I can foresee one of two similar structures developing over the coming weeks. In either case, I think it’s a terrific opportunity. I will discuss each of them in this post.
First, note the volume profile for the latest decline and where it rests in relation to the structure I was worried might break down (here). It sits right in the middle of that thing:
That also happens to be exactly where the inverse I pointed out (3rd chart here) targets. I think we’re going to go there, and when we do, we’ll consolidate. I think this consolidation will be the 4th wave of a 5-wave impulse (you’ll see all this in the chart below), but most people are expecting this rally to fail. They expect the rally to be only 3 waves, and then to turn lower. And, of course, getting up there, will be in 3 waves. I think that is when everyone will pile in short.
I was hedged for some of the decline (ever since the rejection of 4500 warned of here), but it would have been a lot more fun to have been outright bearish all the way down, balls deep in puts. Now, I’m not prone to feeling regret. It’s poison to the trader’s soul, but I’m aware of when it wants to arise. And not fully participating in a decline like that makes the “if only I had…” want to rise up inside of me. When I begin to feel that, it’s instructive. And I know it’s eating others, too. I like to use that to my advantage going forward. Always looking for the trade ahead and not the ones that have been left behind.
And here’s the weird thing: the reason we fell so hard like that is because, despite all those sub-4000 predictions out there, no one was really short. That’s why the market could go down like that. Likewise you can listen to all the bulls all day long gripe at the bears from 2020, but I know most people didn’t actually ride July and August of 2020 up, either. That’s how it could go up like that. Turns out that was really just a huge short squeeze. So they may gripe at bears for being wrong then, but I bet they weren’t right themselves.
I think after this decline, a lot of people are going to be saying to themselves, “Boy, the market really is bearish here. Darn I missed that, I will get the next one though, now that I can see just how bearish the market really is here.” The fear of missing out on another decline like that that will incline them to short up there around 4220-4280. Everyone wanting to not miss the next decline is going to make them miss the next rally, I believe.
Up there at the green wave three, everyone is going to think the squeeze is done (we’ll just have had a 400-point rally or so), but I think the squeeze will only just have begun.
So, we consolidate in something like a triangle up there, even maybe start to drop into a close there at the end of it, only to turn around and move sharply in the other direction instead, for an extended 5th wave (green degree). We’re in a bull flag, maybe we poke out of it, giving us a 700-point rally, and sucking anyone in who feels totally left out, only to then have a first real pullback for a big 2 of orange degree, where we come back down to retest the point of control again from above. And since that will then look like a failed breakout, everyone panics and gets bearish again, only to then have us break out of the bull flag in an even bigger rally:
This is very similar to the one above.
Alternatively, we can use a longer-term point of control for the entire top, which is higher:
On this possibility, the squeeze is actually much bigger than I imagine now and we squeeze to all-time highs, and come back to this higher point of control and retest the bull flag more properly.
In this case, it will be kind of interesting, because a lot of people are going to believe that brief break to all-time highs has to be the market top. It’ll look like a double top. And anyone who wants to count the low just beneath us as “primary 4” (many do), will think the new all-time high is a great candidate for “primary 5.”
Both are very similar, it’s just a matter of how high the squeeze goes. But, I believe this basic set of events could unfold.
4 thoughts on “Here Are the Two Ways I Think This Can Play Out”
If you zoom out, like in your 2nd scenario, the S&P from Jan/2021 to today looks like a big H&S to me. Wouldn’t that structure override other structures and point us DOWN? Mind you same could have been said of Feb/2019 to Oct/2019 … but then look at Jan/2011 to Aug/2011, or Jan/2015 to Aug/2015. And again these time frames all seem to be +/- 8 months while we’re in a 16 month structure… anyway. I guess I like both of your scenarios and don’t see macro-economic factors killing the economy/market. Getting rid of Putin & China opening up would sure seem like good news since the war & china lock down seem pretty priced in right now.
It’s possible, but given sentiment up here, I doubt the H&S will come in to play. But, we will have to see.
I will conduct a test to see how people feel about the structure.
Now everyone will dump based on that tweet lol ;))
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