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Is This Truly a Long-Term Bull Market? An Elliott Wave Perspective

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Looking past the hype, the question is whether this market is in a new long-term bullish trend that will last the next decade, or a minor bull run that will set us up for a significant fall.

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When I look at the IWM, I see two sections that all long-term bullish wave counters "assume" are part of a bullish count, but which are clear 3 wave structures (see chart here). Those two structures that are highlighted in blue boxes cannot be explained appropriately if this was a long-term bull market, unless one is attempting to force a standard impulsive count, which would not be my primary way of viewing this structure. And, I have always been more of a purist, which is why I maintained that silver still had the potential to see 22/24 when everyone else was looking for 60. So, when I see the highlighted 3 wave structures, I must maintain the same position here as I maintained for the metal's rally last year. (And, for those that are thinking they could be leading diagonals, remember that even leading diagonals are 5 wave structures and not 3).With the media in a bullish seventh-heaven, and everyone believing that this market will not correct, I have been continually reflecting on whether this market is in a new long-term bullish trend which will last the next decade, or simply a minor bull run, which will set us up for a significant market fall.

Over the last few weeks, I have presented pictures of the iShares MSCI Emerging Markets Index (NYSEARCA:EEM) and iShares MSCI Japan Index (NYSEARCA:EWJ), which still have further to run to the upside, but which do not paint long term bullish pictures beyond 2014. Last weekend, I presented a picture of the materials sector, which is clearly not in any form of bullish setup. Rather, I am questioning if we will even see the sector exceed the 2011 highs in the iShares Dow Jones US Basic Materials (NYSEARCA:IYM). For those that are "fundamentally" based, this should be a big issue.

Now, let's move onto the iShares Russell 2000 Index (NYSEARCA:IWM), but let me begin with a small digression. For those of you who remember the August – September 2012 seemingly strong run in the metals, you will remember the uber-bullishness that was pervasive in the metals market at that time. In fact, it was quite similar to what we are experiencing right now in the equities. All I was hearing was "shorts are dead," "we are breaking out to new all-time highs," "this is the beginning of the parabolic fifth wave," etc.

In fact, I was even sent emails that insulted me and my ability to analyze metals for not seeing that the fifth wave had begun. Others instructed me to simply "assume" that the fifth wave had begun simply due to the strength of the rally. And, yes, the fact that I called the tops in the metals in 2011 and almost all of the twists and turns in in the metals in 2012 (some to the penny) was clearly forgotten, as emotion seemed to be what was taking over.

But, if you remember my position at the time, week after week I continually reiterated that the September 2011 rally was not begun with a 5 wave structure, but rather a 3 wave structure. This told me that it was most likely not the breakout everyone wanted to believe it was. I remember how alone I felt in maintaining this position as I do not recall seeing anyone else analyzing the market as I was seeing it. In the end, the corrective structure proved to be the case and my call for seeing $22 before we see $60 was correct.

So, as I have said many, many times, a bullish structure must be built upon a solid foundation, in the same way a house has to be built upon a solid foundation. But, if the foundation is not solid, then I do not care if the builders are attempting to build the house one story higher than the neighbor's house; the house will collapse as the owners are moving in.

When I look at the IWM, I see two sections that all long-term bullish wave counters "assume" are part of a bullish count, but which are clear 3 wave structures (see chart here). Those two structures that are highlighted in blue boxes cannot be explained appropriately if this was a long-term bull market, unless one is attempting to force a standard impulsive count, which would not be my primary way of viewing this structure. And, I have always been more of a purist, which is why I maintained that silver still had the potential to see 22/24 when everyone else was looking for 60. So, when I see the highlighted 3 wave structures, I must maintain the same position here as I maintained for the metal's rally last year. (And, for those that are thinking they could be leading diagonals, remember that even leading diagonals are 5 wave structures and not 3).

So, as I said last week, personally, I am taking this market at one larger degree at a time, and am not jumping into the major bull camp, even though I am still expecting higher levels to be seen later this year. But, from an overall market perspective, I would highly suggest readers review the market pattern during the 60s-70s to see what I think has a very strong likelihood at playing out over the next four to five years.

So, for now, we are still looking for a top in what I think is a larger degree third wave within an ending diagonal. This means I am expecting a fourth wave correction to potentially take place this summer. But, as you can see from the chart, I still expect higher levels to be seen into 2014. And, as I have now shown in the EWJ, IYM, EEM, and now in the IWM, it seems as though the next rally will likely start in the late summer or early fall, and take us into the spring of 2014, which would likely represent a large degree market top. In fact, the spring of 2014 would represent a Fibonacci pattern five years from the market bottom in 2009.

Of course, the question is what would get me to turn long-term bullish on this market? Well, if the S&P 500 (INDEXSP:.INX) were to accelerate to the 1730 region over the next month without the pullback I am expecting over the next week or two for green wave (4), then I will reconsider the bullish case, and potentially view the S&P 500 as targeting the regions over 2100, and potentially as high as 2400, well into 2015.

Editor's note: Avi Gilburt is author of ElliottWaveTrader.net, a live trading room and member forum focusing on Elliott Wave market analysis. Avi emphasizes a comprehensive reading of charts and wave counts that is free of personal bias or predisposition. His Elliott Wave analysis appears frequently on sites such as SeekingAlpha, MarketWatch, and TheStreet.com.

Read more:

How to Trade Out a 4th Wave

Messy Consolidation in 4th Wave

Working on Green Wave (3)
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No positions in stocks mentioned.
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