The recent price action we have seen this past week, potentially has the makings of a reversal in progress. Some world stock markets are showing an outside weekly bar reversal pattern, which is a strong pattern to support further weakness.
Looking at a number of highly correlated markets, they are showing a very similar pattern. I favor an impulse wave (5 wave decline) is in progress, an up-down sequence is still needed to develop a 5 wave decline from their respective swing high. If we can count 5 waves to end an impulse wave from last weeks high, a bounce thereafter in 3 waves would support a move lower and offer a selling opportunity.
If the advance from the Dec 2018 low ended at last weeks highs, then far more weakness is expected. So going into next week I am looking for the initial completion of a 5 wave decline on selected markets that are showing the cleaner price structure such as SPX & USDJPY etc. Bounces in 3 waves can be sold with a clear risk control point (origin of the 5 wave decline).
If the markets have transitioned into a “risk-off” environment, then the trade will be to sell rallies until a time the market reverts back to “risk-on”.
HSI (Hang Seng)
Note: It’s important for the bears to develop a bearish reversal clue such as an impulse wave. To date, we don’t have that clue, but with the potential for a 5 wave decline as well as the weekly outside reversal bar patterns on many world stock markets, this has the makings of a market that has ended its rally from the Dec 2018 low and moving lower.
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The recent rally from the lows made in December 2018 appears to be in 3 waves, so I suspected it a 4th wave as part of either idea, at this stage, I would still expect to see a new low based on both of the ideas. The difference is that one idea will end an impulse wave (5 wave decline) and complete the decline from the highs made in Jan 2018. The other idea would still see a bounce, however a new low thereafter would be favored.
I can see the pros and cons for both ideas, but I would turn more bullish from a new low as even the less bullish idea (idea 2) would imply a rally again for wave . So it would present a bullish opportunity below the lows made in December around $54.00 – 49.00.
Holding below 88.52 would further support a move lower, although it needs a break back below 70.00 to argue for new lows.
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Short term whilst it remains above 1220 the current trend remains up. There a few short term ideas I am watching, but if a new high is seen, then it can suggest the end to wave [v] of an impulse wave (5 wave rally) to end wave C of a larger zigzag correction (3 wave advance) from the Dec 2018 low.
Initially, I was trying to count the move from the Dec 2018 low as an impulse wave (5 wave advance), but with the continuation to the upside and the overall look from the Dec 2018 low, I feel the advance counts better as a zigzag correction (large 3 wave advance) and not an impulse wave ( large 5 wave advance).
So allow for a bit more upside to end wave C, a strong move back below 1220 is needed to support a reversal and move lower. If the OEX moves lower, then based on the high correlation with the SPX, it should also see the SPX move lower. So it’s worth watching the OEX for clues to the SPX if you are trading the SPX/ES.
Wave B: (the same sentiment applies for wave X) Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B (X) should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.
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With the new high today, it can potentially end an impulse wave (5 wave advance) from the Feb 2019 lows (10859) and further suggest the end to a larger 3 wave advance (zigzag correction), a strong move back below 11400, then 11300 is further needed to argue for a move lower.
If the current advance is a 3 wave move ie: [a][b][c], then we can expect a new low back below the Dec 2018 low (10268) as the current advance is simply a bear market rally in an ongoing bear market that started in Jan 2018.
The move from $51.62 can be counted as an impulse wave (5 wave advance). However, based on how the current decline develops from $57.81, will help decide if the move from $51.62 – 57.81 is all of wave [c] or only wave [i] of wave [c].
So how will we know?
If a 3 wave decline from $57.81 stays above $51.62, then it will support idea 1 and a bullish bias for a move higher towards $62.00 – 64.00.
If a strong break below $51.62 then it will support idea 2 and a more bearish idea and potentially argue that the whole move from the Dec 2018 low has ended, so the current move from 57.81 needs to be watched carefully as it can have big implications for the next significant move.
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