US Stock market S&P 500

[Mercury]

Ok so the Wave B didn't hold, on to the next set of scenarios and it is quite interesting.  For me I am now almost certain we have seen the top of the Central Bank Bull market (Famous last words, cue rally etc etc...).  The nature of the price action suggests to me a best a retrace rally for St Nick but in what form?  I have 3 potential scenarios in play (excluding new all time highs) as follows:

1. The market hammers down is a large time frame bearish wave 1 (looking for up to 20% "correction" before any rally of significance - not that it will be a correction)
2. We get a bounce of relatively near term support into a small retrace back to previous support breakout (now resistance) before scenario 1 kicks in (see first chart)
3. We get scenario 2 but instead of a small retrace we get a Fib 62% retrace (subject to where the market might actually turn) back to the recent Pennant breakout zone before scenario 1 kicks in (see second chart)

[Mercury]

I should point out, for the avoidance of doubt, that the Wave 1 can end at any point, it doesn't have to travel all the way to the supporting trend-line.  The point here is not to trade the Wave 1, which will be hard to spot and probably will have a fair bit of volatility, but to sell into the rallies.

[Mercury]

The Dow (& SP500) has now arrived at the supporting channel line.  The nature of the price action is still consistent with the market having topped in October (note the most common, by far, season for a major market top prior t a significant bearish market is in the Autumn, the Fall as the Americans call it...).  The current bearish phase has been quite sharp but has, as yet, not really received much MSM attention, no surprise there.  However the market doesn't go in straight lines (apart from Oil it seems..!).  I don't think we can yet be 100% sure that the trend is now down long term but another retrace rally and then a break of lower resistance would clinch it for me.  I remain bearishly biased now unless we get the mother of Santa Claus rallies...  I think we will soon get one but it will only retrace, will not make new highs.

Trading Strategy is simple now, sell strength in the form of retrace rallies to key resistance points.

 

[Mercury]

Not that is it as all relevant @TrendFollower but I am not a full time trader, I work for a living (full time) and I have no idea what you are referring to when you wonder what a professional trader would or would not do...  I do what I do because that is my methodology.  One has to practice ones methodology rigorously or become one of the failure stats.  As I have said before to you it is not that time consuming once I have a market fully analysed to keep up to date.

If you don't like it don't read it.

[Mercury]

I am Long off the swing low and bounce off the supporting channel line.  At present I am tracking this as a retrace move, expecting an A-B-C form up to maybe the Fib 62% and perhaps coincidental with the next US NFP, let's see.  If I do not see the require price action for a retrace then I am Long!  If I do then I will swing Short again.  USD looks to be heading into my long looked for bearish phase (coincident with stocks strength?) and Gold/Silver is heading back down as projected (maybe shifting from a USD to Stocks correlation at last?).  Other stocks indices have been showing a rally for  while now and finally it looks on across the board, albeit not fully in sync and perhaps actually divergent, as one would expect with a market top...

 

[Mercury]

So far so good for my current lead projections on Indices.  If the A-B-C set up is to unfold then the wave A should complete soon, I am targeting the Fib 38% level, which could come up at the US open today.  However there is a little wrinkle to consider, that this is actually all the retrace we will get (if things are very Bearish).  So an option could be to place a Short at any Fib 38% turn just in case the market collapses through lower key support.  You can see the same basic set up on all the US large Caps and a variation on a theme on Dax and FTSE100.  Also the Russell 2000 (US growth stocks) is very depressed indeed, which suggests speculators are giving up on growth stocks (Bullish bias) in favour of the large caps or other vehicles (Bearish bias).

Trading strategy:

1. Close any Longs (I will be) at a clear turn back off the Fib 38% level
2. Consider a placeholder Short, tight stops and move to break even ASAP (i.e. once the market has clearly moved away down)
3. Read the price action on a Bearish phase to assess if it could be a Wave B (further rally to come) of hammers down hard and past previous lows, thus negating a wave B set up.

[Mercury]

The Fed jumped in again yesterday to give us all a timely reminder that the current Bull market is fueled chiefly by Fed (and other Central Banks) policy, this time in the guise of Powell's speech (not even any actual data releases or rate changes...  Hmm!).  This is why I have labeled the current Bull market as the "Central Bank Bubble".

Regardless of why though, the market shot up and blew my leading scenario out (well almost but more on that later).  I confess I was hoping for a nice clean A-B-C to terminate at about Fib 62% (also on SP500) to make it clear on a trend change but things are rarely that simple so back to the drawing board...

Other than fresh all time highs (let's wait and see on that one) I have now 3 potential retrace scenarios to watch for as follows:

1. The move up to date is actually an A-B-C and will end at the Fib 62% or thereabouts (need to check for congruence with other markets) before the drop through support at circa 24,120 level and a much longer Bearish phase.  This would mirror roughly the pattern from the 2007 Bear beginnings (not that this is conclusive in any way, just interesting from a pattern recognition perspective)
2. The current rally is a wave A as previously suggested (just a lot higher than I had hoped for but no matter).  If a similar retrace end to scenario 1 is still a live possibility then a rather deep drop to Wave B would be required followed by another rally to top out around about the Fib 62%, just a little higher than the Wave A top.  Would need to see the current rally top out very soon for this scenario remain valid.  In this scenario I would expect the wave A and Wave C to be roughly of equal length.  Thus when (if) wave B ends I can roughly estimate where wave C rally will end.
3. The third scenario is a little more out there and if it occurs will be harder to trade because it will seem like we are heading for fresh all time highs.  In this scenario the market is in a so-called complex retrace (i.e. each of the A-B-C waves displays its own internal A-B-C (there are other variations on a theme for Complex retraces moves according to EWT).  The point here is complex retraces are hard to spot early and hard to trade.  In this scenario the previously labeled wave 2 (pink) on 8 Nov (26,280 on the Dow) is actually a large wave A and the drop down to currently labeled Blue 1 is a Wave B.  Thus we will get a wave C beyond 26280 but just beyond.  The additional problem with tracking this scenario is that it could also manifest like scenario 2...  

Any of the above 3 could play out.  I'd give it a probability of roughly evens between 1 & 2 at this point.  As for 3 it would require a lack of correlation between the large Caps and the Nasdaq, which does not have scenario 3 as an option because it already made a lower low that the corresponding wave 1 (pink).  Given the high levels of correlation thus far I would judge scenario 3 to be less likely but if Tech becomes weak and investors flee initially to the staples of the Dow then it is possible for the correlation to break before all hell breaks loose across the patch.

Trading strategy:

• If one wants to get Short then taking positions at any of the scenario turns makes sense to me, with tight stops and a quick move to break even to protect against the next scenario in the cascade.
• Alternatively wait for the break of the significant support levels and hold a much wider stop (or do both)
• Comparing all the stock indices as things progress over the coming month will be vital to identifying what is going on.  Even if we lose correlations we should see all of them peak and turn around about the same time and at significant turning points.

Net: things are a bit murkier thank to Powell, we will have to wait and see how price progresses over the coming week and a bit into US NFP release.  As always price action will determine which scenario holds true and reveal trading opportunities.