Earlier in the year, i had been open to the possibility of a relatively brief major correction, partly because of just how badly sentiment deteriorated in April especially. And I knew that that is often accompanied by very significant lows. But as things only deteriorated more, and especially as inflation only accelerated, I then came to accept the possibility that we were very far away (at least months) from a Fed pivot, and so I assumed that that would have a negative effect on risk assets for some time.
And it’s certainly no better today, as the Fed does not seem—to me—to have signaled anything remotely dovish yet. To make matters worse, the initial rally off the low did not look right to me to be consistent with the low.
And yet, this has become quite the rally, sharper here than I would have liked. It can fade quickly if it’s going to do that. But, we’re now above this bear flag. A bear flag that doesn’t break down like a bear flag is not a particularly good sign for bears. If it’s a bear flag that’s going to break down, it probably already should have.
So what if the low is in? It would surprise me, partly because we got so close to the 250-week EMA, but not close enough, and I can’t believe we wouldn’t even bother to go in and check in on it.
But, if we keep rallying, we could be in an impulse wave. And let’s take a look at what that would look like here.
If we don’t reverse overnight, which I would prefer to see given the wave balance here, and if we gap up sharply instead, that would at least in principle be consistent with a third of third to the upside. So, on a count like this, we may expect to head to the orange box for minute (blue) 3, consolidate, and travel to the orange line above that for minor (green) 3, consolidate again, and have yet another rally for minor (green) 5.
So if we don’t turn down sharply, and we end up seeing all of this instead, then it’s far more probable that the low is in. After these waves complete, we should see a deep pullback for a two of a larger degree.
All of this is thrown out the window if we gap down sharply, or if we have a huge, multiple-percentage-point decline in the next day or two (neither of which we would expect to see here if this were an impulse wave to the upside).
And if this does turn out to be how things play out, I can’t apologize enough for getting this wrong.
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