The large structure we have been in all year has been perplexing and complicated. I continue to like the general look of a 5-wave macro structure for a “C” of a stupendous degree. And locally, I am looking for a “C” of primary (pink) degree. I would like to see that unfold in 5 waves. One way we can still do that here if things get briefly angry, is with a falling expanding ending diagonal:
This would accomplish a variety of things. I do follow many bears, and I noticed after the close, that most of them expect a bounce here. And so this overnight weakness is somewhat ironic.
- So, one thing it could accomplish is taking enough people by surprise. I wasn’t too thrilled with the holiday rally, so I am least hedged well here (just in case).
- Another thing it would accomplish is that we can finally get that 250-week EMA tag out of the way, as it sits right down there at the bottom of the proposed structure (I’ve noted that on the chart).
- It might even give us a decent $VIX spike (which we haven’t yet had—and which we don’t always need), and further signs of capitulation such as a PCR spike and even another volume spike.
- It would also still be an acceptable way for us to “underthrow” the large, macro bullish wedge we have been in. It’s a big wedge, so perhaps a big “underthrow” is fitting.
- And finally, it would prevent Armageddon as it would imply we are, in fact, closer to a low, and not entering a genuine crash.
I think if we do move down there, it would create a bit of a panic, as the market would feel bidless after such a pansy-ass rally we just had. And that makes it a good candidate for a low. Perhaps too many are trying to play for bounces, and given the fact that we really haven’t had more than one good bear market rally (March), people might give up on that entirely. Maybe that would be healthy.
So, this is just a thought. It’s me saying: even we do fall, I’m still not willing to call for a crash. Why? I will reiterate main aspects of my thesis here:
- The sentiment readings since April in particular are at 30+ year lows. And historically, this happens at lows, or just prior to huge rallies. Given the dataset, it seems prudent to accept the data at face value (and not to assume “this time it’s different”).
- The collapse in breadth is consistent with a low (it can get a little worse, but probably not too much worse).
- This decline has been widely anticipated for months and so something seems off here. It makes me skeptical that we can be in too much trouble (though I’m comfortable hedging here and there when it seems prudent to do so).
- My expectation is for the “inflation trade” to be unwinding imminently. And there are some promising signs that that is at hand (such as oil, looking as though it’s changed trend).
- If the inflation trade unwinds, the Fed can take its foot off the market’s throat, and I think they will do just that (that’s literally what they have said they intend to do). I think a market crash is a headache they would much rather avoid.
I see no reason (yet) to change these views.
There are other ways we may count this that gets us to a low faster, but given the overnight weakness (in the Asia session as opposed to the European open which has been what’s hit us lately), it may have room to run tonight. This structure (falling expanding diagonal) is just speculative, and I wanted to share it because it would help to account for a steep, but short-lived drop and so it’s something you can keep in mind if we do get a bigger puke tonight. In other words, even if we do see something steep right here, it might not yet be a reason to panic.