Has the Bearish Case Gone Tits Up? Au Contraire Mes Frères

I know I already said I wasn’t going to have a longer post for this weekend, as I had sort of a lot that I wanted to point yesterday (here), but, I will actually have a few things I want to cover in this article.

*Begin Stream of Consciousness*


First, let’s talk about this little structure we made today:

SPX

We gapped down and retraced in a little wiggle.

This is actually very similar to the initial moves coming off the August high, where we also gapped down, and then retraced in a little wiggle:

SPX

Now the one in August lasted two days, but there’s no need for the duration to repeat. It’s welcome to, but there’s no requirement.

Another thing I want to point out is that when we approach major resistance (like the 200-day SMA), we should overcome it by gapping over it. And in this case, we have not:

SPX

But what we have done (today) is we gapped under it. And often (not always) the gap is the winner. So if we had gapped over it, I would be more inclined to think we could rally further, at least in the short term. But we never did, so, we haven’t really overcome the resistance. And now instead, by gapping under it, I am more inclined to believe that the sustainable move is the gapped direction, that is to say, the move back under it.

Like back here in March, see how we gapped over it?:

SPX

That gap overcoming resistance allowed us a weeklong rally for an almost further 4% rally.

And notice the exact opposite on the way back down:

SPX

By gapping back under it, support was lost for good.

Don’t believe me?

See June 2020:

SPX

We had to gap over it to keep it. Now there are no guarantees in life. But, since we haven’t gapped over our 200-day, and have instead done the exact opposite (we just gapped under it), I am inclined to count that in favor of the bears. It’s not a guarantee (there are historical examples that involve overcoming the moving average without a gap). But, needing to gap over it in order to secure it happens often enough that maybe it matters here.


Now let me give you the obvious bullish interpretation.

If one were inclined to be bullish, here is what one would do:

We’re over the 200-day. It looks like we have taken it and retested it:

SPX

Most people are accepting that as a bullish signal.

Also, when we look at the futures market, it just looks like a REALLY OBVIOUS 1-2 to the upside:

ES

“Twos” often retrace to the 61.8% fib. And if it is (a 1-2), we would expect much higher prices to come in a 5-wave structure.

And even on the cash session, the rally looks incomplete:

SPX

3rd waves aren’t at the tops, 5th waves are. And the Powell pump looks a hell of a lot like a 3rd wave (they are typically the very strongest), and so most people are going to want that 4th and 5th. Now we just had a small pullback (which could be the 4th), and so most market participants probably expect another push.

So, all of this is obviously bullish. And because of that, I am fairly convinced at the moment that the opposite may be true.


That’s where the magic of ending diagonals triangles that keep showing up all year might come into play here.

And this leads me to my preferred count here (which I have been working on all day in the chat room—so some of you have already seen this).

SPX

Now yesterday, we did, in the end, form something that looks a lot like a triangle (the red a-e; you can also label them as 1-5; you will sometimes see either one in the literature). And a triangle can be one of those weird ending diagonal triangles I’ve been discussing lately (e.g., here, and in the ending sections of this). And in this case, it means that it can be the 5th wave. And since it didn’t make a new high over the Powell pump, it can be a truncated 5th wave. And if so, we have all the waves we need.

And since then, we’ve had a drop, and then a rally that can be counted as a 3-swing move (red a-b-c) today. And all of that means that we might have a 1-2 to the downside in place heading into the weekend. This can produce a gap down and I’ve noted the typical targets for a 3rd wave if we get it.


I think there’s a lot going for this count. The bullish count looks too obvious to me. The recapture of the 200-day ignores the spooky gapping behavior we often see but are missing here. No one will be looking at yesterday as the 5th wave in an ending diagonal. Not only because it’s a triangle, but also because it’s truncated. No one will be stupid enough to count today as a “2” because it’s almost a complete retrace, and “twos” typically retrace only 50-61.8% (but today we retraced almost 100% of the drop). And the reason so many people miss 3rd wave gap downs is that sometimes they can sneak up on us, and I think this could be one of those times.


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