The Long Weekend Review

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Ok, so let me summarize some things much like I did the other day.

In the October rally, I assumed the bear market wasn’t over and that we would have a another huge drop, perhaps taking us even as low as 3000. However, as we topped, things like high-yield credit, and the structure itself, breadth, and other things I watch were a bit odd, and I became less inclined toward that view and opened up the possibility that the October low was the the low, at least for the first of several bear markets that we may encounter over the coming years (and that was laid out here).

As we stand here today, I am more and more inclined to the view that the October low was the low. Adding to that hypothesis is the growing eagerness of market participants for a catastrophe. That counts, to my mind, in the bulls’ favor. I think sentiment is too bearish. I also think that the market is going to be further ahead of the Fed than we can easily see from our individual vantage points. I do not think the low is going to be loudly announced. I think we will see it looking backwards. And so all of this continues to make it plausible that the low is in.

Now, if the low is in, a lot of things can still happen going forward, including a deeper drop. I don’t have enough here to be strongly convicted.

Let’s look at the possibilities. We’ve just dawdled and dawdled and dawdled down here. This may have been an accumulation much like the one I suggested here. And the primary count I have been using remains intact. Carrying over yesterday’s thought, we could have simply made another 1-2 in orange, which follows on the heels of the 1-2 in blue:


There are a few things I don’t completely like about this now. They don’t invalidate it, but I’m not as enthusiastic as I had been.

  1. I don’t like how deep the orange 2 is. We had an excellent bear trap on Wednesday. And we got within about 16 points of that low today, which lets those folks off too easily. If we’re entering a 3rd blue wave, better to just get going.
  2. The diamond—as a diamond—shouldn’t really do what it did today, retrace this deeply. As a structure, it’s not really behaving like a diamond reversal pattern, as it had been yesterday. Maybe that’s something, maybe it’s not.
  3. I don’t really like the huge rally into the close late in the session. Often—not always—those get rejected with a gap down the next day. That’s less likely to happen on a Friday: sometimes strength (or weakness) into a close on Friday sees followthrough on Monday. But, generally speaking, it’s better to close in the other direction.

As I said, none of these invalidate the bullish count, and we might still go shooting straight up. IF we do, and we’re actually very bullish, I want to see us go way up, a little under the 200-day SMA, then consolidate for 1-4 days, then gap over that moving average and we’re going to have a squeeze like June 2020. That’s the massacre I referred to before.

Given all of that, the ES-mini futures contracts have made one of the most beautiful triangles. And those can become many, many things. I wish we would have simply gapped up and rallied all day today, because that would have made things easier for me. But, we didn’t, we have this triangle, and now I have to deal with it, so let’s do that.

First, let’s look at the triangle (it’s most visible on futures, so I’ll use that for the rest of the article):


It’s a coil, and it means a big move is coming, and it’s symmetrical, which means I can’t choose a direction based on the structure alone. It’s directionally agnostic. There’s not much I can do about that. There are folks out there who will insist on one direction or the other, and it’s a coin flip and if they’re right, they’ll be really right, and if they’re wrong, they’ll be really wrong. And I don’t like to do that. So, I’m going to show all the options and try my best to play along as we go.

When all of this started and we got the weird camel-humpy high and the extra swing with the CPI squeeze, I thought this was all a good candidate for an expanded flat correction (that’s the bullish count in the cash session I’ve been carrying and what you see at the top of the article).

Backed out on futures, it looks like this:


We have 3-waves up for orange “A,” then 3-waves back for orange “B,” and we should enter orange “C” and go up. But, I’m no sure I like the triangle in that. What do I do with that? An accumulation down here is fine, and it looks like that on cash, but it’s an outright triangle on futures, and so let’s at least acknowledge all the things a triangle can do to us.

First of all, sometimes triangles look like triangles and then they just go shooting up forever just because. An example from last year:


A genuine triangle is found in only two places: 4th waves and B-waves. And that is neither of those, I don’t think. And so it’s one of those that looks like a triangle but isn’t really one. Who knows. And that’s possible with us here, today. Maybe we just go shooting up.

But, if it is a real triangle, it should be in a 4th or B-wave. And that opens up some weird shit.

Now, recall the flat:

That green C should be a 5-wave impulse. And there’s enough here for it to be done already, but what if the triangle is, in fact, a 4th wave? It could just be the 4th wave of that green C, and we need 5, so maybe this:


This would mean that we are still really close to a bottom, maybe we gap down on Monday and then we move up very powerfully from there. The one main thing I dislike about this is, frankly, I think too many people see it this way. And that might make it less likely. It doesn’t mean it won’t happen, just that a lot of people do think we’re in a 4th wave triangle here and so maybe we’re not.

That leaves us with a B-wave. And things get especially weird with that. The reason is, you can always count B-wave triangles in either direction, sort of “externally” as a bigger B-wave, or internally, as a B-wave within something. And that lends itself to the agnostic nature of these structures.

So let’s look.

For a B-wave, it could mean my external count is not right, and that we’re not in a flat. So you don’t have to keep scrolling up and down, let’s look one more time at that flat:

Notice where the orange “A” is. That not being the high is what makes what follows an expanded flat. After that orange “A,” we need “3 waves” and the CPI spike is one of them (the Green B at the top). But if I’m wrong about that, then the actual high could be orange “A” and we still need 3 waves from that.

And if we fall apart, this consolidation can just be a central piece in a 3-wave A-B-C decline in green of orange B:


And if we get equal legs between green C and green A of orange B, we can retest the October lows with a double bottom. One thing going against this immediately bearish count is that I do think sentiment is already too bearish here to support this.

And so, let’s look at the last possibility. Remember, B-waves can be internal and external, and the one above is just a big, external B-wave in itself. Let me show what can happen though when everyone expects that (this will be the case with the 4th wave, too: in other words most people see a 4th wave, and so expect an immediate drop, and this B-wave variation above would also involve an immediate drop, and so maybe we don’t get those).

But if it’s not an external green “B” in itself in entirety, but rather a structure internal to that green “B,” it can do this:


Note that it is now a triangle of a lower degree (blue instead of green, with all the a-e letters flipped around to the opposite sides).

And if we get a short squeeze, the higher it goes, the higher orange B will be, too. So this one’s not as ugly. We have a rally, then one more drop, then we go to all-time highs over the course of many months, deep into next year.

Ok, so, that’s not helpful, and I’m sorry. There’s just too much that can happen here with a structure like the one we’ve made. I don’t like to guess and I don’t have enough here to be more certain. Sometimes that happens. So, sometimes better to wait and see. I have a modest futures long on and I added some SPY calls to that today.

So, if we’re really bullish like at the beginning of the article, that will all work. If we’re temporarily bullish like the chart just above this, that will also be fine, and if we’re bearish, I will get stopped out of futures and will take a small knick on the chin with the calls, but I’m not in the market super heavy because I don’t have a lot of conviction and I need to see what happens. Maybe I miss part of it, maybe I don’t. We’ll have to see.

Of all of the possibilities I’ve noted, the two I like the most are the first and last. I think those would be the two least expected options. The 4th wave and Green B-wave options are the two I think most people expect at the moment. They could be right. We’ll have to see.

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