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Looking Back to Look Ahead in S&Ps

Posted 10/15/2018 9:18AM CT | RJO Market Insights

Now that the market’s collapse last week is a very obvious statement to the masses, what should we expect next?  The last time the market provided pretty much the exact type of price action that we had last week was in early-Feb of this year.  In 06-Feb’s Technical Blog we discussed the likelihood that the dramatic and impulsive and quite obvious decline directly from an all-time high was likely to be rebutted by a potentially equally extensive (B- or 2nd-Wave) rebuttal before further lateral-to-lower correction would unfold in a more extensive way.

The weekly log scale chart below shows an extensive, 5-week recovery that retraced more than 80% of the initial counter-trend 12% decline from 2879 to 2529 before the correction continued to early-Apr’s 2552 low.  In that 06-Feb Blog we advised waiting for a bullish divergence in momentum to complete a suspected 5-wave decline and expose a favorable risk/reward buying opportunity that, we conceded, could merely be part of a broader peak/correction/reversal-threat process.

In last week’s 10-Oct Technical Blog we discussed exactly the same discipline.

E-Mini S&P 500 Weekly Chart

There’s no question that the extent of last week’s decline is sufficient to conclude 21-Sep’s 2947 high as the end of the rally from at least 02-Apr’s 2552 low.  And given the prospect that that 2552 – 2947 rally is the completing 5th-Wave of a giant move from Feb’16’s 1802 low that would warn of a correction lower that could span months or even quarters, the MANNER in which the market rebuts the recent decline- either in a labored/corrective way or a trendy/impulsive way to dictate our actions in the weeks ahead and after tha market provides what we believe will be an extensive rebound.

E-Mini S&P 500 Daily Chart

The depth of Jan-Apr’s correction drove S&P levels down 12% and that proved to be an outstanding buying opportunity.  Scary but outstanding.  The market has thus far declined 8%.  We are not inferring that this current decline will match Jan-Feb’s 12% decline to the 2590-area (although until and unless the market stems this slide with a confirmed bullish divergence in mo, anything is possible to the downside).  What we ARE saying however is that just like that initial and obvious Jan/Feb collapse, we believe this market is only a confirmed bullish divergence in mo away from completing this decline and exposing a correction or reversal higher that could be equally as extensive.

The 240-min chart below details the past three weeks’ unraveling thus far.  The past couple days has shown a slowdown in the descent, which is the typical (4th-wave) precursor to that final (5th-wave) gasp that the market fails to hold and confirms a bullish divergence in mo that ends the decline.  Thur’s 2799 high serves as a micro risk parameter the market is minimally required to recover above to break the slide and perhaps identify its end (2712 currently).  Until at least such 2799+ strength is proven, we believe it’s worth acting on the premise that the past couple days’ lateral chop is the corrective 4th-wave of the decline ahead of at least one more round of new lows below 2712.

Regardless of whether the market achieves that new low or recovers above 2799, the more important takeaway is what we believe is a very likely and potentially extensive recovery that could reach the 2850-area or higher in the weeks ahead.  These issues considered and while acknowledging further lateral-to-lower prices in the days immediately ahead, a neutral/sideline position remains advised for the time being.  We will be watchful for that confirmed bullish divergence in momentum to stem the slide and perhaps offer a nice risk/reward punting opportunity from the bull side.

E-Mini S&P 240 Minute Chart

 

RJO Market Insights

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