$SPX Evening Update

Starting with some basics, we see two primary structures.

We are involved in the green bullish ascending triangle and the red, upward-sloping channel:


Having popped that green triangle and faded back under the top trend line of it is excellent, as this is now just a failed breakout of a bullish structure. And closing near the lower trend line is also quite excellent, because that should be support, and it is best to see it broken with a gap. So, it’s possible that we gap down again and break that support.

As far as counting things goes, there are 3 things I am able to do.

The first is bullish, and I think it is unlikely. But, I will point it out because we haven’t actually left the channel yet.

There is a fib relationship between the main swings off the high (1.272 extension):


I’m not really sure how I would count the whole thing, but if the move from the 12/1 high is a 3-swing pullback in an uptrend that is not yet complete, it may rally yet again. I don’t think this is particularly likely, but it is possible. As a precaution against this, I closed some of my SPY puts and lowered my short futures stop loss (as discussed already in the chat). If we suddenly see more strength, I will close the rest of my puts (or more likely sell puts against them) and wait and see.

But, generally speaking, losing the 200-day moving average should be a good sign for the bears. And so, let’s look at the two bearish counts.

The first way is to continue as I left off on Friday. From that count, I had us entering an orange 3 down, and I like that we have a gap here  this morning for that:


That orange 3 (if it is an orange 3) should have a relationship with orange 1, and we do have that now, as the top of the box in the chart above is the 1.618 extension of orange 1. And so it’s possible that orange 3 is in now. I would normally like to see a much deeper 3 when the 2 is such a deep retracement, so I would prefer to see it go to the bottom of the orange box (or even lower). Normally there’s a huge “window” between the low of 1 and the high of 4 (because the 3rd waves are very large and their twos normally only retrace 50-61.8%—in our case, the retracement was almost total), and we wouldn’t really get that kind of “window” here if the orange 3 is done.

But, if it is, we might do something like this. I would think we would still need orange 5, and if we get a gap down, that could be it:


But if we do gap down, we would lose the channel as support, and so a retracement for blue 2 probably won’t really recapture the trend line. And sometimes what they will do is grind lost support and hug from beneath it for a while, before finally letting it go. So, this is possible, but it’s not my favorite.

My favorite is actually this (and I will explain why further below).

It’s possible that my orange 1-2 above is of the wrong degree, and that it’s already the blue 1-2 instead. And we can have something dark like this:


In this case, we’re just not going to see a lot of retracement on the way down. We could be entering the 3rd of 3rd of a much larger degree down.

Here is why I like this darker alternative.

On the second count above, where we need to have a retest of the channel (or we hug it, or something), it’s going to end up doing this:


We would have a “cup” for orange 2, then a “cup” for blue 2, then a larger “cup” of green 2. But, I’m sort of envisioning it this way, why?

It’s because of the decline from the August high. It made, in the end, what was probably a growing “nest” of ones and twos, like this:


Each “two” making a new “cup” with a retracement. And my worry is: back then, it didn’t feel as easy as it now looks. Does that make sense? And the reason why is because the prior declines (prior to the decline from the August high) didn’t make these super nice and pretty “cups” for all the “twos.” In other words, we tend to model a decline in our minds by what we last experienced. And the decline from the August high didn’t look like the declines prior to it. And so it was difficult as it unfolded.

And so maybe our present decline (if we do end up breaking our support) isn’t going to look like the decline from August—our last decline. I worry that we may try to “model” our decline based off of our most recent experience, and maybe it’s not going to be that easy. So, maybe we don’t get retracements this time.

And instead, maybe only sideways consolidations:


And, in the end, it would make sense. If our high is a “2” (green arrow at the top), we should be entering a “3,” and they should have a much faster “slope” (fat red arrows and fat text below):


Alright, that’s my thinking. We haven’t lost the trend line, and we need to (if we’re bearish). Closing where we did is good, and we can gap under the trend line to break it properly. If we do gap down, we’ll see how things go.

I hope you all have a great night.

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