Posted on Aug 24, 2023, 09:09 by Dave Toth
By taking out Tue’s 4440 high yesterday, the market has confirmed that high as an initial counter-trend high and confirmed a bullish divergence in short-term momentum, ending the sell-off from 27-Jul’s 4635 high at 18-Aug’s 4350 low. Yesterday’s continuation of this week’s rally also leaves Tue’s 4394 low in its wake as the latest smaller-degree corrective low we would now expect the market to sustain gains above per any more immediate and broader bullish count.
A failure below 4394 will render the recovery from 4350 a 3-wave and thus corrective affair and satisfy the third of our three key reversal requirements that would then warn of not only a resumption of late-Jul/early-Aug’s downtrend, but also a correction or reversal lower that could be major in scope. In this short-term but important regard, Tue’s 4394 low serves as our new short-term parameter from which shorter-term traders with tighter risk profiles can objectively base non-bearish decisions like short-covers and cautious bullish punts.
On a broader scale and as discussed in 18-Aug’s Technical Blog, 17-Aug’s break below 10-Jul’s 4411 corrective low confirms a bearish divergence in WEEKLY momentum that, combined with the arguable 5-wave impulsiveness of the decline from 27-Jul’s 4635 high to last week’s 4350 low, satisfy the first two of our three key reversal requirements. The key third of these requirements is proof of 3-wave corrective behavior on a rebuttal to the suspected initial counter-trend decline that is arrested by a countering bearish divergence in momentum from a level south of THE high at 4635. Herein lies the importance of Tue’s 4394 low, the failure below which will render the current recovery attempt a 3-wave and thus corrective affair.
IF IF IF last week’s 4350 low and exact 50% retrace of May-Jul’s portion of the bull COMPLETED a 94th-Wave) correction, then by definition the market would be expected to resume trendy, impulsive and increasingly obvious behavior to the upside straight away, blowing away 27-Jul’s 4635 high. A countering bearish divergence in momentum either below 4394 or perhaps from the areas around the (4493) 50% or (4526) 61.8% retraces of Jul-Aug’s 4635 – 4350 decline will be behavior INconsistent with a broader bullish count and reinforcing of a broader peak/correction/reversal count. Such (B- or 2nd-wave) corrective rebuttals to initial counter-trend declines are TYPICAL of peak/reversal processes.
Lastly, and what makes the bearish divergence in weekly momentum so crucial at this time, is that it stems from the extreme upper recesses and key resistance of the past year-and-a-half’s range amidst a return to relatively frothy bullish sentiment levels and after a 41-week rally from last Oct’s 3502 low that was virtually identical in length to Jan-Oct’22’s 40-week decline. Given the magnitude of this 41-week uptrend from last Oct’s 3502 low, no, the recent setback is not of a sufficient scale to CONCLUDE a major reversal lower. But it IS more than sufficient to identify 27-Jul’s 4635 high THE precise high this market now needs to recoup to mitigate a peak/reversal threat, reinstate the bull and expose potential steep gains thereafter. And while commensurately larger-degree weakness below key former resistance-turned-support around the 4200-area remains required to confirm a major reversal lower, an admittedly short-term failure below Tue’s 4394 corrective low will reinforce our peak/reversal count and warn of an eventual break below 18-Aug’s 4350 low. And a sub-4350 break will certainly raise the odds of an assault on that pivotal 4200-area.
These issues considered, shorter-term traders with tight risk profiles are advised to move to a neutral/sideline position to circumvent the heights unknown of a steeper correction or reversal higher. A relapse below 4394 is required to negate this call and re-expose the peak/reversal threat that we believe would warrant a cautious bearish stance. Longer-term institutional players and investors remain advised to maintain a neutral/sideline policy as a result of the broader peak/reversal elements discussed over the past week. We will keep an exceptionally keen eye on upside MOMENTUM in the period immediately ahead, where a recovery-stemming bearish divergence from a level shy of Jul’s 4635 high may present an extraordinary risk/reward opportunity from the bear side.
