March Melt-Up Madness

March Madness is a term referring to the college basketball single-elimination tournament of 68 teams, leading up to the “Final Four,” from which the ultimate college basketball champion is determined. Most of the games take place during the last half of March, with the ultimate winner determined in early April.

But, I am seeing potential for a March Madness setup in the equity market as well.

While analyst and investor alike have been scratching their heads at the amazing market rally, we have seen since we struck the low back in March, I think many will be surprised at the next phase of the rally, which may actually be one of the strongest.

I know all the reasons that the market is not supposed to rally, but since when is the market a reasonable environment? You see, the stock market is driven mostly by emotion, and trying to reason within an emotional environment is like trying to reason with your spouse when they are emotional. How well does that work for you?

Back in March of 2020, while we were approaching the lows near 2200SPX, most were viewing this as the initiation of a larger bear market. Yet, I reiterated to all those willing to listen that I think we are about to begin an epic rally which will take us to 4000+, and potentially point us to the 6000 region in the coming years:

“Our long-term targets are still 4000+ in the SPX. And, thus far, I have not seen anything to dispel us of this notion. From our perspective, this was the 4^th wave decline I had actually expected to see last year. But, it certainly took its sweet time to show up. Yet, that does not change the fact that it is likely a 4^th wave. And, since Elliott’s structures are 5-wave structures, it still leaves me expecting a 5^th wave in the coming years which should take us at least to 4000, with potential to move as high as 6000.” March 15, 2020

“The evidence leads me to conclude that we need a 5^th wave to 4000+ in the coming years before the bull market off the 2009 low completes.” March 21, 2020

And, as the weeks progressed, the market made it clear that we were starting that major 5^th wave to 4000+. Yet, the one thing that the market did which made it more difficult on my analysis is the lack of standard pullbacks along the way. In fact, not a single pullback since the March low exceeded a .382 Fibonacci retracement throughout this rally, and that applies to the larger and smaller degree sub-structures. In fact, many retracements did not even exceed the .236 Fibonacci retracement.

Most market participants remained way too bearish all the way up, which did not allow us for much of a pullback throughout all segments of this rally off the March 2020 lows. In fact, most market participants were looking for the next major drop/crash as we continued to rally over 1500 points off the March 2020 low, with many shorting for a good portion of that rally. That is likely what prevented us from seeing standard pullbacks along the way.

And this is why I always say that understanding market context is one of the most important and powerful pieces of information for an investor. If you mistakenly believed that the March 2020 drop was the start of a bear market rather than the culmination of one, then you lost one of the best buying opportunities we have seen in many years. However, our view of market context told us clearly that the March 2020 decline was the culmination of a larger degree correction that had been going on for some time underneath the hood of the market, and when completed, would launch us into our next bullish phase.

Now, I am going to provide a bit of market context so that you hopefully will not make the same mistake again. You see, the 3^rd wave is often the strongest segment of the Elliott Wave 5-wave structure. And, currently, the market is building that potential for the heart of a 3^rd wave advance within this final 5^th wave advance off the 2009 lows. This segment of the rally phase of the March 2020 lows is pointing us first to the 4300SPX region in the spring, with the potential for the 4600SPX region by the summer.

But, before you begin to leverage up to the hilt on the long side, I must warn you that I am going to be watching the market very carefully over the coming 2-3 weeks to provide me with the setup which will trigger that rally. Should that setup develop and trigger in the next 2-3 weeks, then we will likely see a very strong March for the equity market.

Currently, our next resistance is in the 4050/60SPX region. And, as long as the market is contained below that resistance over the next week or so, I am expecting another bout of weakness before we are ready to head to 4300 in earnest.

I won’t bore you with how we use our Fibonacci Pinball methodology to identify these higher probability confluence points within the market. But, if you are interested in learning, you can review the 6-part series I wrote on the basics of how we approach our analysis.

Currently, our major support is in the 3800/3850SPX region. And, as long as we continue to respect that support as we build our setup in the coming two weeks, then I will be expecting a strong rally throughout March. But, again, I reiterate that I am looking for a specific setup to develop in the coming two weeks before I turn aggressively bullish for the month of March.

For if we see a break down below 3800SPX during this time, then it means that our 2^nd wave pullback can again re-test the 3600 region before we begin that 3^rd wave rally phase to 4300, and the rally to 4300SPX is simply postponed a bit. So, watch for the market clues during the next two weeks, as I think there is a very good chance that we could set up for that rally to 4300 sooner rather than later.

Avi Gilburt is a widely followed Elliott Wave analyst and founder of ElliottWaveTrader.net, a live trading room featuring his analysis on the S&P 500, precious metals, oil & USD, plus a team of analysts covering a range of other markets.