What I am hoping to see is something about like this:
The market is oversold, and there is a near consensus among analysts that we are headed lower. That always makes me nervous. I would like to at least see a retest of the head and shoulders neckline. Caveats are that we’re now spending time under the 50-day SMA and 4000. Briefly is fine. But if we persist under here, I can’t rule out us going lower again. It matters whether that level is support or resistance.
One thing that’s exceptionally difficult for me here is trying to count this decline. It looks like an impulse wave (because of its force), but it counts terribly as one. I have tried many times. Yes, I can easily label it an impulse wave—anyone can slap some numbers and letters on a chart. But it doesn’t count internally well as an impulse wave. I can’t seem to find good internal fib relationships that would justify counting it as an impulse. It is a bit odd.
There are a lot of 3-wave moves inside this structure. If I were to look for really good internal fib relationships, all I can come up with is something excruciating like this:
That’s what we get if we want to find really good internal fibs. Yuck. And I can’t find too many good fibs at today’s low. So it’s not clear to me what will happen next.
If this rally continues, and we can recapture 4000, the 50-day SMA, and if we head to the neckline, I have a feeling that it will be a bear trap, believe it or not. I think a pullback off that neckline from beneath will lead to a surprise gap up.
However, if we don’t get strong followthrough on this rally, and if we dawdle around here (the green B-C) with 4000 remaining as resistance above us, I can see another drop ahead of us. And that drop has really good fibs at 3621, which will only just barely take out the June low.
I like surprises, and either of these could work. A rally to the neckline is what many of course expect (because they will want to short it again up there), so if we get there, I will be inclined to expect a rally from there. And if we dawdle down here, and begin to fail again (as we head to pink C off the bottom of the chart), I think most are going to try to count 5 waves down way too early, i.e., I think they will be looking for a major low just below the low we made today, in which case I can see a 300-point plunge from that spot as the surprise.
So: the key right now is 4000 and how we behave around it.
As for playing this, I have been bottom fishing (we’re oversold). My hedge has been position sizing (small). I leaned into the long side a bit this morning, given the beautiful—what looked like—ending diagonal on futures that I pointed out, and since that moved sharply in my favor, my strategy is always to take some right back off again, which I did. The last calls I bought this morning were three-baggers at the close, and that helped to reattach some fingers that got snipped over the last couple of days. Right now I am still holding some calls because I’m not sure that this advance is complete. I will be prepared to short the pink B if we do something like that (reject 4000 from beneath as in the second chart instead of recapturing it as in the first chart). So, let’s see what happens over the next couple of days.
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