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Holiday Update II - 12/26/2015

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For the time being, the forecast remains unchanged, despite the rush to the exits witnessed during the last  20 or so minutes of trading. 

Thursday's shortened session left behind a pattern bearing a keen resemblance to that of the December 17th session. This is depicted in chart #1 below. Is another sell-off in the cards? While anything is possible, the wave count depicted in chart #2 of my recent article suggests the contrary. That said, the market needs no chart jockey's permission to do whatever it wants. A forecast is just a forecast; It is simply the technician's interpretation of the price action at any particular moment in time, given the information on hand. Newly available information could either bolster the scenario laid out in the forecast, or it could just as easily invalidate it. As traders, we're constantly on the lookout for a high reward-to-risk technical setup, regardless of market direction. It's like navigating through rough seas. Hence, forecasting the market is a dynamic endeavor requiring, at a minimum, constant fine-tuning as new information flows in. In light of this, it always blows my mind when I'm ridiculed or scorned for scrapping the previous day's forecast in favor of a new one.


Chart 1. The keen similarity between the December 17th and December 24th patterns.

Again, and for the time being, the forecast remains unchanged, despite the rush to the exits witnessed during the last  20 or so minutes of trading. As depicted in chart #2 below, we've been on the lookout for some profit taking (wave 4) on the back of a 4-day running-of-the-bulls wave 3 festival. Since wave 2 was deep (78.6% retracement, i.e., larger than 50%). The alternation guideline strongly favors a relatively shallow wave 4, not to exceed the 38.2% retracement of wave 3

In the case of the post-December 17th sell-off, and referring to chart #2 below, a trader reliant on harmonic chart patterns would have easily recognized the bullish SHARK (0-X-A-B-C)  whose point C (not shown) would have precipitated a reversal from the extremely tight PRZ of 2035.25. But no such thing happened, and price continued on downward. In comparison, should those last 20 minutes of Thursday's session turn out to be the tip of the iceberg (i.e., the start of a much further trip down south),  we will know it if the 2.236 x AB extension is violated. In fact we will KNOW it, and even SUSPECT it, way sooner. When? Why?

(Note - Unlike the December 17th case, it's difficult this time around to justify the presence of a Shark pattern because there's no obvious place to mark point 0)

First, given the depth of wave 2, a shallow wave 4 is all that's needed. For instance, a 23.6% retracement would suffice. But we all know that buyers are more likely to reappear on a retest of a prior High-Volume Area (HVA), specifically the [2046 - 2036] HVA depicted in chart #3 below. Hence, my preference for this HVA's vPOC (Volume Point of Control) of ~2042, which on chart #2 (30-min) below also happens to coincide with TDST Support (2141.75). This would be the ideal wave 4 landing zone, as the anticipitated wave 5 would then have its ideal projection in perfect line with the December 17th Fed-decision reaction high of 2072.75. In light of the above, we will SUSPECT a deeper sell-off upon the violation of the vPOC (2041.50), and subsequently KNOW it upon the violation of the 38.2% retracement level (2039.75).  

Referring to chart #3, note that should the vPOC of 2042 be violated, the odds would then heavily favor reaching the bottom of the HVA [2046-2036]. This would automatically imply the violation of the 38.2% retracement, and by then, the alleged wave 4 would be at 2036 or below, and inside the span of wave b of 3. The latter only occurs in rare cases, i.e., when wave 2 is exceptionally shallow, which is certainly not the case here!

CONCLUSION: The line in the sand as far as wave 4 is concerned is 2039.75. A subsequent drop below this critical level would turn us BEARISH. 


Chart 2. We'll give wave 4 leeway up to the 38.2% retracement, namely, 2039.75. A drop below this price level would then invalidate the yellow wave count.


Chart 3. The market profile chart. Experienced traders know that price travels from one HVA to another, albeit the most direct path is not always the one
taken (i.e., choppy, more often than not). A drop below 2036 would heavily favor a move down to 2018-2007 (as a start). 

If Bearish Scenario, What Next?

Should the bearish scenario take hold (i.e., a drop below 2039.75, followed by a drop below 2036), the next milestone would most likely be last week's HVA of [2017-2008]. By then, we would have certainly begun to strongly reconsider the original bearish forecast, making the recent range-bound action merely the product of seasonality.


Trade smart,

 Peter 


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