The markets finally got some relief from the selling on Monday, bouncing from within the target zone of the extended fifth wave count. I am now favoring that wave interpretation going forward.
Most of the rally work was done by the futures market, after a short-covering panic was sparked by the (apparently unfounded) rumor that the IMF was going to attempt to bail out Italy by holding a huge raffle and a bake sale. The rumor came under suspicion when it was discovered that the first place raffle prize allegedly being offered (described by the IMF as “a beautiful summer home”) was, in fact, the Vatican. The rumor was finally completely quashed when Christine Lagarde held a press conference and vehemently denied allegations that she had arranged the purchase of “massive quantities of pie shells and marshmallows.” The IMF indicated that its annual Winter Carnival and Face Painting Event would still be held on schedule.
Despite my disappointment upon learning that my hopes of winning a beautiful new home had been crushed, I continue to expect that this bounce will be short-lived. There are a number of reasons for this expectation, described in detail as follows. The first is that the bounce fits well very within the expectations of the extended fifth wave count. In fact, not only did the bounce come from the target zone, but the area indicated on yesterday’s chart is exactly where the rally ran into resistance.
This count anticipates there is still a little bit more upside left, with the preferred target range falling between 1209 and 1225 SPX. This target range assumes that the move down yesterday competed the b-wave of blue wave 2 (see chart below). It’s difficult to say if the b-wave completed though, so a little more downside is certainly possible before we move above yesterday’s high.
I should also note that, given the market’s position, it would not surprise me if these counter-trend rally targets were missed. If my big picture count is correct, the larger waves pressing down on this market could compress the smaller waves and create upside failures, as they seemed to do earlier in the month.
Another reason to be skeptical of the rally is that the money flow yesterday was negative, particularly in large block trades. This indicates that the big money players were selling into yesterday’s strength, while the retail investors were buying. Negative money flow on a 3% up day is a sign of underlying weakness in the market. Below are the numbers showing yesterday’s money flow:
The next chart depicts my preferred count’s expectations of what could happen when the rally ends. I believe we have only completed the first wave (blue 1) of red wave (iii) down. The current rally is blue wave 2 of red (iii). Blue wave 3 should follow the rally, and carry the market rapidly to new lows. My medium term view has been, and continues to be, that the market will ultimately knock out the October lows. If my preferred count is correct, blue wave 3 now has the potential to test the October lows all by itself, which means we could approach new lows quite rapidly after this rally ends. And there would still be more downside to follow after another correction in blue wave 4 (not shown).
Sustained trade above 1225 would call this count into question, and would lend credence to the bullish alternate count shown yesterday.