I expected the rally to fail, and that worked. And during that failure, I became somewhat agnostic because the drop hasn’t been entirely as I would have liked it to be for the bearish case. And because of that I have given close to equal weight to both bearish and bullish outcomes, but I now think I have enough information to hold a conviction.
And that conviction is bullish.
I detailed some of my initial thoughts here, and I will discuss a few more now. To summarize some of my prior thoughts, I wanted to see the meat of the move lower blast through 4000, but the meaty part of the move happened way too high, spending all of the fuel. And so here we are, having reached seller exhaustion, mere points below that level, and just barely under the 50-day SMA. That’s not a great sign, I don’t think. Because we are now due for a very big rally, and that will mean that we will have found support on 4000 and the 50-day SMA. And that is largely fatal to the bearish case.
So here we are, with a 5-wave pattern, probably now complete. It’s much clearer on futures, so I’ll use that to demonstrate it:
We can know it’s probably five waves complete because of that sharp bullish divergence. I closed my long-duration short prematurely on Friday, but I don’t mind much, because not being in the market in the final leg (other than some trial longs and my poor, dead bull put spreads, sniff) has given me time to observe while not also having to fight emotions. I was able to catch the longest wave (1), and two-thirds of the next longest wave (the 3), and so I’m perfectly satisfied with that.
I find it interesting that each wave has gotten shorter and more vertical. 2.5 million contracts traded today, more than on Friday, covering less ground. I think we’re very close (if not already at) a bottom.
The fact that we never retested the head and shoulders neckline from beneath (I discussed that in the first chart here) tells me, I think, a great deal. There are no bulls. And that’s what the bearish view needs here. That there was not even enough people to give us that counter trend bounce that I was hoping to see tells us about the paucity of buyers, and where in a structure will you find such a thing? In crashes, and at bottoms. I do not think we are in a crash (because each leg lower is getting smaller, not larger), and so I am left to conclude that we are at a bottom.
I have recently been looking at the idea of an expanded flat coming (here), and I have been utilizing a channel for the structure off the June low (here). That channel has broken by too much, and this has been too low now for the “A-wave” of a 3-wave expanded flat still to come. My response to that is twofold: 1) I am adjusting the channel to better account for the tippy-top of where I think cycle (yellow) 3 actually occurred, which lowers the slope of the channel, giving us some more space, and 2) I now believe that we have already seen an expanded flat, we’re just finishing it now, instead if us still being in the middle of it:
A nice 3-3-5 structure. There are excellent fibs here, and so I can justify a major low, if we do see a rally (which i think we will but could always be wrong).
I also find it interesting that, for the last two weeks, the economic data coming out has been improving: inflation data softening, jobs data slightly beating estimates, and then today: consumer sentiment beat expectations. The last one is especially interesting to me. Historically, consumer sentiment typically bottoms after recessions are already over. And for equities, when that happens, the low is always already in. And so if consumer sentiment (which has been absolutely in the toilet for months) has turned, it’s possible that the economy is now growing again (if even only slowly)
That does not mean that we won’t have a double-dip recession. And if we do rally, and even if we do shoot up to all-time highs once more (as discussed here), it doesn’t necessarily mean that we’re out of the woods. We may have had a contraction in the economy, and we may have another contraction ahead of us. And I think given the longer-term patterns of distribution I think I see in many stocks, this is still very possible (that a bigger bear market may come next year).
So, let’s see what happens. I am inclined to try to play this bullishly, especially if we see a rally from here. If we don’t, I will have to reassess. But, given the profits I made on the decline, i’m ok watching for a minute if I need to.
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