So why is 3678 the important number? The maximum fib extension a Wave B (in theory) can make off of a Wave A low is 1.236. If you look at the chart you will see this 1.236 fib number two times. First, the one the measures the March rally. Second, the one that measures the recent corrective wave off the Sept high. What is amazing to me is that both of the 1.236 levels align almost perfectly at 3678! I don't think that is a coincidence.
Watch this 3678 level and look for either a rejection or a breakout in the next week or so. Rejection = we have a confirmed bear market rally.
Clear breakout and retest = bull market rally. This means we are likely seeing a motive wave 5 with an upside around 4000.
Why I think this is a bear market rally.
1) You can also see the clear pattern ending right at the 1.236(3678) level. That is a with a minimum expected break down to 3500 level.
2) Bear market (corrective) rallies are usually driven by a handful of companies. This was clearly the case through most of the summer with the FAANG stocks. A lot of stocks have ridden those coattails to this high, but you have companies like Tesla with a 1,200 PE ratio and Amazon at 90. Do you remember the Apple rally this summer?
3) There is a tsunami of debt, bankruptcies, foreclosures coming due to COVID. Sure, online retailers have down well and only line shopping in general has done well. However, the estimate is something like 10+% of small businesses will go out of business in the next 6-12 months. My understanding there is even more "zombie" companies.
Why I think this could be a bull market rally.
1) I have seen the S&P break to the upside in the pattern. Note that this type of breakout has shown to have the affect of significantly increasing the eventual correction that will follow the ensuing rally (think Feb-March drop).
2) The Covid vaccine "irrational exuberance" is strong in the market. With the release just around the corner and what looks like an early release in Europe, I think the market could go exponential like we say just the other week.
3) Government stimulus can wipe away a lot of debt/bankruptcy fear. If the government can pass something in the coming week or so, then this combined with the vaccine could really rally the market.
With some down trends and channel
Trading Channels #1
Trading Channels #2
Worst case scenario correction
Hope this helps. Good luck.
Thursday at 11:05 at the 5m time frame. Another retest and rejection.