Is There Such A Thing As Being “Too” Bullish?

The answer to the question I posed in the title to this update is “yes.”  And, it may very well apply to our current situation if the market continues to rally over the next week up to the 2823SPX level.  So, let’s review where we are step by step, as this may be a bit more of a complex write up.

First, as I have stressed so many times before, without a clear c-wave down to complete an a-b-c correction, it is often quite difficult to define where a correction has completed.  That is the issue with which we have been struggling on the SPX.  We have not had that clear c-wave down to complete this correction, so we have been considering several iterations of triangle patterns.  And, as I have noted, we may have a completed triangle, as presented in yellow, but the proportions to that triangle are truly unusual, which is why I have not been so eager to adopt it until proven.  

With the move through 2758SPX today, the market has suggested that the purple count is becoming less likely, even though it not impossible or has invalidated.  Yet, it certainly has made it a bit less likely at this point in time, especially relative to the set up we had less week.  So, based upon where we now stand as of my writing this update, I would view the yellow and purple count potentials as being of equal probability at this time. 

But, in order to maintain either of these potential patterns as maintaining a reasonable level of probability, I would be using the 2775ES region as the relevant resistance.  As long as the market does not rally through that level, the next pullback will either be a wave iv in the leading diagonal for yellow wave 1 (assuming we hold over 2720ES), or it will top the d-wave in purple, with a break down below 2720ES being the initial indication of follow through lower in the e-wave.  Again, as long as we remain below 2775ES, I do not have a strong preference at this time between these two potentials.

Now, the bigger issue is presented by the red count that I have noted we need to keep in the back of our minds.  With the current structure we are seeing, the probabilities of that potential have certainly increased from where they were a week ago.  In fact, if we rally through 2775ES within the next day or so, then I would have to view that potential as my primary count.

Moreover, the window within which that count will apply will be extremely narrow.  You see, that wave structure suggests that we are in an ending diagonal for the c-wave of that (b) wave, and since wave 3 in that diagonal was shorter than wave 1, this 5th wave must be shorter than wave 3 as wave 3 cannot be the shortest wave within a 5 wave structure.  That means that this count is capped at 2824.29, as wave 3 would be the shortest wave in that count once we hit 2824.30.  And, since 2823SPX is the ideal target for this (b) wave structure, that works almost too perfectly.

Should this pattern actually develop, and we turn down at 2823SPX, then it would point us down to 2480SPX, wherein (a)=(c), as presented in red.  And, if the market drops off the 2823SPX level in an impulsive initial structure, that would certainly increase the probabilities that this structure is playing out to a high degree of probability.

So, while the market continues to chop back and forth through this region, as we have for the last several months, I want you to remember that the most likely scenario is that we are setting up to attack the 3000SPX region.   The question with which we have still been grappling is within what structure are we going to rally to that region.  This suggests that the next pullback we see in the market will likely be a buying opportunity.  The question that the market has yet to answer is if that buying opportunity will be a yellow wave 2, an e-wave of the purple triangle, or the (c) wave of a much bigger wave (4) structure.  Where this move tops out in the coming week will likely tell that story.

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Avi Gilburt is founder of ElliottWaveTrader.net.