Pushed To The Edge

We have clearly broken below 4165SPX.  And, it places us in somewhat of a “no-mans-land.”  So, let’s try to think through this process.

As I have been saying, in order for me to accept a leading diagonal in the green count, I really need to see us drop to at least the 4100SPX region.  You see, a wave v in a leading diagonal minimally targets the 1.618 extension of the diagonal’s i-ii structure, and most commonly targets the 1.764 extension.  In our case, that is the 4060-4100SPX region.  So, until we actually get there, I am somewhat reticent to adopt the green count just yet.

Now, today, we dropped to a region wherein a potential wave [v] of 5 in the blue [c] wave is equal to .618 times the size of waves [i]-[iii].  And, we usually do not see a 5th wave exceed that ratio.  That is generally the 4130SPX region.  So, it tells us just how much the market has pushed any bullish potential to the edge.   And, as long as we hold that region, then I think there is still a reasonable, albeit stretched, perspective that can still view this as a wave 5 in the [c] wave of 4 in blue.

Just so that you would understand, if we drop to the 4100SPX region, then we would have a c=.764*a in wave v of 1 in green at the 1.618 extension of waves i-ii, and if we drop to the 4060SPX region, then we have an a=c relationship at the 1.764 extension of waves i-ii.  

Now, should we have to adopt the green count, I want to again stress that as long as we hold the 4050-4100SPX region, then the most reasonable expectation is to see a wave 2 bounce.  And, that bounce target, as it stands right now, is in the 4350-4475SPX region.   Moreover, as I have outlined in past updates, should we see that wave 2 bounce, which would set up a 1-2 downside structure, then I am targeting the 2900-3300SPX region for the c-wave decline.  

As far as a risk management perspective, I do have to note that a break-down below 4000SPX would suggest that decline is already in progress.   However, I do not see that set up as a reasonable expectation.  Rather, I would expect the standard 1-2 structure to take shape in the coming weeks and months before we break 4000 in earnest.  But, we do have to know where we have to change focus.

I want to also add that due to us coming down this low, and this close to the diagonal target, I am going to continue to track that count.  And, should we see a rally in the coming weeks, I will be on high alert if I see any declines that take shape as a 5-wave structure.   Should I see that in the coming weeks after we rally to 4300+, then I may move to the green count at that time, as that would be an initial signal that wave 3 may be starting.  So, it will not go away and will always stay in the background until we are able to exceed 4607SPX.  Please keep this in the back of your mind at all times from now on, as it certainly has increased the risk on the long side.

Lastly, I want to end with some advice I penned this morning as an alert in our trading room:

“I have seen a number of questions - especially from newer members - about how do you "play" the market right now?

Well, that is not a simple nor a one-size-fits-all answer.  You see, much depends on your risk tolerance and goals.   

For example, aggressive traders have been layering in on this decline down here, and placing stops where they feel comfortable.  Others that are much more risk averse may want to wait for the a-wave back up towards the 4401 region (to confirm we break out of the downtrend channel) to complete, and then buy some long positions with a corrective b-wave pullback.  They can then add more positions on the break out over 4401.

As far as if we head into the green count and when to cut the longs you already own, well, again, not an easy question.  Some may choose to exit their positions once we move down to the 4100SPX region.  Others may want to wait for a wave 2 bounce to sell their long positions.  But, I will note that if we see a direct break down below 4000, then it likely means we are going directly towards the 2900-3300SPX region, and a stop out would certainly be warranted.

So, take a look at the paths we have laid out, and make your primary and alternative plans based upon your comfort and risk tolerance levels.  Only you can decide that for yourself.  No one else can answer that for you.”

Avi Gilburt is founder of ElliottWaveTrader.net.