Published 06th December 2018
We get straight to the most critical point. Is intermediate wave 3 unfolding already? The current sell-off isn’t probably intermediate wave (3) yet. First, typical retracement targets for an alleged intermediate wave (2) have not been reached during the recent bounce. Historically, more than 90% of second waves past cycle turns retraced at least 38% of the bearish decline. Second, there are a few big opening gaps within the December downswing. The DAX closed more than 80% of these gaps historically. An intermediate third wave in the current setup is a kiss-and-goodbye situation with no retracement of any Northbound opening gaps. This is contrary to what has been observed in long-term equity index datasets. The above facts lead to the conclusion that minor wave 3 is probably extending instead. This means that intermediate wave (2) is still ahead of us.
What has to happen that the odds for a crash increase and our black scenario proves wrong? The S&P 500 would have to reach the 2,600 figure on an increasing downside momentum. Moreover, that action needs broad-based confirmation by virtually all risky assets worldwide. Last but not least, some newsflow trigger often comes along a “surprising” narrative within that kind of situations.
Our conclusions do not imply that a deeper sell-off within minor wave 3 won’t happen. Some further downside is likely. However, that is most limited to another 5% loss. The yellow box and red dotted horizontal line are potential S/R clusters.