The Bear Market has Ended ... or has it?

Many bloggers have proclaimed that today's rally is the start of a multi-month bear market rally. Just like the 10/13 rally, this may be too obvious a sign for the bear market's end. I think that there is a better than even chance for the market to register one more trend low before the real rally starts. If the market opens and stays below today's high, I think this scenario is possible.

Notice that price has been carving out a long and painful ending diagonal formation. These are so annoying because prices stay at depressed levels for an extended period of time and trend slightly downwards, providing no relief. An ending diagonal is composed of 5 waves, 4 of which have completed thus far. A 5th wave drop that undercuts today's low (and possibly the 10/10/08 low) would complete the pattern and lead to an explosive, unrelenting rally to 1050 and higher. Today's rally washed out the bears. One final decline would washout the remaining bulls, and undercutting the 10/10/08 low would respark the "crash" fears.

However, there is also some good evidence for this rally sticking. Notice that there have been 3 high accumulation days (higher volume up days) and only 2 distribution days since 10/10. This is pretty constructive. Also, see the following chart:

This 1h chart of SPX shows that the rally from 839.80 could be counted in 5-waves, and the decline is clearly in 3-waves. Also, price is breaking above the downtrend line. Thus, if the market gaps up, it would likely confirm that the bear market is done for now. A good re-entry point would be the topside of that trendline.
In summary, I favor the possibility of one last washout decline to complete the elliot wave pattern. However, a gap up would reduce the possibility of this scenario.


in the mountains said...

and yet another possibility could be that we're still in the 4th wave and it's unfolding as a flat, the C wave of which began today. If that turns out to be the case, the C wave should carry slightly above where the A wave ended on 10/14 (because the C wave is starting at a higher price than the beginning of the A wave).

EW can be maddening at times because there are so many alternate counts.

in the mountains said...

I just reviewed your alternate chart, and I think that one is a very low probability because C waves are always impulsive. The C wave in that alternate chart does not look impulsive to me, so even though I would like to hope that the bottom is in, I think that interpretation is unlikely.

Narayana said...

Thus if that last wave down cannot be a C wave, it must be Wave-iii of the ending diagonal. It'll be interesting to see if this rally has legs for a gap up tomorrow.

in the mountains said...

I looked at the recent down move again (what you are calling a possible C wave), and you might make the case that it's impulsive and that its 5th wave (5 of C) is an ending diagonal. So your alternate view is still on the table.

Also, when I said C waves are always impulsive, I should qualify that to mean C's of Zigzags or flats. C waves within an ED or within a triangle are not impulsive. But the C of an ABC is impulsive and often runs fast and quick like a 3rd wave of an impulse.

Great blog here! Best of luck to you in your trading!