I would like to review the structure on the S&P 500 this year, as it unfolded. Doing so will help me to clarify my thoughts, and it will help you to see how I try to interpret structure as it evolves.
I hope it will help you to see how wave theory can be used as we go along: I don’t want folks to think it’s all wishful thinking. It tends more often to render structure intelligible, and when it fails, it tells us an even greater deal about the structure, as we will get to by then end. That part is especially important.
The article is long because it has about a dozen images, but it’s straightforward and there’s not a lot of text, so I hope you find it helpful.
The initial decline off the all-time high was a 3-wave structure (the red 1), which should incline us to believe that the greater 3-wave decline that we saw (the whole red count) should see a 3-wave retracement (the green count), perhaps like this:
That part worked out very well:
Now at that point, I still had no way to know if we we were going to rush back to all-time highs again or not. There was a lot of top calling up there—and that always makes me very nervous. And, after all, any 3-wave decline can be the completion of a pullback in a greater uptrend. I was still very much open to the possibility of new highs from there. To have been otherwise would have been too dogmatic—so it seemed to me.
That said, if we did think we would see lower prices, we could expect a further 3-wave decline (at least, they can also be 5-waves) perhaps like this:
And having gotten that, things look pretty intelligible, looking back at it:
And despite my deep concerns at the time regarding sentiment having hit 30-years lows (which continued to leave me open to a dramatic surprise to the upside), I did warn that a failure at 4500 at the orange arrow (here) could lead to downside, and I warned that the structure forming at the blue arrow was prone to failure (here).
All that said, assessing it now, all of that part seems at least intelligible. Having seen all of that unfold, what would we then expect? We had seen two back-to-back 3-wave declines, and so we should once again look for a 3-wave advance, much like the one in February and March, like this:
And initially, things looked terrific:
But things did not stay looking terrific, as the market fell completely apart right there after the terrible CPI print:
I didn’t get the extra leg up that I was looking for.
So now what do we do? One option was to assume that the 3-wave advance must already be smashed in there, like this (the squished final green count in there leading to the June high):
And if so, we would then modify our thinking and quickly arrive at the conclusion that we were already in the next 3-wave decline, like this:
And that is why I was inclined to believe the structure at the low would fail.
But God damn it, we got this:
Well now I just look dumb lol. But wait, but wait.
I think that reassessing the situation actually now tells us a most crucial clue to the structure.
Remember, I was expecting this:
And I never really got the nice extra green swing. Looking at it now though, it seems pretty clear that this last rally is the swing I had been looking for, like this (the latest green 1-2-3):
And so it’s all there now. And that can mean that we should now expect at least another 3-legs lower (though I actually think this leg will be 5-waves, and I also think this process will continue for quite some time).
So I bring all of this up because: these last couple of swings badly disoriented me at first, but I think having done that, they are actually most instructive now. In the end, all of the swings I would expect to see are still present. And the failure to get a further rally in June tells us a great deal—I think—about the health of the market. By not getting 3-swings up, but getting the 3-swings by going up, then much lower, and only then up one more time, I think it’s telling us just how bearish the market actually is. It is much like the discussion I had about “running flats” (here).
We are in a down trend. We should have seen a 3-wave “correction” of that downtrend, which should have been countertrend, i.e., up. But in the end, we still did get a 3-wave “correction,” only it moved in the direction of the trend (down). That means the market is very bearish.
Now I sort of screwed some of those swings up, but I wanted to walk you through this whole process so you would see that I’m not entirely making things up as I go. I expected certain swings in the market. The swings are all here. And there should be many more to come. And how the last swings unfolded tells us we’re probably in fairly grave danger and that would match the patterns of distribution I believe I see in various instruments.
So, I am sorry that I first expected the last green 3 to go up, only to have it unfold as it has. But, I think I have now reoriented myself and I wanted you see the process by which I have done so. I think we had a countertrend correction that moved in the direction of the trend, and this is intelligible. It would have been better to have expected that, and I am sorry that I wasn’t able to. But, it’s now told us something very important because it did that. I now think I know exactly what disoriented me and why it did so. And if I’m right, it’s going to mislead a lot of people who do not detect the correction having moved in the direction of the trend. Many will now be expecting a larger countertrend correction, and I don’t think they’re going to get it because it’s already done. They are now going to expect what I expected at the June high. Some larger move to the upside and I think that will be a mistake.
I don’t want you to come to conclusion that I am not governed by reason haha.
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