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Yesterday's sharp continuation lower was not unexpected as last Friday's note was bluntly titled "More downside ahead" and I've been overly cautious for months with the backdrop of a plethora of upside DeMark exhaustion signals on daily, weekly, and monthly time frames lining up combined with extreme bullish sentiment.   Up until today there were no indicators showing oversold conditions and volatility hadn't really become a 'thing' as it is now.  Sentiment and "good news" peaked a couple weeks ago at record levels with the backdrop of one of the best earnings seasons as measured by earnings/revenue percentage beats and good economic data.  Markets top in this type of environment and bottom in the exact opposite!

Tops are a process but when indicators are skewed so far on the liability side of the technical ledger, one can prepare.  My call was to raise cash ~25% but wasn't an all in push in chips short call. In mid January, I said to raise more cash.  I did get some downside alpha as I put on some SPY, QQQ, IWM April puts on 1/24 and took off half yesterday and will evaluate today what to do with the remainder.   I'm far from victory lapping as the hard work is just beginning.   So now what?  Can a bounce happen?  Yes.

S&P bullish sentiment is now 18% bulls down from a record high two weeks ago at 96%. This is one of the sharpest moves I've ever seen so a snap back to 50% is possible.  When it broke the 10 day moving average at 90% for two days straight it was a first sign of a turn.  A week ago I highlighted the massive January fund/ETF inflows of $78 billion (a record) and ran VWAP levels on the major ETF's.  It was important as it showed people generally got in late and it served a good level of where people would start to get underwater.  The levels broke and now people who bought in January are hoping to get even.  These levels now serve as resistance.  Several technicians are highlighting the severe oversold levels (% of stocks above the 10 day moving average at 1% and S&P 500 % of stocks above the 50 day is at 20% - a level I mentioned yesterday I wanted to see)

There are two parts to Elliott Wave analysis, the math/Fibonacci stuff and the psychology of what is happening during each wave.  Let's examine what I see in the psychology in the recent past and the future. In the last quarter we completed  the fifth wave where Wave five is the final leg in the direction of the dominant trend. The news is almost universally positive CHECK and everyone is bullish CHECK. Unfortunately, this is when many average investors finally buy in, right before the top CHECK. Volume is often lower in wave five than in wave three, and many momentum indicators start to show divergences (prices reach a new high but the indicators do not reach a new peak) MOSTLY RIGHT At the end of a major bull market, bears may very well be ridiculed CHECK.   Sounds about right.   The sharp down move has been a wave A corrective pattern or the first down wave.   Wave A: Corrections are typically harder to identify than impulse moves CHECK. In wave A of a bear market, the fundamental news is usually still positive CHECK. Most analysts see the drop as a correction in a still-active bull market CHECK. Some technical indicators that accompany wave A include increased volume CHECK, rising inmplied volatility CHECK.  Since many markets have now seen the the first down wave, a lower high bounce is ahead. Wave B: Prices reverse higher, which many see as a resumption of the now long-gone bull market. Those familiar with classical technical analysis may see the peak as the right shoulder of a head and shoulders reversal pattern. The volume during wave B should be lower than in wave A. By this point, fundamentals are probably no longer improving, but they most likely have not yet turned negative.  Shorting into the Wave B or second wave down is my secret sauce as I can measure a buy stop at old highs.   We have not seen the lows in 2018 as the wave pattern is just starting.  I posted a some charts that clearly shows the first wave down. This is not an "all clear" signal  - stay nimble and tight with stops.    

I'm off the desk headed to a lunch in NYC so I'll get back with emails later.   

Thank you for your patience with the new formatting.  A work in progress. 

The SPX and other indexes have fallen after some clusters of DeMark upside exhaustion signals.  One of the attributes of the past year has been very few pullbacks which the DeMark signals has triggered on the daily time frame ahead of short and shallow stalling out periods.  This last move I felt was the blow off top extending wave 5 but would be more relevant with the recent monthly upside exhaustion signals - which are rare but effective. The downside wave pattern I discussed above is evident with a downside wave 1/A.  

European indexes have looked MUCH different than US indexes and Asian indexes.  Considering the positioning with the Euro is so skewed bullish and a dollar bounce is my call perhaps Europe will react positively soon.  DAX had a recent downside red Countdown 13 exhaustion and a green Setup 9 today.  

Hong Kong Hang Seng also had some upside exhaustion signals that took a little longer to work but now has rolled over and also have the first down wave after wave 5.  Bouncing off the 50 day is pretty textbook. 

The Bloomberg World index had a couple recent upside exhaustion signals that were a tad early but now has rolled over and also has the wave set up

Some people have cited the Advance Decline data to stay bullish.  This is the daily and it's broken down under the 50 day moving average vs when it backed off and held the 50 day in November. 

By the way notice there are more downside exhaustion 13's.  Look at them for potential long ideas.

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