With the bulls taking the market through resistance, they have certainly opened the door to yet another unorthodox pullback low within the rally since March 2020. Therefore, I have to now view the market rather neutrally in the near-term since we broke out through resistance. But, again, that does not mean I have turned bullish. I still see a potential for the bears to take us down for a lower low, but it is not as a high probability in my view since we broke out through resistance.
Between where we closed today and up until the 4585SPX region there is another resistance region that can still turn us down. But, the question now is if we can break back below 4470SPX. Yet, this is where it does get a bit more tricky. And, this is a VERY technical point.
I noted many times that the initial drop in what I have labeled as wave i down in green was best counted as a 3-wave decline. That is why we had some potential to for this c-wave to be an ending diagonal. You see, ending diagonals take shape with 3-wave sub-structures, which make them much harder to track. And, the reason I am still leaving this door open is not only because the initial move down counted as a 3-wave drop, but the rally off the recent low is counted best as a 3-wave rally. So, this leaves the door open for the market to make that lower low in wave , but it is not as high probability as it was if we had respected resistance.
However, if the bulls are able to take us beyond 4585, this too becomes a lower probability.
This brings me back to a point I try to make fairly often to investors. During a bull market, it is not advisable to trade the short side unless you have a very solid and low risk entry within a high confidence structure. The better way is to raise cash where you think you are topping, and deploy that cash as you believe you are hitting the lows.
For this reason, as we were striking the lows recently, I noted in the chat room that I was deploying some of the cash that I raised near the high. My own plan is that I begin to deploy the cash I raise at the bottom of what I think is wave iii in the c-wave, since sometimes we do not get that 5th wave lower low, as the market morphs into an unorthodox w-x-y type of bottoming structure, which is usually much less common. Yet, in this rally since March of 2020, it has become the norm rather than the exception.
Yet, I still maintain my trading plan. So, I still have cash to deploy if we do get that lower low. But, I still do not think this is an environment for most of you to be shorting, unless you are very nimble and can manage your risk appropriately. Most should be buying the dips.
Therefore, if we do get the gift of a lower low over the coming week or so, then I will deploy the remaining cash I raised near the high. If we do not, then I will allow the market to complete all 5 waves up for wave 1, and I will deploy the remaining cash during the wave 2 pullback.
So, in summary, we have resistance overhead now around the 4575/85SPX region, and support at 4470SPX. Depending on how the market navigates this region can be instructive as to whether we can get that lower low. I wish I could be more confident about either side of this trade, but the 3-wave structures at the highs and lows have clouded my ability to maintain a stronger stance.
But, as I warned as we were actually hitting the lows, when this market begins the rally, due to how extremely oversold we have been, the momentum can easily take us to complete wave 1 and provide us with yet another unorthodox low. And, if we see the MACD on the daily chart cross positively, and hold that for a day or two, then we likely have begun the trek to 5500SPX over the coming year or so.
In the bigger picture, we still have about 1000 points to the upside, and about 400 points of risk to the downside. But, if you are looking at individual stocks, there are even better opportunities there. So, keep focused on your plan to be fully invested for the next run to 5500SPX in the coming year.