Bottom line
While the anticipated follow through of the “Feb 5th rebound” came last week, subsequent price actions suggest that 1) prices are coming up against substantial resistance, 2) and that the remaining upside potential no longer compensates for the downside risk. This statement does not mean to rule out further upside potential, but does emphasize the poor reward-risk profile for long exposure at current levels. The downside risk is a third wave decline. Third waves are almost always powerful.
Detail
The ambiguity in the wave degree, (ii) of [iii] of 1-down OR [ii] of 1-down, is yet to be resolved. However, it may not be as important as previously thought. Regardless of the remaining upside potential, which most likely is limited, the market is at a point where the remaining upside potential no longer compensates for the downside risk. The downside risk is a third wave decline. Third waves are almost always powerful.
Key observations that highlight the downside risk.
[2] If it is (ii) of [iii] of 1-down, the rebound has sent large cap indexes to, and small cap indexes beyond the point of recognition / the Prechter point. In other words, the market has experienced sufficient retracement of (i) of [iii].
[3] Prices are now approaching significant overhead resistance. For example, the 1103-1105 area in SPX (cash) is where several fourth waves of various degrees reside (Chart 2).
The argument for more upside potential has been that the market is in a larger degree wave [ii] advance, rather than a smaller degree wave (ii) rebound. This view is supported by the deep retracement (to date) of the Feb 3-5 sell-off in the Nasdaq Composite, the Nasdaq 100 and the Russell 2000 indexes. However, the reward-risk profile is equally poor for long exposure in these indices, even if they are in a wave [ii] advance.
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