MARKET ENVIRONMENT: by Woody Dorsey.
I noted that the decline might end towards the end of last week: “Thursday’s trade will be telling.” It was typical “of a 3 or c wave phenomenon.” I had “read” the signs in the news complex and recognized that the SCOTUS scandal because it was a metaphor for all of the cognitive dissonance. I would also add that the weird divergent news, optimism and market behavior of this Summer was unusual and fits with the potential for a very long term cycle crest in prices. Sometimes we see that events in the past were not immediately understood. Suffice it to say that I am trained to view events and interpret them in terms of psychology and Market Energy. Rates will continue to rise as I noted 5 years ago, for decades. The bounce from the rate panic fits with the expected stock bounce. But, the “discounting” which leads to relief episodes is not structural or durable.
- Near Term Diagnosis: Sentiment is 17% Bullish today. So far, last weeks’ 0% and 2% were extreme readings which did identify at least a mini nadir in the panic.
- Interim Term Diagnosis: “The divergences in Sentiment, Advance Decline statistics and a multitude of negative market stories argued for a cogent Interim High in place.” This was a telling break but as advised it is way too simplistic to take a one way hard line market view.
- Long Term Diagnosis: Equities have likely registered a Cycle High. That is not necessarily relevant to trading decisions. I have forecast a Low due in 2022. I have been bearish on Treasuries for 5 years, but that Big Picture has not really helped anybody short term trading.
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MARKET TIMING: A tactical trading low was ideally due last week and came in on 10/11 synchronous with the 0% Bullish. This week is messy with an upside bias due next week. Given the expansion of the range, it may all amount to not very much: “I still foresee a notable relief rally in November. That may be followed by more weakness than anyone expects into year end.” The code is for a nominal Recovery near 10/26 and, post-Election, engineer a decent upside episode into Thanksgiving followed by perhaps surprisingly robust downside in December. These codes may morph and become more, or less defined, so be aware of that. These are tricky times and “loco” maneuvers can occur.
SENTIMENT INTERPRETATION: The Dorsey Tactical Market Sentiment generated 98% on 9/21. That euphoria did signal the High close. It is amazing how telling these numbers are! From last week: “I am watching for some kind of really low sentiment number for us to reference with the timing and technical pattern. It has been trending lower but a hard down day into the close has not happened.” Well that did finally happen with the 0% Bullish on 10/11. I said: “It is a great time to cover.”
The DORSEY Intermediate Market Sentiment did notably crater. I had advised, on the 0% reading: “If on Thanksgiving day you look back and the trading low was made here you may realize that it warranted some sort of trade.” This measure is approaching the lows of February.
MARKET SUMMARY: No change: “a real, albeit rare, correction is occurring. The nominal timing code was for a low late last. Sure, I think it will stay sloppy here but the message remains: “There is definitely upside in November.” Reality is, “Making Markets Great Again.” This is great for traders!
TECHNICAL VIEW by Gary Dean: Last week I was looking for a bounce that failed to test or break the previous lows. We did get a very fast bounce that failed that day and we got close to my 2700 target. Is that is? Maybe, but it is a little tricky here. The bullish divergences on the 15 minute chart were suggesting that the wave 3 was near ending, which I believe it did. The 60 minute chart has no bullish divergences in place, which is suggesting we are in a wave 4 up and wave 5 down is pending. I would NOT trade the short side, even if we get that move down, being what is on deck is a move back up towards the 2900-ish area. Another reason I would stay away from shorting, is we may have completed the 5th wave and the move up towards 2900 has started. The safest trading plan right now-let this move exhaust itself and see how support holds. If it doesn’t and we make new lows, we should see some bullish divergences and have a better entry on the long side.
Below is the chart from Thursday showing the expected movement, which we got.
Right now, we could either be in a wave 4 up (A,B,C) pattern, which would suggest another round of selling is pending. The risk with trading that pattern, is we already completed wave 5 and are now heading back up towards the 2900 level. Once this move exhausts itself, I want to see how support holds. That is when I will be looking long. Right now, it is to risky to jump long or short.
Nothing has really changed on the daily chart.Momentum is oversold and the bearish wedge pattern all but played out. I see more points on the upside than the downside.
Summary: I was expecting some choppy tape and we got that. I would not be to quick to pick a side, being there is risk either way. Let this bounce exhaust itself and let’s see how the bulls react at support. If this is just a wave 4 up and wave 5 down is pending, it would make getting long a lot easier.
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