Posted on Sep 01, 2022, 07:57 by Dave Toth
In 15-Aug’s Technical Blog, one day before 16-Aug’s 4328 high, we identified three levels the bull needed to sustain gains above to not only maintain a broader bullish prospect, but also to reduce the odds and threat that the recovery from 17-Jun’s 3639 low is a major bear market correction: 4202, 4113, and 3950. On Mon 22-Aug and as discussed in that day’s Technical Blog, the market confirmed a bearish divergence in very short-term momentum below 4202. Two days later, the market failed below 09-Aug’s 4113 larger-degree corrective low. In overnight trading last night, the market broke 28-Jun’s 3950 high and area of former resistance-turned-support that jeopardizes the impulsive integrity of an alternate bullish count, raises the odds that Jun-Aug’s 61.8% recovery is a 3-wave and thus corrective affair and warns of a massive 3rd-Wave resumption of Jan-Jun’s INITIAL decline in what we believe is a major bear market that’s just getting started.
On Jun-Aug’s way up, we specific corrective lows and BULL risk parameters the market needed to sustain gains above to maintain a bullish count. The same holds to the downside relative to the past couple weeks’ decline where we now look for and identify specific, objective levels the market needs to sustain losses below to maintain and reinforce our major bearish call. The 240-min chart below shows the past couple weeks’ developing slide that leaves clear corrective highs in its wake at 4073, 4218 and especially 16-Aug’s 4328 high. To threaten and then negate or defer our major bearish count, this market must recoup these levels. The RISK to a resumed bearish policy and exposure has been specified. Until and unless such strength is proven, ignoring the prospect for what could be a mammoth 3rd-Wave meltdown similar to 2008 – 2009’s ultimate 58% meltdown exposes tremendous risk long equity exposure of any kind (futures, IRAs, 401Ks, etc.) and outstanding opportunity for those looking to acknowledge and position for the bear.
On a daily log scale basis, the chart below shows the past couple weeks’ relapse and bear risk levels. While specific and objective risk definition is always paramount, what’s crucially important to take away from this chart is the price action that preceded the past two weeks’ relapse: a relatively extensive 24% Jan-Jun decline that unfolded in a 5-wave sequence followed by an exact 61.8%, 3-wave (as a result of today’s break below 28-Jun’s 3950 A-Wave high) retrace of Jan-Jun’s 4808 – 3639 decline. Such 5-wave INITIAL counter-trend decline followed by such an “extensive” (i.e. 61.8% ret) recovery attempt is consummate EARLY peak/reversal-environment behavior. If correct and until threatened/negated by a recovery above levels like 4073, 4218 and especially 4328, a 3rd-Wave collapse below 17-Jun’s 3639 low/support and lone remaining bull-hope threshold is expected. Below 3639, there will be NO TECHNICAL REASON WHATSOEVER to continue to hold bullish equity exposure of any kind.
Moving out to a weekly log chart above, it’s easy to see NO technical levels of any merit whatsoever below 17-Jun’s 3639 low. Below 3639, we would anticipated the same type of massive 3rd-Wave collapse that followed Oct’07 – May’08’s 1st-Wave-down-2nd-Wave-up peak/reversal process that is virtually identical in price and time to this year’s 23-week, 24% decline and 9-week 19%/61.8% ret correction. In late-Jun’08, when the market relapsed below Mar’08’s 1253 INITIAL 1st-wave low, the massive 3rd-Wave rout was on and proceeded to an ultimate 58% drawdown over the ensuring 10 months.
This market has already given back 9.5% of Jun-Aug’s 19% recovery. And it could easily take another month or two, with interim corrective bounces, to ultimately work its way down through 17-Jun’s 3639 low and last line in the sand for bulls. But until and unless this market recovers above the recent corrective highs and risk parameters we identified above, lateral-to-lower, and possibly much lower prices in the period ahead should hardly come as a surprise following the extent of the past two weeks’ erosion.
Finally and from a very long-term perspective, we would remind traders and investors of the technical facts on which this major bearish call is predicated:
- Jan’s bearish divergences in daily, weekly and monthly momentum amidst
- historically extreme
bullish sentiment/contrary opinion indicators
- Bullish Consensus (marketvane.net)
- AAII portfolio equity exposure
- AAI equity-to-cash levels
- unheard of “outside month AND outside quarter down” in Jan and 1Q22 (i.e. higher highs, lower lows and lower closes than Dec and 4Q21’s ranges and closes)
- a sharply flattening/inverted Treasury yield curve
- complete 5-wave Elliott sequence from Mar’20’s 2174 low
- arguably complete and massive 5-wave Elliott sequence from Mar 2009 666 low.
Identical facts and observations warned of and accompanied 2018 – 2020’s major 2-year lateral correction, 2007 – 2009’s 58% bear market and 2000 – 2002’s 50% decline. We’re not keen on “forecasts” as most if not all aren’t worth the paper their written on. But if this market breaks Jun’s 3639 low to truly reinstate this year’s bear trend and confirm this major bearish count, we believe the subsequent fallout will be to at least the 2200-to-2000-area over the following year or so. And it could be worse than that. To threaten or negate this call, all the market has to do is recover above at least 4218 and especially 4328. Until and unless such specific strength is proven, further and possibly monstrously lower prices are anticipated in the weeks, months and quarters ahead.
These issues considered, a bearish policy and exposure remain advised with a recovery above at least 4073 and preferably 4218 required for shorter-term traders to stand aside. Commensurately larger-degree strength above 4328 is required for longer-term institutional players and investors to follow suit and reverse into a cautious bullish stance. In lieu of such strength, further and possibly steep losses straight away are expected.