S&P 500’s “dip” Is Underway. Where Will It Bottom?
“The Dip” Is Underway
“[The] price action makes for a complete five-wave EWP impulse pattern up from the November 3 low at $3698. My primary expectation is [therefore] that the index topped for black W-a at $4100 for a picture-perfect (green) W-5 = W-1 relationship. It should now be working on the more prominent black W-b to ideally $3795+/-70 before the next rally (black W-c of blue W-B) to ideally $4340-4470 starts. A break below this week’s low at $3937 will confirm this thesis.”
Thus my primary expectation for that push lower was invalidated because the index dropped below $4034 on December 2 and continued to drop below $3937 two days later. See Figure 1 below.
Short-term Bounce Before We See the Next Move Lower
The hourly chart above shows the preferred, primary, scenario from last week, in more detail.* The SPX should have bottomed, for green W-a and should be in the countertrend rally/bounce labeled green W-b to ideally $4020+/-20. Corrections always move in three waves; after W-b, the index should produce the next leg lower labeled green W-c. Depending on where exactly the W-b tops and the extension of the W-c, I anticipated a low at ideally $3730-3870. Once more price data becomes available, we can narrow down this target zone.
Once the $3800+/-70 zone is reached, based on seasonality, preferably later next week, we must entertain the notion all of black W-b has already bottomed out. The index will have to move below $3635 (the 76.40% retrace of the October 13 – December 1 rally), with the first warning below $3725, to start to suggest there will not be a more significant C-wave rally to $4300+.
Last week was indeed “the … initiation of the final decline to that W-b target zone before W-c starts.” That remains our primary battle plan. Short-term (hours to days) we should expect a counter-trend rally to around $4020+/-20 before we see the next decline to ideally $3730-3870.
From there we continue to expect a more significant C-wave rally to $4300+. Our contingency plan is now that a move below $3635 (the 76.40% retrace of the October 13 – December 1 rally), with the first warning below $3725, will seriously jeopardize a Bullish resolution for year’s end.
*Since financial markets are -like life in general- probabilistic, it has options. Thus, there’s always a chance one’s primary expectation is wrong, i.e., when the markets break above or below certain price levels determined by the EWP rules.* Thus, one must always have an alternative expectation available. This approach is no different from placing an actual trade. One has a primary expectation -based on high odds, say 10:1- the trade will become profitable. Why else place the trade!? But at the same time, one has a certain price level -the stop loss level- below (or above, in case one is short) the purchase price where one knows the trade is wrong and must be abandoned: the alternative. We also always hope the trade will be profitable, but we know with certainty, not all trades are consistently profitable. Understanding that trading and forecasting the markets using the EWP primary and alternative are the same, one can then use those invalidation levels determined by the EWP as one’s stop loss levels for trading.