$ES Bear Case Revisited, Just in Case

My main view on $ES remains that “the correction’s lows are in” is more probable than “we need one more leg down.” If that view is true, we should continue to stay somewhat elevated, enduring a series of pullbacks and new highs, completing the fours and fives of a first full impulse wave off the lows. Many individual names suggest this to me. Another reason I have been preferring this view is my sense of sentiment during the initial stages of the rally off the lows: it felt to me as though it was nearly consensus that we would have another leg lower. And as I suspected we might, we shot straight up instead.

But now that we’ve had such a sharp rally, virtually no one—it now seems to me—believes we will have another leg lower in the correction, and so I am more inclined to at least acknowledge its possibility than I was before, so I will do that here in this post.

The bull view is of course this, some more drifting arc, or even something more obnoxious to the upside.

ES

The bear view though would see this rally as a “B” wave. They can be sharp, and B-waves often retrace 89% of the move they are correcting, and we’re about there now. The only real way we can have high confidence that the correction is over is by taking out the prior all-time high. Some other points in favor of this view:

  1. The count problem I discussed this morning,
  2. The bullish wedge we were in, treated solely as a classical chart pattern and forgetting wave counts, has met its requirement (breakouts of bull wedges need only target close to their origins, and we’re there)
  3. Much of this squeeze, feels to me just like that: it sort of looks at least as much like a short squeeze as it does genuine “deep” buying. When big institutions are accumulating, there is often a little more “back and forth” along the way as they rotate on the way up. On the contrary, much of this latest move feels a bit more like bear liquidation.

So, in the spirit of not wanting to be caught completely off guard, this is what “the correction needs another leg lower” could look like, targeting the big orange box below us. This is not my primary view, but I feel like its probability has grown a bit over the last few days.

ES


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