is, Elliott wave does not tell us what the problem is, it just tells us the stock market will correct. And because the stock market does not correct for no reason, you can tell something bad will happen, like a pandemic.
One of the features of corrections is the larger the wave up the larger the correction. If the wave under observation is of supercycle degree (large in time and magnitude), the correction will be large too. For example if we take the wave up in the Dow Jones since the crash of 1929 to the recent high, it is in five waves. If this wave is complete the current correction will extend. According to the guidelines, it should be larger in time and magnitude. The decline could take the Dow Jones below 2000 within ten years.
In a bear market the Fed will always find a way to boost the markets. These Fed induced rallies can hurt you if you are short, therefore it is not recommend to go short early in the bounce. You will recall the 5% rally in the S&P 500 in one day last week. Applying Elliott wave analysis gives us some clues about the levels where the rally will end. While these rallies are powerful, they will fail, in fact these rallies will provide opportunities to short the market.
Without central bank intervention the markets would crash immediately. If the Fed or the government intervene with monetary stimulus or any form of stimulus, in the short term markets will rally, but longer term markets will crash anyway. In the end Elliott wave wins. Why? Because that is the way the markets move, they follow the Elliott wave pattern.
Remember, whatever Trump or the Fed do will be temporary, the decline will resume. DO NOT believe what they say, their objective is to maintain stability in the financial markets, they will never scare you. They will always say that everything is fine or under control. IT IS NOT FINE, the Fed is losing control, believe me, I have studied Elliott wave for more than twenty years. I have seen this pattern repeat itself many times.
Once the bear market starts nothing will stop it, because what happens is a change of investors behaviour. The mood changes, from euphoria to fear. The more the market declines the more fearful they become. the more fearful they become the more they lose confidence in the Fed and Trump. At this stage they will follow their own instinct, and they will sell, sell sell. The Fed will no longer control the market. Trump and the Fed can only manipulate the markets when investors are in the right state of mind, when they trust the government and the Fed. This trust will disappear, then investors will scratch their head whether to buy or sell.
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