Here are the Paths This Correction Could Take

With the action yesterday, additional clarity is coming to light for the U.S. indices.  As you are aware, one of the key value-adds of a Bayesian process is incorporating new information into the decision process -- the more quality new information, the clearer the picture gets.  Here are the paths we're seeing with their respective Bayesian Probability (BP) percentages: 

(1) A press down to 268-272 (which has happened) in the SPDR S&P 500 (SPY) and then a sharp reversal to the low 290s and then back to the low 270s, and then "the correction is over." This path assumes the bull market continues and SPY will be greater than 330 within 12 months.  The entire correction will last between many weeks to up to 4 months from ATHs -- but lean towards closer to 3-4 months in total duration. [BP=34%] 

(2) A low near 268ish (which could have already happened) and then a rally back to the high 270s and then a push down to the low 260s. This path assumes the bull market continues and SPY will be greater than 330 within 12 months.  The entire correction will last between many week to up to 4 months from ATHs -- but lean towards closer to 2-3 months in total duration. [BP=43%]

(3) A bear market of sorts has begun dropping well below 260 (with no immediate recovery). This path is expected to last months and have bearish attributes of a 20%-30% correction from ATHs. [BP=23%] 

A vibration window was confirmed for Oct 25-29.  A vibration window is a moment in time that serves as resistance or support in price, usually manifesting as a relative high or low in price.

I’d also like to layer my insights onto the BTS’s interpretation of paths. As I’ve mentioned, this is most likely the last significant corrective wave before "the top" sometime in late 2019 for the US indices -- and this last corrective wave should be begin to take the form of the bear market that will follow after "the top."  

So the question becomes, will this corrective wave we are presently correct more in price or across time?  Path (1) implies more of a correction across time with a deep retrace up to the 290s and then back down to the 270s that tests the resolve of traders and investors. (Note: At the present time, the BPs don’t assign much value to slowing down in the mid-280s -- so if and when SPY gets above 280, then the path to the low 290s would be the most likely outcome.)  

By contrast, Path (2) is more of a correction in price than time -- one more scary drop and then it’s over. Path (2) will also most likely just kick around with few tradable setups for the next week or so before that last scary drop to the low 260s. 

So what would most “scare” traders? A micro bullish run back to the 290s and then a drop to the 270s, or trading in a tight range for a week or so and then one more rug pull? At the moment, the BPs favor Path (2), but Path (1) ain’t a distant second place.  Risk management and patience will be the best thing for your portfolio while we wait for the market to tell us our next decent RR opportunity.

Luke Miller, who has developed a Bayesian timing system for trading the stock market, hosts two Bayesian timing premium services at ElliottWaveTrader.