Stocks: When "Sentiment is Strikingly Suited" for a Major Stock Market Event

What an extreme use of leverage tells you about the trend

By Elliott Wave International

Stock market history shows that when the Elliott wave model of stock market patterns and market bullish/bearish sentiment indicators are aligned, you have the basis for a high-confidence forecast.
That was the exact situation back in January, right before the stock market's jarring sell-off, from which stocks still haven't quite recovered.
Let's start with a brief review of Elliott Wave International's analysis of the DJIA's Elliott wave chart pattern. On Jan. 5, the Elliott Wave Financial Forecast noted:

The wave structure of the advance looks mature ....

Mature, as in -- we could clearly see a 5-wave price pattern on DJIA charts. When a fifth wave ends, a move in the opposite direction begins.
Indeed, just three weeks later, the DJIA hit a peak of 26,617. As you'll recall, a period of wild volatility shortly followed.

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What also helped the Elliott Wave Financial Forecast make the call was the extreme bullish reading in the stock market's sentiment measures, which supported the view that the DJIA's "advance looks mature":

Sentiment is strikingly suited for the end of an advance.

Realize that sentiment is "suited for the end of an advance" when it reaches an extreme bullish reading. In a nutshell, when everyone is bullish, everyone has already bought, so the price cannot move any higher. The opposite is true at the end of a prolonged downturn.
Now, let's proceed with the details of key sentiment measures from around the start of 2018.
This chart and commentary is also from the January Financial Forecast (Elliott wave labels available to subscribers):

The chart shows the National Association of Active Investment Managers' Equity Exposure index. NAAIM's index hit a record high of 109.4 the week of December 11. Since 100 equates to a 100% invested position, this means that NAAIM portfolios were leveraged long to a record degree. As noted above, the extreme use of leverage represents a heightened state of expectation, as it means that buyers of stock are so confident in an advance that they are willing to borrow money to bet on rising share prices. [Emphasis added.]

Another January Financial Forecast chart with accompanying commentary sheds more light on the prevailing sentiment just before the DJIA's January 26 peak:

Last month we showed a chart of the Rydex Total Leveraged Bull/Bear Ratio through November. With leveraged-long Rydex assets more than 14.4 times as great as leveraged-short assets, the ratio tied the prior record extreme registered in late 2014. In December, the ratio shattered that record with a surge to 18.6, a boost of 29% from the November high, as shown by the lower graph on the chart. The middle line on the graph shows an even more breathtaking spike in Rydex's Bull/Bear Ratio (unleveraged). The ratio jumped to 22 on December 29, easily the most extreme reading in the 16-year history of the data. [Emphaisis added.]

So, as you might imagine, our Elliott Wave Financial Forecast editors were not surprised by the DJIA's peak (26,617) just three weeks later.
Regarding the details of EWI's technical analysis at the time, we encourage you to see them for yourself in a new free report that remains relevant now (see below).
The January setup will repeat itself, and having the knowledge of what to look for can help you avoid getting caught unprepared -- as well as capturing opportunities that every market reversal presents.
Read the free report now -- just look for the quick-access details below.
Learn how to spot once-in-a-lifetime opportunities and avoid dangerous pitfalls that no one else sees coming
We can help you learn how to spot opportunities and side step risks that will surprise most investors.
You can get deeper insights in Elliott Wave International's new free report: 5 "Tells" that the Markets Are About to Reverse.
The insights that you'll gain are especially applicable to the price patterns of key financial markets, including the stock market, now.
Read the free report now.

This article was syndicated by Elliott Wave International and was originally published under the headline Stocks: When "Sentiment is Strikingly Suited" for a Major Stock Market Event. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Trader Case Study: What Happens When You Use Corporate Earnings to Pick Trades

See which data set helped traders stay in front of REGN’s late 2017-early 2018 crash

By Elliott Wave International

According to a June 26 Fortune Magazine article, New York-based bio tech company Regeneron Pharmaceuticals is one of the "100 Best Places for Millennials to Work" in the world. Shares one of Regeneron's employees:
"The thing I love about working at Regeneron is that when they say data is king, they mean it. Our work and projects are always changing based on what the data shows us."
We hear the same expression bandied about Wall Street; data is king to determining a market's price trend, with the long-reigning monarch of that data being earnings reports.
All hail earnings reports? Not so fast!
Our very own senior analyst and long-reigning Trader's Classroom instructor Jeffrey Kennedy admits to the "seductive nature" of earnings data, tempting investors into a false sense of confidence regarding future price action. But there's a danger in such logic, as Jeffrey explains:
"My own experience trading earnings reports has been hit or miss. At the very least, it's been frustrating because there have been times when the earnings report will be positive, and the stock price will decline -- or vice a versa."

