Last week, I noted that as long as the S&P500 holds the 2320SPX level, it will begin a rally. On Monday, the market bottomed at 2322SPX, and began a 2% rally.

If one takes the time to become an open-minded market observer, one can learn a lot about the stock market, and how human beings react within the stock market.

We all know and love the phrase “buy low, and sell high.” While that is the ideal goal for investors, most investors are unable to attain their goals of buying the lows or selling the highs. Why is that? It is simply because we are emotional creatures, and we allow our emotions to drive our buying and selling decisions. For that reason, we are fearful to buy when all others around us are fearful as price drops, and we are exuberant and unable to sell when all others around us are euphoric at the highs. When you come to grips with this simple fact, and begin to understand the nature of the market, then you are on your way to becoming a much better investor.

So, back in February of 2016, when everyone was fearful of a stock market crash, we were turning quite bullish. And, we will not likely be turning bearish until the rest of the market turns bullish.

In fact, back in 2015 and going into 2016, I was warning my members at Elliottwavetrader.net that not only are we setting up for a rally which will take us to 2500+ on the SPX, but I was also expecting that the paradigms and correlations many follow would be breaking down.

And, since that time, as the evil emperor in Star Wars noted, “Everything is proceeding as I have foreseen.”

Moreover, it seems that Morgan Stanley has finally taken notice, stating this in early 2017:

“Regional correlations, cross-asset correlations and individual stock and FX correlations have fallen simultaneously. That’s unusual; we haven’t seen a shift this severe in over a decade . . .”

Before the election in November of 2016, I was again preparing the members in our trading room at Elliottwavetrader.net for the next phase of the strong rally I was expecting, which would take us into 2017. And, since that time, it seems the rally has not only taken most market participants by surprise, many still remain within their mindset of disbelief.

However, recently, I am witnessing something quite notable in the stock market. I am starting to see some former bears beginning to embrace this stock market rally. In fact, someone who was fighting this rally tooth and nail for quite some time noted this past week that “the traditional causes of recessions . . . are nowhere on the horizon.”

Those words were music to my ears. And, I am going to expect that more and more bears will be coming over to the dark side. Even Harry Dent, one of the biggest bears in the market for many years, turned bullish in early 2017. Yes, my friends, it seems the long-term topping process has begun. But, we still have a ways to go.

In fact, in Elliott Wave parlance, the point in time when former bears turn bullish begins once we move through the point of recognition, which is the heart of the 3rd wave within Elliott’s 5 wave structure. And, as you can see from the attached “before” and “after” charts, the heart of the 3rd wave, wave (III) of (3), is now done, which is likely why many former bears have begun to turn bullish.

See below two daily SPX charts by Avi, the top one from December 10, 2016 and the bottom from April 3, 2017, indicating how the S&P 500 closely followed his projected 3rd wave path. Click to expand charts

This is quite typical of how the market reacts. Remember, most people do not turn bullish at the lows, but rather, bullishness develops as the market rallies higher and higher, with the most extreme levels of bullishness being evident near major market tops. This is simply how human nature works within the herd, and being able to track market sentiment allows you to rise above it rather than become a part of it.

So, as we set up to head to 2500SPX to complete the 3rd wave in a few months, I certainly expect more bears will join the bullish party. By the time we have completed the 5th wave later this year, or early next year, the market will be proclaiming in unison that “the traditional causes of recessions . . . are nowhere on the horizon.” And, until the majority of the market becomes convinced of the bull market, there will be no correction of which to speak. So, for now, you can keep ignoring all those “crash” calls.

Remember the wise words of Professor Hernan Cortes:

“Financial markets never collapse when things look bad. In fact, quite the contrary is true. Before contractions begin, macroeconomic flows always look fine. That is why the vast majority of economists always proclaim the economy to be in excellent health just before it swoons.”

Along the lines of these “sentiments,” I remember reading this article quite some time ago which outlined the strongly bullish sentiments of market participants and officials right before the Great Depression. I think it is worth a read, as it is exactly what I am going to expect this time around. And, remember what George Santayana said:

“Those who cannot remember the past are condemned to repeat it.”

Price pattern sentiment indications and upcoming expectations

As I have been reiterating for years, the market will likely eclipse the 2500SPX level so that we are able to generate the bullishness needed to mark a long term market top. And, the way we are setting up right now, our first test of the 2500SPX region will likely occur by summer time.

However, it does not necessarily mean we will be taking a direct route. While the market may choose the direct route from here, I still think there is a high probability that we can rally to even a new all-time high before we test the 2300SPX region, and potentially even temporarily break it. That would then set up a strong 200 point rally to the 2500SPX region.

But, I would strongly suggest that you consider using any pullback in the market as a buying opportunity until we hit the 2500SPX region. Once we strike the 2500 region, long term investors can begin to reduce their risk, as we would be nearing the completion of the long-term trend. While there is still potential for another pullback going into the fall of 2017, which can set up one more rally over 2600SPX, I think the risks will have increased to levels not acceptable for most long-term investors once we do strike 2500SPX. And, when you consider that the top we will likely strike in 2017, or early 2018 will set us up to retest the 2100SPX region, it will not likely be worth the risk for most long-term investors.

See charts illustrating the wave counts on the S&P 500.  

Avi Gilburt is a widely followed Elliott Wave technical analyst and author of ElliottWaveTrader.net (www.elliottwavetrader.net), a live Trading Room featuring his intraday market analysis (including emini S&P 500, metals, oil, USD & VXX), interactive member-analyst forum, and detailed library of Elliott Wave education.