A Review of Options Available to Us

I have already discussed the two main things I’m looking at as I try to discover the 5 wave pattern as it unfolds.

I want to review the options we have. This is my gut speaking: I think it was very easy to short the 200-day simple moving average. Because of that, I am trying to look for the unexpected ahead of us. We all see an impulse wave unfolding, no denying that. So the question is: if there’s going to be a surprise, will it be because the final wave runs very long, or will it run very short, or is something else going on?

There are two bearish and one bullish possibilities.


Bearish #1

If we’re in 5 green waves down and the 5th runs very long, I expect something like below. I would expect another drop from here, and where most will expect that to be green 5 complete, it may just be blue 1 of green 5, and we go on to plunge much deeper:

SPX


Bearish #2

Another possibility is what I was alluding to earlier, where perhaps green 5 wraps up before folks are expecting it to. If it’s put in today somehow, it could mean that the big orange 1 is in now, and we’re going to have a big rally:

SPX

This setup is still of course ultimately bearish. Both of these options above are predicated on us having a big pink B up there at the top. But what if, contrary to what we would all expect, the low is in? I don’t think it is, but the rally we just had was pretty impressive, so let’s acknowledge the bullish case, just to not be dogmatic.


Bullish #1

If green 5 is wrapping up early and we’re bullish, it means the big rally was a 3, and we’re in a 4 now. If that’s the case, we’re going to make an “h,” where this decline was the stem, and we’ll have a rally, one more partial drop, and then we would probably head to all-time highs from there, sort of like this:

SPX


We might indeed still have another drop ahead to finish green 5 at lower prices. But let’s say we all expect that.

Can we count the decline as complete early? We might be able to, like this. Because we got a 5-wave decline this afternoon, the 5th wave could be truncated:

SPX

There are other ways this can be counted as well. If we’re bearish, we need the market to drop soon. But instead of trying to guess, I’ve gone ahead and closed my bear call spreads for literal lunch money (that was supposed to be a joke, as I expected a couple hundred overnight and I could only buy them back for just less than I opened them for). But I don’t want to risk the collateral right now. I have rolled my shorter-duration ITM puts that were the second leg my strangle from the other day, and I have added calls. I will keep my longer-duration puts.

I can see this going either way, and I don’t have a lot of conviction for any case right now. Sentiment is very bearish, but not too many puts in the system, either. Jackson Hole is a wildcard. So, I have in effect reacquired a strangle. The last time we were in a range, it was lot easier because the range was much wider (in early August). We ranged about 80 points or so, but this has only been 30.

So, I’ll sleep well, and I will accept any outcome that comes. If we breach this channel to the upside with vigor, so be it. I will be inclined to think this decline was an “A” wave—part of a large wave 4 correction. If we drop, good, I’d rather that and will look to the bearish outcomes. But here we’re at a junction and I don’t feel like flipping a coin right now.


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