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Get immediate access to Jeffrey Kennedy's free 20-minute video, "4 Keys to Crafting Rock-Solid Trades." In this video, Jeffrey reveals his time-proven tricks to ID top trade set-ups in the markets you follow. Learn more now.

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You've seen this happen too, I'm sure. So, why does it happen?
Because it's not the hard data inside the earnings report that drives prices. It's how the market participants interpret that data. And their interpretation depends on the current trend in market psychology. But hold on, let's let Jeffrey explain more.
Over the course of his career as a technical market analyst and trading instructor, Jeffrey has relied on another form of data to determine the most "watch-worthy" issues: Elliott wave analysis. For Jeffrey, there are three main requirements for a high-confidence trade set-up:

• A Clear Trend: Jeffrey explains: "The first thing I want to identify on a market's price chart is the trend." Higher highs and higher lows indicate an uptrend, whereas lower highs and lower lows suggest a downtrend at play.
• A Recognizable Wave Pattern: Jeffrey is emphatic: "If you can't count [the Elliott wave subdivisions inside a price move], don't trade it." He sticks to the five core Elliott wave patterns: impulse wave, ending diagonal, zigzag, flat, and triangle.
• A Clue to Price Personality: Slow and choppy price action contained within parallel lines indicates countertrend action -- i.e., a correction. Conversely, when prices move far and fast, and especially if you see a price gap on the chart, this indicates the so-called impulse waves -- i.e., the direction of the larger trend.

Now let's see how Jeffrey uses this Elliott wave data to interpret real-world price charts. One market that's fresh on the brain is Regeneron Pharmaceuticals (NASDAQ: REGN).
Our first mention of REGN comes from Jeffrey's October 19, 2017 Trader's Classroom video lesson. See why Elliott waves called for REGN to step off a sharp bearish cliff to new lows. Simply press "play" and enjoy:

Here's a close-up of Jeffrey's chart of REGN along with a recap of his overall forecast:

"The weight of evidence... would argue for a move to the downside."

The next chart shows you how closely REGN's prices followed Jeffrey's October 19 Trader's Classroom Elliott wave script: They collapsed 35% to a four-year low.
And yes – prices fell DESPITE one of the most glowing earnings reports in the biotech company's history.
You read that right! On November 8, 2017, Regeneron published its Q3 2017 earnings, which showed "street-topping revenue" that "crushed" expectations with a 27.5% increase in adjusted income per share and a 23% increase in sales versus year ago period. (Investor's Business Journal)

The failure of a positive earnings report to stem the market's decline and fuel a rally is exactly the "hit or miss" nature of the earnings beast Jeffrey spoke about.
By contrast, Elliott wave analysis steered a clear, objective course that proved invaluable to traders and investors.
And while Elliott wave data enabled Jeffrey to anticipate the larger trend unfolding on Regeneron's weekly price chart, it also facilitated a strong assessment of the market's near-term prospects in his more recent, June 26, 2018 Trader's Classroom video lesson.
There, Jeffrey "moved down to a smaller, 60-minute time frame to examine the smaller Elliott wave substructure." The chart, pictured below showed that a large move up was on tap.

And here's what happened next:

In the same June 26 Trader's Classroom video lesson, Jeffrey also revisits REGN's larger trend, to answer the question:
"Is there sufficient evidence in place that the selloff from the 2017 high is complete?"
In the video, Jeffrey examines the data at hand and comes up with a strong case for one kind of move in the weeks and months ahead.
While not every Elliott wave forecast works out, the value of Elliott wave analysis is clear from this real-world example -- and from every Trader's Classroom lesson Jeffrey records for his subscribers.

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Get immediate access to Jeffrey Kennedy's free 20-minute video, "4 Keys to Crafting Rock-Solid Trades." In this video, Jeffrey reveals his time-proven tricks to ID top trade set-ups in the markets you follow. Learn more now.

This article was syndicated by Elliott Wave International and was originally published under the headline Trader Case Study: What Happens When You Use Corporate Earnings to Pick Trades. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.