If We Do Not Take Out the 9/3 High Tonight, I Will Adopt a Medium-Term Bullish Stance (Few Weeks): Here’s Why

The risk signals I’ve been seeing made me bearish, and that looks to have been a reasonable stance to have adopted here. It remains possible to count $ES as a series of ones and twos to the downside, but it’s looking clutch at this point. One can only put in so many ones and twos but at some point, you’ve got to see the threes or otherwise it’s just wishful thinking. Without taking out the September 3rd high with a murderous expansion of range, I will be doubtful of the nested bear count. As the waves unfold, what we should be seeing is acceleration, but we’re getting contraction here instead (hence the bullish wedge).

I’m listening loud and clear to that. I was right to be bearish here, but I also don’t want to overstay my welcome. I think that “bad dream” count is promising for several reasons (in addition to the ones I discussed in that article). The volume spike today is a symptom of a capitulatory low, but, realistically speaking, we’re not all that low in price. That, my friends, is the definition of strong support. Let me show you what I found by checking the volume on an intraday chart.

Imagine these two circled areas as two distinct candles and you’ll immediately see the problem. When dealing with high volume, we want to see volume confirmed by price. We got that overnight (high volume, moving down lots), but look at where most of the volume traded. All in what would look like a stubby candle compared to the one before it. Someone soaked up every last penny of that selling. That may signal a strong reversal coming. The majority of contracts traded without a commensurate movement in price.


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And Let’s Also Look at the “Bad Dream” $ES Scenario

Earlier, I looked into the face of my worst nightmare—the possibility of a 1-2. As I pointed out before however, I’m super skeptical of that because it would involve 10-20 trillion dollars coming into the market and I think the probability of that is virtually zero. Literally a laughable supposition.

But, I do feel like the market may be bottoming here, and there’s another “bullish” alternative that we can examine that suggests the top is near, not miles above us. So, not a nightmare, just a bad dream.

We have formed a bullish wedge complete with divergence.  This will be invalidated if we sell off hard overnight. But I feel like we’re due for a bounce now. So let us see.

Other things I see: counting the Nasdaq 100 impulsively down is a stretch, though possible. I’ve seen a lot of bear flags and head and shoulders patterns and the measured moves on virtually all of them have been met. It’s greedy to expect more without new structures implying so.

$ES came right to the 38.2% retracement of the prior advance today right on the kisser. That is most frequently associated with 4th waves, and so we can give that a try. I am also haunted by the thought that distribution always takes longer and longer than many of us can ever even imagine. They are patient at their work whereas we small fish are by nature more impatient in our own work.

So, I can envision a rally here, and I can envision people who are beginning to have doubts because of the recent selling swerving far back over to overconfidence as we rally only to then have the bottom fall out just above us. I’ve pointed this out before, but the wave degrees I’m looking at way up here at the top suggest something big, and I would expect to see something more like February or August 2020 to show its face. 5-7% down before anyone realizes what’s hit us, that sort of thing. This dripping lower lets everyone get nice and hedged and the market won’t fall sharply under those conditions.

Maybe what we’ve done here is formed a left shoulder. Maybe we have a head to come. Sorry for the constant spitballing here, but are there a lot of things that can happen still. Once we really get going in a trending market, it will be relatively straightforward for long stretches.


Let’s at Least Examine My Worst Nightmare: The Bull Case

Being blindly bearish is never a good idea, so let’s at least take a look at the bullish case for $ES. It’s the 1-2 to the upside count that I referred to dismissively last night. Truth is, I don’t really have any idea what this market’s been up to going up as much as it has this last year and a half, and for all I know it may go even higher just to piss people like me off even more than it already has.

So, we detected a topping process, and that part’s good because we were right about that. What have we accomplished? So far, not too much. We’re 3% off the highs and above the September high. If that holds, we need to accept the fact—as disgusting as it is—that this has been a retest of those levels. We do have a way to count the structure as a correction if we need to (the green A-B-C), and the actual measured move of the head and shoulders pattern hit with precision today. We also have parallel rails here, which, yes, is a bull flag. Ermagerd.

If we’re in very bearish market conditions, we do actually need to move down in price, and we’ve done a bit of that but not a whole lot yet.

Here is my thought: if we recapture the H&S neckline (green) and people buy a lot puts up there and on the way there, it means everyone is trying to fade the counter rally and they will be wrong about it. So, that’s what I’m going to watch.

I’ve had an intermediate (orange) 5 up at the top, but nothing stops this from being 1 of that 5. A lot of the risk assets (oil, high yield debt, etc.) are badly oversold here and I would expect them to bounce. And if they can get some momentum behind them when they do inevitably bounce, it is possible that the risk signals I observed pointed to this much needed correction rather than a major top.

All of this is off the table if we start moving down aggressively, but until then we should know that this exists.


$ES at Very Important Juncture

I continue to see two possibilities here for $ES. The two options were last pointed out here.

  1. The very bearish count is the not white count. On that count, we’re one-twoing our way down and we need a huge plunge through the September high to confirm.
  2. The still bearish but worse later rather than sooner count is white, and it’s that we’re in a leading diagonal that could be done at any moment (now that we’ve taken out the last low).

In either case, I think we will get a reaction here because of that September high. In the case of the former, it will be for subminuette (red) 2; in the case of the latter it will be a much bigger, more drawn out “white two” of a larger degree.

I wish I could be more helpful than that here. The $VIX is very high, puts are definitely being bought here in some size, so I can definitely see the second option happening, but the first is just as possible.


Expectations for $ES from Here

The liquidation break looks impulsive and is what I would expect after a nest. My general thought here is:

We’ll see if we can get to the orange box, but regardless of where this particular move ends, I’m looking for a 3-4-5 minute (blue) degree (to finish minor [green] 3), followed by a 4-5 minor (green) waves to finish intermediate (orange) 1. What I would like to see between minor (green) 3 & 5 is bullish divergence on the hourly.

I think they may get a “holiday rally” of some kind, just from lower prices not from up here.

*All of these boxes may need to be adjusted based on the length of this wave we’re in now.