The Weekend Review of the Markets: A Look at Our Various Options

Happy Weekend, traders!

So, the S&P 500 keeps getting slammed and we continue to see nothing but bearish price action. On Thursday we had that good initial intraday reversal, but that was given back by the close. That could have been negated with a gap up, which we immediately got on Friday’s open, but then that was faded in turn as well.


In the process of Thursday’s trade and Friday’s early trade, we formed a contracting structure—which is directionally agnostic in itself. Since we’re at the lower daily Bollinger band and since we continue to have divergence on the VIX, I’ve been open to a low forming here rather than below, though I am not married to the idea. I was long from Thursday’s late morning lows and I held those until the pattern began to fail then flipped and sold into Friday’s lows but have flipped long again late in Friday’s session as a precaution because we’re in the same place we were in several respects: we’re still at the lower Bollinger band we still have a VIX that is diverging.

Another reason I want to expect a bounce at some point is exactly because we just fell from a contracting structure. That is almost certainly a “4th wave triangle” of some degree, which should mean any spill from it is a 5th wave of that degree:


What I don’t know—and about which I won’t hazard a guess just yet—is whether today was the totality of that 5th wave or whether it still has more to go. I will say that the little new contraction we made toward the close could be an ending diagonal:


It has the right number of internal waves and it contracts. But—just like going in today—I can’t be certain about this until we start going up with some oompf, so I’m not at all married to my longs and if the market weakens I will keep selling it until they make me stop.

For instance, it’s the very nature of the contracting structures to be directionally agnostic. For all I know for now, the late contraction is just another 4th wave triangle of an even smaller degree, and the small rally into the close is a little “e-wave” stop clearing raid before we have another drop (e-waves can sometime fall short of the triangle’s upper rail—as was the case of the orange “e” above us—or they can run long):


If it is another 4th wave, we can gap down for instance.

The good news for bulls is that we’ve now seen several of these kinds of contractions:


These are almost certainly all 4th waves of various degrees, and it’s only a matter of time before we run out of wave degrees we can use. When 4th waves start stacking up like this, we’re almost certainly at the ass end of a decline, not the mouth.

That doesn’t prevent us from deeply capitulating another hundred points or more first, but we are at least close in terms of time. My strategy for now has been to sell any weakness, use a stop, and try a long on any strong green candle with good volume. If that candle sticks, I keep the long, and wait to see if we start going up again, and rinse and repeat until we get a low, which will come at some point.

I will spend the rest of the article discussing various ways we may count what we’re seeing. There’s something in here for both bulls and bears so you won’t want to miss it.

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Ok, so: all I’m saying is this: the market is either clownishly bearish here, or it’s clownishly bullish here. That said, my macro view is, as it has been: that the fastest and most severe Fed hiking cycle in history should have lag effects that will probably cause a recession, and perhaps a harsh one at that. And if that happens, the equity markets will not survive. That is what I think should happen.

But lol

My strategy for some time will be to follow price as best as I am able to. If we see a strong rally emerge, bullish bias until that low is taken out. If that low fails, bearish bias until we see a new rally attempt, etc. At some point, things will clarify for us, or at least that is my hope.

I hope everyone has a fine weekend and I look forward to seeing you next week.

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