S&P500: to impulse or to not impulse that is the question!

2 dic 2019

Two weeks ago I shared my view on the SPX in that it was either following a standard impulse patterns higher or it was following an ending diagonal pattern. I mentioned back then "The first [option] sees (grey) minute-iii complete soon then wave-iv (orange target zone) and then wave-v to complete (green) minor-3." Ideally I would have liked to see wave-iv reach SPX3075-3040, but all we got was 3091 though this pullback materialized indeed "soon" as the low was in three days after my update was posted... So, the pullback was right on cue, but shallower then anticipated. It happens, as it's impossible to get it right all the time, and note the SPX is now already trading at the same level as two weeks ago: 3115... In addition, because the pullback was so shallow the subsequent rally fell also short as an ~100p rally would have been ideal but "all we got" was ~65p. This is common, as it means too many buyers jumped in at these higher levels, causing buyers exhaustion (i.e. when everybody has bought/is long, all that's left to do is to sell/go short).

So, although the jury is still out there on which of the two larger patterns is evolving, we now know the market did five waves (grey, minute-i,ii,iii,iv,v) up off the October 3 SPX2855.94 low, completing (green) minor-3/c. The 3 is for the impulse, the c label is for the diagonal. So the Bulls want to see the green "alt: 4" complete at ideally SPX 3042: the 100% retrace as in a standard impulse pattern wave-3 often reaches the 161.80% Fib-extension of wave-1, measured from wave-2, and then wave-4 should drop down to the 100% Fib-extension before wave-5 does (ideally) a nice 5=1 extension to the 200% Fib-extension. The latter is in this case at SPX 3229. So, last night the Futures market reached SPX3158, which is exactly the 1.618x extension and started today's decline. A BINGO for the standard impulse pattern so far. This patterns is exemplified by the orange arrows. Ultimately, price will need to move and close below last week's low at SPX3091, to confirm wave-3/c has completed, but the daily charts look weak, market breadth is negative, and sentiment readings have been frothy for weeks, so all suggest this should be accomplished over the next few days.

The alternate is that we thus only saw three (green) minor waves up and that completed (red) intermediate wave-c of the diagonal, and wave-d is now underway. Note, I label the diagonal in letters to distinguish it from the impulse. Price will have to move and close below SPX3040 and especially below 3022 to tell us the diagonal pattern is in play. Thus there's still some ways to go... If that happens, then the current decline will be labeled as red wave-d and it should drop to ideally SPX 3005+/-15. Now that still means there will be at a minimum a wave-e to complete (black) major wave-3 at around SPX 3200, followed by another wave-4 and 5 (grey arrows).

Thus, the current decline is one way or another still a great buying opportunity, and we'll just have to monitor the price action carefully to better determine when and where this musical dance of chairs ends.

Trade Safe!