Dr_Roboto

S&P 500 - Approaching critical 3678 level (bear or bull rally)

OANDA:SPX500USD   S&P 500 Index
S&P is reaching its most important level of this rally. There is a high probability that all the market action from Feb to today is a large ABC corrective wave. Wave A was Feb-March. We could be seeing the conclusion of Wave B.

So why is 3678 the important number? The maximum fib extension a Wave B (in Elliott wave 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 rising wedge pattern ending right at the 1.236(3678) level. That is a bearish pattern 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 rising wedge 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.

Elliot Wave Count

With some down trends and channel

Trading Channels #1

Trading Channels #2

Some useful trend lines

Worst case scenario correction

Hope this helps. Good luck.
Comment: One more as a large up channel
Comment: 3678.1 at around 10am. Interesting to see if it takes another run at before closing.
Comment: At the 4h. The RSI is close to overbought. However, if history teaches us anything about this rally, then that does not mean squat.
Comment: 2pm and its ready to test again. Right now it is at the top of the rising wedge, close to the top edge of the regression channel, a hair under the 1.236 fib, and cRSI is overbought both on the traditional 70 level and the cyclic bounds. However, the MACD is not crossing over. End of day close above would be a very bullish sign. A gap up tomorrow morning and this is a bull rally and get ready for a massive bubble.
Comment: End of day and as expected a 2nd test right to the major 1.236 fib level. Could not of called it any better ;) Now lets see if we drop tomorrow or we gap above.
Comment: In case you are watching this idea instead of my newer one.

Thursday at 11:05 at the 5m time frame. Another retest and rejection.
Comment: 3:43pm. Hammer time
Comment: End of day. I don't know, but this looks like a setup for tomorrow to gap up. The bears came at the last second, but may be too little too late.

Comments

This is really helpful! I appreciate the detail you put into discovering the trend lines; it's been instructional for me to follow your posts. One more piece of evidence I would add to the "bear market rally" column is when you divide SPX by Gold as I did here , you see a bear market that began Sep 25 2018 to coincide with the Fed's raising of interest rates. (Here are the notes from the fed meeting: https://www.federalreserve.gov/monetarypolicy/fomcminutes20180926.htm.) The rally off March 2020 lows is a bear market rally on the SPX / Gold chart. This is similar to what happened during the Great Depression where USD was pegged to gold. Market optimism also occurred during the financial crisis of 2007 and pretty much all other financial crises, as people tend to underestimate the economic impacts of what's going on. The evidence is right in the chart during these periods on days when stocks go up. Why else would rational people (although there's an argument to be made that investors are irrational) buy stock during these times, causing a bear market rally to form as it is forming today? The text book says that when you print money you get inflation. But Japan in the late 1980s and early 1990s printed all kinds of money and their NIKKEI 225 index has not reached their peak of 1991, not even today. Japan then had inflation between -1 and 1.5% for the decades that followed their 1991 crash. Then look at the US in 2008-9. We had minimal inflation in the real economy, even with record high QE and asset prices and record low corporate taxes. What comes next? Stock bulls clearly think the Fed is going to inflate everything and the dollar will weaken. But there are factors that a strong dollar is here to stay like the $12T in ex-US debt denominated in USD or the $59T of US debt denominated in USD -- all this needs to be paid back with dollars. There's also the national security interests of the US which require strong dollars to buy alliances and finance potential war. So, our policy makers (especially when Trump leaves office) will bump up against the limits of how much money can they can print. Fed tightening is the classic catalyst for popping a bubble. But hopefully, the thing will pop before then and the stock market bears can at least recoup all our losses and maybe make some "told you so" money. That is what I have been going to bed dreaming about these days.
+4 Reply
@unicow, your issue is that you are too rational ;) I think that is the general quality of all bears, me included. You are 100% right about everything. BUT. The market spends most of its time being irrational right up to the edge. I think that you hit the nail on the head with "people tend to underestimate the economic impacts of what's going on." Most investors are ignorant about all of it. They just buy because the news articles or friends say so. The rise of the 401k and forcing all people to put their retirement into the market is the biggest ponzi scheme of all and IMO really drives a lot. 401k's pour $B into the market every year and most people never fuss with it, just keep putting it in no mater what. To be honest, I don't blame them. The market is such a gambling machine. It is easier to just invest and walk away. I did that for the longest time and should go back to it. I was a lot less stressed out. All this crazy volatility with record crashes followed by record rallies is exhausting. I get way too little return on my time invested, but I am a chart geek now and it keeps me occupied during my boring zoom meetings.
+4 Reply
unicow Dr_Roboto
I love it! Zoom meetings are the worst btw.
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jedington Dr_Roboto
@Dr_Roboto, I appreciate the charts anyways, so thanks.
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Hell yeah it should be hammer time, “ECB warns banks are ‘all over the place’ on bad loan preparations” just published article now on FT.
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I saw 3,681 come across the tape. Up-channel on the 5 min.
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@z3m25, I had 3680.7 as the top fib from the March bottom. So far on the SPX500USD it registered 3681.2 on that test. I still don't know if it is going to break it or not. It's sure hang around up here with no selling pressure. My gut feeling is that it is going to break above this week, because being rejected would be rational.

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A lots of lines.
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Crazy to read this now. I saw the same, without all the detail, cleared out more than 1/2 of my swing trades should this be the top for a while. Great breakdown and thank you!!!
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@z3m25, your welcome.
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