$SPX Evening Musing

Alright, so my fears this weekend about our proximity to the 200-day and what that might do did what it did.

If my last count in that article is right (that the whole orange 1-2 is done), we can be in orange 3 now, and within that, we will need 5 green waves. We may have completed green 1 today, and if we go up some more from here, I will assume we’re still in it. But, if we consolidate here, and persist above the 200-day SMA, we might do something like this:

Now “technically,” we did get a gap at the 200-day, but it was only about 5 points and we immediately closed it. Usually (not always) the gap that overcomes the 200-day moving average is a bit bigger, maybe something easier to see on the daily chart. So, we did get a gap, but if it wasn’t good enough, maybe our recapture of the 200-day is not set in stone yet. The last few times we have breached the 200-day, we didn’t stay up here for long, and I can’t predict that we will or will not this time, either. But, in the event that we do not persist above it, and lose it quickly, I can make green C “bigger.”

In the chart above, I have green C (of orange 2) as a 5-wave drop (in blue). But green “C” can also become a larger 3-wave move (a-b-c in blue), and since we made a new high, I would try to develop it as an expanded flat (this is in the chart below). The VIX made a higher low against SPX’s higher high. JNK made a lower high against SPX’s higher high. And so if those mean anything, I can’t rule out another drop—if we can’t keep this moving average. If that happens, it can look like this:

Last week someone tweeted that there was a lot of deleveraging of longs who took positions from the beginning of the year. So that drop we just had (blue “a” in the chart above)—despite being sort of small—squeezed out a lot of longs. And frankly, I wouldn’t be surprised to learn that this rally went right on to do the same to the shorts. And that kind of “squeeze out the bulls, then squeeze out the bears” is the kind of erratic motion we might see in something wild like an expanded flat. They’re often big painful whipsaws.

So, we have earnings, we approach the FOMC, lots can still happen here. The longer we persist above the 200-day the better, but I can’t guarantee that we will persist, we just have to see if we do. If we do lose it right away, I can imagine a drop back to the 3800-3900 area of prior consolidation.

Have a good evening.