Friday, October 15, 2021

SPX Update: Three Wave Pshaw

Since last update, SPX declined down to the blue iii label on the near-term chart (second chart today), then bounced strongly after the Fed minutes were released.  From there, it managed to claw its way back above 4429, which kicks out the immediately bearish idea of "bear: ii," but leaves open the possibility of the current wave developing as an ending diagonal (first mentioned on 10/8).  Please note the sketch below is not intended to be an exact roadmap, more of a very general "artist's rendition of an ending diagonal, still at large."

Near-term, SPX captured blue iii from the charts -- and while that wasn't all bears and I were hoping for, the end of wave three can always be the end of wave C (when no fourth and fifth waves materialize):

The clear three-wave nature of the rally from 4278 to 4429 had me pretty sold on the idea of a subdividing third wave, but that option has been kicked in the head now.  

Back at the end of September, I began discussing the idea of the price low (which wasn't even in yet -- 4278 eventually becoming that low) marking the bottom of a B-wave and a C-wave developing from there, to run back up to north of 4465... I initially liked that idea because of the pattern in ES futures, which (back at the first high of 4465) had made a new high relative to cash.  But then, after the very obvious three wave rally to 4429, I started to second guess that (which is easy to do when you're dealing with a subtle initial clue, such as something that only shows up in the futures market).  Now it appears that initial read was more correct than the latter read.

And to examine the complete other side of the trade:  On the bull side of the coin, we have to refer back to the number of charts I showed that had all back-tested long-term trend lines from above.  SPX, COMPQ, and TRAN were among the charts that showed this back test, and on October 8 I wrote: 

Last update noted the bevy of long-term trendlines just below the market, and, not surprisingly, the market managed a respectable bounce from those lines. If you're a bull, then that's the back-test you were hoping for, and you probably stay the course.

Obviously, "stay the course" is not the direction I've been leaning, but this is why I try not to ignore things that run contrary to my own biases.  Especially when, as I wrote a few times, it's very early in the pattern and thus there's nothing resembling "confirmation" yet.  So, along those same lines, the bull version of the three-wave rally is not an ending diagonal, but a bull nest.

In conclusion, the three wave rally off the October lows was not a subdividing bear ii.  That idea was wrong and is off the table.  From here, the bear version of the pattern is an ending diagonal C-wave, while the bull version is a bull nest.  We'll track these as they develop.  Trade safe.

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