Bull and Bear Cases Should All Head Lower Next: Weekend Discussion

In this weekend’s article, I will present 3 counts. Two are bearish. One of these is modest, one is disgusting. And I will also present the bullish count as well.


Bearish #1

Let’s begin with some modesty.

On this count, it’s bearish, but so not so terrible. It involves a retest of the June low. There are a couple of fib relationships I can use, one (pictured below) barely takes out the June low. There are also others that only barely do not (that is, they get close). At any rate, they’re all within fifty points or so of the level indicated in this chart.

But the general idea on this count, is that’s it’s effectively an a-b-c major correction (in yellow), and the market and economy will survive in reasonable shape and we’ll all move on with our lives soon enough (maybe after another months or so). On this interpretation, we’ll have another selloff, create a double bottom, and then recover from there.

SPX


Bearish #2

This one is disgusting. I considered it a very long time ago (privately), but I’m going to publish the idea as an official possibility, given the nature of the large structure we’re in.

If this big green funnel we’re in does send us all the way to the very bottom, and rally from there, it is a classical chart pattern (“falling broadening pattern”) and it also bears a name in Elliott Wave Theory (“Leading Expanding Diagonal”).

And here is how it would be counted:

SPX

These are “impulse” waves (5-wave structures), but they have an overlap between “1” and “4” and they make an expanding structure like this. The internal motive waves are 5-wave structures (the Orange counts that lead down), and the internal corrective waves are 3-wave moves; and there is a pretty good way internally to count our recent decline as an impulse wave, followed by a “2,” completed today. This would be very crashy, as it would imply that we’re entering the biggest 3rd wave decline of the structure.

If we move really sharply lower next week, blasting through the June lows, this become probable. Once it’s complete down there, we could then expect an enormous rally from there, as these structures tend to retrace very deeply, between 78.6% and even 89% of their declines. That would take us right back up to the orange box. But if that’s the case, it could be very bad news, as that may only be the first stage of the bear market, after which we have an even more severe decline for the yellow c.

I post this thought because the funnel shape is there, and if we fall very sharply, I’ll have to do something with it, and this is it.

Why so bearish? Well, the news coming out of Europe is actually pretty terrible. The energy crisis there may worsen, and I know that about 30% of S&P 500 earnings come from Europe. If they enter a very sharp recession, we will unavoidably as well, and of course we have our own problems here, too on top of those. So, this is “the bubble has actually popped” count.


Bullish #1

The bullish count is in play if we have a pullback here, but don’t even bother to take out our most recent lows (let alone ever even get close to the June lows). We can’t ignore that we have a beautiful fib touch right at the 9/6 low:

SPX

And because of that, we can count this structure as complete (if we never violate that low from here).


Zoomed in, we have already been discussing the local count. I have been vacillating on whether to count the structure we were in the other day as a triangle B-Wave or a 4th Wave (you can read more about that here). Ultimately, it won’t matter much if we do or not (because in either case we should be about done here). If it’s a flat, the structure as a whole looks very good as a flat (for pink 2):

SPX

It should be a 3-3-5 structure, and if we count it this way, that’s what it is. It looks good.

But, since it’s a 3-3-5, we may use the “5” in the bullish count, too. It may be the beginning impulse wave of a much larger bull run. And it would be this:

SPX

After 5 waves up, we would still expect a retracement here (for Orange 2). And so that is why I am comfortable only being short here.

In the bearish cases, that Orange 1 is either a “B,” or a “2,” and we will be heading much lower in a “C” or a “3,” but even if we’re bullish, we should have a pullback here.

If we do get such a pullback, the key of course will be, “Do we take out the 9/6 low?” If we don’t and if we rally above today’s high, the bullish count becomes extremely likely. If we take out the 9/6 low, then I would expect a very strong decline.


I didn’t hear anything new in Powell’s recent talk. The situation in Europe seems to be deteriorating very rapidly and terribly. Things may get worse. But, if the war stops, and the energy crisis is averted, perhaps the improving consumer confidence survey we just had is hinting that the worst is already behind us. So, I can see this going either way, though I am certainly tilting toward the bearish outcomes for the time being.

Equity PCR just bled all week, and I think this rally was just a short covering rally:

PCCE

I see plenty of bulls. I do see a lot of bears, but it doesn’t seem too extreme.

Have a nice weekend.


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