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September 20, 2015

How Equities Can Fool the Most People Right Now

The U.S. stock market is setting up to make major fools out of just about everyone, bulls and bears alike. On the bullish side, traders are viewing the August low, which included a huge weekly reversal, as a pivot that will lead to new highs. But before those highs can arrive, we need confirmation of a weekly cycle low. Such confirmation is still lacking.

In fact, this week's rally was rejected right at the LowerBand in conjunction with the 75WMA... still bearish action. If the current daily cycle fails, the August low will, by definition, be taken out, trapping bulls and emboldening bears. So let's see how the current daily cycle is shaping up.

The daily cycle swung lower just in time to maintain a left-translated nature. If that Day 17 high sticks as the peak, prices will soon be back in panic mode, sending prices below the August low. In fact, a move below the August low will also likely lead to a failed yearly cycle, indicating a bear market is underway.

So then how do the bears get fooled? Well, look at that weekly cycle count. Assuming August does not hold a weekly cycle low, we are now heading into Week 33. So as the current daily cycle extends the intermediate decline, the count will reach Week 36 or 37. A weekly cycle low will then surely form, sending prices sharply higher. With bulls blown out and bears getting aggressive, stocks would then launch 10-15% to get back above the lower TrendBand. But that bounce will only constitute your classic bear market rally, rolling over and moving back lower just as sharply once the bears are eviscerated.

This scenario depends, of course, on a failed daily cycle. If price turns higher and moves the cycle peak past Day 20, new bulls market highs will remain on the table. But judging by the technical action and the opportunity to fool the most people, I am expecting an ugly few weeks ahead.

 

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