Can We Break Out Sooner Rather Than Later?

Let’s take a step back and review where we have been.  Once the market broke the 2880SPX support, I noted that the risk of trading any further upside is not worth the potential reward, which is why I personally went to cash.  And, when we broke 2770SPX, I warned that we were likely heading down to the 2600 region before we see any real “bounce.” 

Thereafter, in early December, even though I had wanted to see a bigger “bounce,” the market provided us indications that it wanted to drop down to the 2250-2335 a-wave target sooner rather than later, and certainly followed through on that downside structure right to our target.  In the overnight session on December 25th, I noted that the market was likely bottoming after it hit the 2316ES region, and our first target was the 2400-2420 region, on its way to 2470-2520SPX.

Thus far, the market has been providing us relatively good signs of its intentions, at least for those willing to listen, while most others “out there” have been taken by surprise with this market action.  But, it has certainly not provided the “ideal” structures we have always wanted to see.

Over the weekend, I noted that the market is going to have to provide us with an impulsive decline or else we may have our initial indication that the a-wave bottom has been struck, and the b-wave rally to 2800+ has begun.  (But, keep in mind it will not be a one-directional trade).

The drop overnight last night failed to complete 5 waves down, and has now given us 5 waves up off the overnight low.  This now forces me to consider whether all of the b-wave of a bigger (a) wave rally has completed at this morning’s lows.  While it would be relatively small for a b-wave pullback, remember how oversold this market has been of late, and the pullbacks in the initial rally off the lows were also relatively small and shallow.  So, for me to ignore this potential here would not be wise.

At this point in time, if the market is choosing the more aggressive path, then we will be targeting the 2640+ region to complete the (a) wave of the b-wave much sooner than I had initially expected. 

As I noted earlier in this update, the downside has not been impulsive off the 2520SPX resistance thus far.  And, until some impulsive break down below 2467SPX is seen, I have nothing that is suggesting that we will see a lower low in a 5th wave at this time.  Remember, during corrective waves, we have to listen to the messages the market gives us.  And, even though the greater majority of the time the market would have provided us with that 5th wave down with positive divergences at that low, it is starting to give us signs that this may not be happening.

So, I am going to provide the same warning I have provided for months.  PLEASE do not trade aggressively within a 4th wave correction.  Moreover, you need to respect these regions of resistance and support, in the same manner in which the market does. 

As long as the market remained below 2520SPX, then we had the strong potential to take us down in a 5th wave.  But, as I outlined over the weekend, we needed to see an impulsive structure develop off that resistance.  And, when we do not, then we have no clear indications that the market is going to drop lower to complete the a-wave of wave 4, as it may have completed in an unusual manner (as I have discussed in prior updates).  That means that the market is starting to give us initial indications that we are now in the (a) wave of the larger degree b-wave rally with targets over 2800.

Now, for those that are still choosing to remain in cash, that is not an unreasonable position.  I want you to maintain a focus on the bigger perspective, and not allow FOMO (Fear Of Missing Out) to drive your decisions.  Should we break out in a c-wave of (a), then I am sure there will be day trading opportunities during that c-wave.  However, keep in mind that when that (a) wave completes, we will likely see a larger degree (b) wave pullback before we rally to 2800+.  Maintain focus upon that perspective, and it will likely keep you from making a mistake driven by FOMO.

Also, keep in mind that this 4th wave will likely take us much more time, and likely has much lower before it is completed.  And, while I would personally love to be more aggressive on the long side to 2800+, I think the safer time to do so is after the bigger (a) wave completes, and we get a multi-week (b) wave pullback. 

Remember, 4th waves are treacherous and are notorious for separating traders from the cash they earned during the prior 3rd wave.  Do not allow the market to do the same to you.  Allow the market to provide you with a higher probability set up before you trade during a 4th wave.  And, even when it does provide a nice set up, we often see those breaking down during 4th waves.  So, keep in mind that we are likely in a larger degree 4th wave at all times, and opportunities will present themselves many times in many different ways.  But, always remember that 4th waves are difficult to BOTH bulls and bears. 

Currently, unless the market can break down below 2467SPX, it has a set up pointing to 2640+.  And, even if it does break down below 2467SPX, we have to watch that structure closely, as it may only be a bigger b-wave in an (a) wave rally off the lows.  And, should we break out in this current set up, then I will adjust the count to make the larger degree b-wave to 2800+ my primary count. 

For now, I have no indications that a lower low is going to be struck below the one struck at the end of December.  Should I get clear indications otherwise, you will be the first to know.  I promise.  (smile).

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Avi Gilburt is founder of ElliottWaveTrader.net.