Would Like To See A Rally Next

There are times when one looks to analysis, and there are times when one must take action.  As we have been rallying towards the .618 retracement of the prior decline, the market was telling us that it was time to be looking for a decline, and potentially one that can even take us to lower lows on the year (as per the red count).   Therefore, I hope you took the opportunity to position appropriately. And, by that, I mean in a protective manner or raising additional cash.  And, if you did not, you “should” have one more opportunity, as I would reasonably expect a rally for at least a retracement of today’s decline.

With us topping today at EXACTLY the .618 retracement of the decline from 4325 as per our expectation, I think it was quite clear from all the analysis that we were due for a pullback.   And, in the primary green count, if we reached the .618 retracement of the prior decline, it would likely be all of the a-wave, with the pullback being the green b-wave.  

Due to the fact that the market spiked straight down, I cannot really tell if we had a 5-wave decline.  But, to be honest, it really does not matter.  As I said earlier, the market is providing us with exceptional parameters, no matter what the count.  The count will resolve around the parameters, but the question is how you approach the market right now.  And, for now, it all revolves around whether the bulls can take back 4175ES or not.

While I have stated over and over my preference for the green count for many reasons, I have also said that when we get to the target for this rally, I want to buy some protection in case the red count rears its head.  While I again noted my intention this morning, since we were so close to the .618 retracement pre-market, and I would not be able to buy puts at that time, I was left with simply shorting SPY.  I will be holding this main position unless the market stops me out by rallying over the high struck in the premarket hours at 4175ES (this is the December contract, which is about 18 points higher than the SPX).

Moreover, should we get the bounce that I want to see in the coming days, then I will likely be buying puts as we move to the retracement target I have on my chart.   Since I am writing this update when we still do not have a confirmed bottom to today’s drop, that target box may be slightly adjusted depending on where we find a bottom on this drop today.

Now, since I cannot be terribly confident that the decline we have seen today is 5 waves down or not, I am going to be trading it as though it was in order to protect my account.  That means that as long as we remain below 4175ES, I intend on maintaining protection on my account.  Moreover, if the next rally is CLEARLY corrective, then I will be adding puts to my protection.  

However, if the next rally is CLEARLY an impulsive 5-wave structure, then we will have to more strongly consider that the b-wave has bottomed, and that the c-wave to levels over 4325SPX has begun.  But, remember, I do not think it is wise to trust that pattern UNTIL the market is able to break back over 4175ES.  Until that happens, it is wise to remain protective due to the downside potential.  I intend to let the market stop me out of my protection, and this way I can have much higher confidence in a bullish resolution.  And, yes, I am approaching the market in this manner even though I would much prefer to see the green count continue higher.  I simply believe it is prudent and appropriate risk management to approach the market in such a manner at this juncture.  Others may disagree, but I am just letting you know how I am approaching the market.

For now, I am looking for a rally which may not occur until tomorrow.  And, the shape of that rally, and the height of that rally will likely provide us more distinction between the green and red counts.   You see, either the rally is going to be a CLEAR impulsive move to suggest the b-wave is already done, or a [b] wave is going to have to approach today’s pre-market high in order to keep the [a][b][c] structure within the pattern I am showing on the 5-minute ES chart.   

Otherwise, a corrective rally which provides us an a-b-c structure into the box overhead will likely resolve in a 3rd wave down in red.  This brings me to another point.  While I noted this morning that this may only be the wave i of a bigger wave 1, it is now large enough to support that bigger 1-2, but with the expectation of a VERY large extension for wave 3 down.  So, if this market does decline in the red count, it may be a rather quick move.  

In summary, I think it is reasonable to look for a rally over the next day or two.  The nature of that rally will give us more information as to how the market will resolve in this region.  But, a resolution is likely going to be seen very soon and I suggest you should remain protective until the bulls can take back 4175ES in impulsive fashion.   


Avi Gilburt is founder of ElliottWaveTrader.net.