The nature of the human mind is such that it wants to extrapolate the recent past into the immediate future. This is why traders tend to get bullish near tops, and bearish near bottoms. This is why, near the most recent top, the majority of traders were bullish. But the nature of the market is such that, in most instances, by the time a trade appears obvious, it's usually the wrong trade.
A critical part of trading is the ability to prepare for, and sometimes act upon, the opposite of what seems obvious. That's far from being the entire skill-set, but it's a key part of it: You have to be willing to sell when everyone is screaming "buy!" and be willing to buy when everyone is screaming "sell!"
By way of example, one of our forum members commented (on Wednesday) about how I was holding my ground on the bear case, and I replied:
I've just made it a policy not to flip to bullish at resistance, unless there's an incredibly clear reason to do so -- and, from the perspective of the wave pattern, anyway, there isn't a good reason yet, since we could easily still be completing wave C of an ABC flat. The tricky thing is: C-waves are supposed to make everyone bullish -- especially in a flat, where they hold the A-wave low, then break the A-wave high and thus make a "higher low, higher high," which is almost universally considered to be bullish by technicians.
Since we were bearish at the most recent top, nimble bears likely captured enough profit on Friday's decline to assure that -- no matter what happens from here regarding the intermediate picture -- the most recent bear trade will end up in the "plus" column.
Regarding the intermediate term, bears can clearly be hopeful -- but newer traders probably won't understand that I was actually more bearish near the recent top than I am now. Part of the reason for that is because both the intermediate-term (IT) bear count and IT bull count were in agreement to this point (see SPX 2-hour chart -- fourth chart below). So, from the standpoint of both my preferred and alternate count, I was essentially assigning 100% odds to this recent decline. But at this point, the bull and bear paths can diverge.
Thus, I believe bears should be a bit cautious now, since the market has not eliminated the bull options from the picture and we're still inside a multi-month trading range. And since this ain't my first rodeo, I am well-aware that the information sent to us by the market from inside a trading range can be garbled and misleading.
In any event, there's nothing that screams "bullish" yet -- bulls will need to make a better case than they have with the recent price action. I'm simply warning that bears should remain aware of the caveats and turn cautious now --but obviously, the bear case remains alive and well after Friday's monster sell-off.
Interesting to note that INDU just retraced roughly 70% of the last three weeks of rally in essentially one single session. That's not typically a bullish signal. So the bear count remains slightly favored, but the market may have more tricks up its sleeve, and I certainly wouldn't accept anything but clear, low-risk entries from here.
We'll start with INDU's chart. I hesitated to even attempt drawing the potential bounce path (blue dashed line), since I have only a minor bounce at Friday's low to draw from -- but I gave it a shot anyway; just take that path with a grain of salt right now.
No change to INDU's trend line chart, except to note that the decline has, so far, found support at the trend line from the February lows.
Here's another way to look at INDU, which I found intriguing: (continued, next page)
Next, the SPX 2-hour chart shows that we've reached the first intermediate bull/bear inflection point:
A closer look at the bull count below:
SPX easily captured Wednesday's target zone, and the speed of the decline made it easy to hold shorts right on through to the second target zone. Near-term, there's not enough to draw from to project a high-probability path, but SPX could potentially follow a similar path as shown on INDU's first chart (though, again, that's just a gut-instinct shot in the dark; there are no clear impulse waves off the low to draw from yet):
Finally, a quick bonus chart of gold, which presents a possible bearish sell trigger: