Friday, February 28, 2020

INDU and SPX: The Perfect Storm

Last update discussed some of the lower zones the market could be aiming for, and those have since been captured and exceeded.  We also had a timely discussion of the Mega-Bear Count (and I'm glad we did), and that count is, amazingly, not looking at all impossible.

Before we go further, I'm going to reprint something I wrote in the forums yesterday:

I'm going to restate this yet again, but I think we're in a psychological dead zone for the market, and I have a hard time seeing us get out until there's either Central Bank intervention, or a cure for Coronavirus. 

On its current trajectory, Coronavirus will devastate the world economy, so there's a tangible issue there... but intangibly, Coronavirus triggers a PRIMAL fear in people: The fear of death. People associate money with security, and we associate security with life. 

We thus associate MONEY with LIFE. 

A virus that triggers our collective fear of death likewise triggers a collective scramble toward self-preservation. And that means preserving our assets. Thus, in this psychological backdrop, the selling is perceived as an additional THREAT to our security, to our well-being. And it thus can easily beget even more selling. 

This is a new challenge for most of us who are alive today. We haven't seen a deadly global pandemic in our lifetimes. And, at least in the West, we have grown soft and weak as a society. Many people think "struggle" means getting a bad haircut. They are ill-equipped to deal with genuine struggle, and thus will likely be even more prone to panic. In other words, this could be something of a "perfect storm" striking the market. 

I will continue to be extremely cautious, and while I will hedge along the way, I probably won't consider going net long until we see a CLEAR (not a "well, can't rule this one out!") impulsive rally.

There are some rumors floating around the Street that the Central Banks may indeed step in this weekend... so I guess if those are true, bears need to stay alert to the option of a gap higher on Monday.  I can't trade rumors though, so I take them with a grain of salt.  Let's look at some charts.

This first chart shows that my preferred read (discussed back on February 2) of a nasty bear nest was correct.  The question now is how many more extensions the extended fifth wants -- so don't take the presence of any v's on this chart as proof-positive that it's time to jump out in front of this freight train.  It can be a very bad idea to front-run this type of wave.  Patience is key.

Bigger picture, unless the Central Banks jump in "bigly," then the Mega-Bear Count isn't looking so crazy after all.  Now, that said, I'm a firm believer that we always need to understand both sides of the trade:  The bull count now is that the current decline is a nested SECOND wave, to lead to a massive third wave rally.  If we see coordinated Central Bank intervention, anyone who lived through the Quantitate Easing years (2009-2014) knows that the Fed's printing press can work absolute wonders on the stock market (and it can even create all sorts of "excellent" jobs, such as Part-time Gum Wad Remover and Emergency Bumper Car Repair Person -- remember those years?  Cracks me up that many in the media already seem to have forgotten how bad they actually were.)

Anyway, keep an eye on that lower trend line, if we get there.

Next up, SPX has fallen through median channel support.  In the past, this has led to brief-lived bounces, but keep in mind that if we're in the Big C wave, then we can't COUNT on that.  In the Elliott Wave world, C wave is sometimes said to stand for "Crash" wave.  C waves are third waves, so they have all the power typically associated with a third wave.

In conclusion, due to the depth of the retrace, we're likely down to two options:

1.  The Mega-Bear count
2.  The decline as a bullish second wave

What we're watching for now is either/both

1.  Significant Central Bank intervention
2.  An impulsive rally

Until then, draw your crash channels and wait for the market to break out before even considering getting bullish.  Trading this wave, I've been reminded of my friend Lee Adler's old saying:

"There's no such thing as support in a bear market."

Trade safe.

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