Let’s Briefly Look at a Dark Alternative for the S&P 500

My primary view—which continues to be long-term bullish—suggests to me that this year’s dirty and cruel price action is simply a correction, after which I expect the bull market in equities to resume. My fundamental reasons for that are because many of the things we see for bear markets often require recessions and, as I’ve pointed out recently, I don’t see enough evidence suggesting that we’re near a recession at this time.

And aside from the fundamentals, there are also some technical reasons we might want to believe that the correction is ending. For starters, corrections are typically composed of 3-wave structures. And, in a basic sense, we have that now:

We went down, then we went up, and then we went down again. 3 swings. For this to be complete, we need to see a lot strength in the coming weeks and months, where essentially every dip is bought. That is consistent with my two present counts (i.e., here and here).

That said, until we really do get going without looking back, it is always possible that we are within a larger 3-swing move than what we can see at this time. There is one reason I am bringing this up right now, and it’s some of the options flow lately. I don’t live and die by flow, but I do keep an eye on it. And it appears right now that put buying is utterly relentless here. It’s stronger than I would like to see. What I would hope to see is much of that coming off here, and not so much being put on. It might not mean anything, they can be wrong, too, but day in, day out, big multi-million-dollar blocks of puts keep hitting the tape and if “they” know something that I don’t know, maybe I should perk my ears up a bit and so that’s what I’m doing here with this post. Maybe it’s just hedges. I don’t know.

With put buying, it goes something like this: when retail (small traders) buy puts, it drives the market higher, and relentlessly so. However, with big boy put buying, it can literally move the market. And so we need to be careful.

If we do need a larger 3-swing move, I have an idea about what it might look like. It could mean that the big primary (pink) “C” will become an ending diagonal, and that would require one more lower low, perhaps like this:

I don’t know what probability to place on this. I don’t think it is terribly probable, I only acknowledge that it is a possibility here.

If everyone is too invested in the melt-up narrative, then perhaps we need to get people so bearish with another drop that they will give up on that thought in order to miss out on it.