Before we go to the charts and evaluate last week’s forecast with what really happened, I wanted to share a few words, which I shared with my premium members in this weekend’s digest as well: “The past two weeks saw the fastest 10% correction since 1928 (see here) and saw an entire ETF fund (XIV) implode in a matter of hours, wiping >$2.2B off the table. Hence, no wonder emotions ran high, but money and emotions are never a good combination! Despite all the drama, new records, etc so far the market has done nothing out of the ordinary and pretty much done exactly what a 4th wave at this degree (major) is supposed to do: retrace 38.2% of the prior 3rd wave. To put it all in a bigger perspective: The S&P had risen almost 60% since the February 2016 SPX1810 low, had risen >330% since the March 2009, SPX667 low, and gone >400 days without a 5% correction. Thus a 10% correction at this stage is normal and healthy. As such, there’s simple a next buying opportunity knocking on our doors.“
With that said and having put the last two weeks into the appropriate context, let’s see what we got. In last week’s update, see here, I was correctly anticpating the low at $6825 was of substantial significance to warrant a larger bounce. Little did I know that bounce was already complete by then. 1:1 market vs me. However, I did forecast that we’d see “…in the case of a 38.2% retrace, the a-wave of the 4th wave bottoms at the 23.6% retrace and the c-wave then targets lower after the b-wave “bounce”. In this case to as low as $6675 (38.2% retrace).” Already on Friday we got “$6631”. Close enough. 1:2 market vs me. Cont’d Below.
Hence, technically the market has already done all it’s required to do for a 4th wave and did so by the book: 1) wave-a to 23.6% retrace of prior 3rd wave; 2) wave-b was 50% retrace of wave-a; 3) wave-c then targeted the 38.2% retrace of prior 3rd wave. Thus all requirements for a 4th wave low have been met. Why question it, right!?
Especially since at Friday’s low and -close there was a plethora of positive divergences among many charts and indicators: daily and hourly RSI5, Nasdaq’s McClellan Oscillator, Zweig Breadth, VIX, etc etc telling us we should expect higher prices over at least the next few days. However, there was and still is too little price data available to be able to tell us if all of the 4th wave was in, or if the market needs more time to wrong foot the majority necessary to kick start the next rally. This is shown in the two options in the daily chart above.
Regardless, what we do have is IMHO a trade-able bottom with a well-defined risk/reward ratio. Limited downside risk from Fridays’ low (~$100) vs $1000 or more upside reward from that same low. For now we’ll let the market decided which route it will take, but either will eventually lead to new ATHs. Closer to home, a break above the 76.4% retrace of the entire move from the ATH to Friday’s low will be the first serious indication major-4 is in. A stall at the 50-62% retrace and then drop below $6775 (last Thursday’s close) will put the immediate-Bullish case more on thin ice. Guess what the market will most likely do to keep us all guessing for as long as possible 😉