Trade Alert: S&P 500 - Setting Up For Downside

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Brian Fletcher
Summary

The S&P 500 is approaching our target region before a turn down.

Upon completion to the upside, there are two potential downside targets. We favor the lower levels into the 2,200 region next.

For those seeking to exit equities and buy back 15% - 25% lower, in this article I discuss levels to exit and re-enter.

In my last article on the S&P 500 a month ago I showed three paths SPX could take to lower levels, and as we now know it chose what I described as the Alt. B count:

Alt. B – a direct move up to the 2,868 region. IF the 2,611 can hold, SPX can be forming a smaller abc structure that heads straight up to the 2,800 region, specifically 2,868, to complete all of the B wave more swiftly. In this instance, we will be looking for shorts for the blue C-wave down to complete all of Primary Degree Wave 4.

So where do we go now?

Since SPX failed to break support and has continued to grind up on weakening technicals, we are now looking for completion of all of the B-wave into the 2,867–2,877 region. The shallow B-wave, as shown on the daily S&P Emini chart below, shows the 1.0 extension at 2,877 where the overall .886 retrace fib has confluence in the 2,866 region. This was the region suggested as the Alt. B target in my article on February 14, 2019, and nothing has changed this perspective.

This will then leave two possibilities on the table, both that resolve down, as follows:

  1. An ABC pull back into the 2,516–2,438 region, which will be a wave 2 against the entire move up off the Christmas low, which will result in taking out the all-time high; or
  2. A fast and furious C-wave down to the 2,357–2,187 region to complete all of Primary Degree wave 4, before then heading to new all-time highs.

S&P 500 Daily Emini ChartS&P 500 Emini Futures Contract Daily Chart

While either is quite possible, once the upside completes, the downside pattern will provide additional clues as to which count is most likely playing out. However, in order for option 1 listed above to be more likely, the move up off the pre-Christmas low would look better if counted as an impulsive structure, and since it started with a 3-wave move instead, it counts much better as a wxy pattern. Said differently, while the move up has been a V-shaped recovery, it is still corrective. It is for this reason that we favor option 2, with the next major move down to be in the 2,200 region.

Both counts point down, but assuming we are correct, this next move will feel very much like a market crash. C-waves are notorious for their swift and dramatic nature, and since this C-wave targets a move down of over 600 points, it will exhibit crash like characteristics.

From an intermediate term perspective, the SPX is setting up for a minimum 12-15% drop, and more likely a 20-24% drop. This provides a wonderful opportunity for those who are currently long equities to exit and re-enter from lower levels. Even in the more innocuous option 1, as described above, it affords the opportunity to exit and re-enter 12-15% lower.

For active investors, traders, and swing traders, it provides an opportunity to short US indices on an intermediate term basis, and then toggle back to longer term long exposure on the pullback. Upon the completion of this move down, we are still expecting a Primary Degree wave 5 to much higher levels.

S&P 500 Monthly ChartS&P 500 Monthly Chart

To take advantage of the next move down, we will be looking to position our investors and subscribers into shares of Proshares TR/Short S&P 500 1x inverse the S&P500 (SH), and once we can confirm the S&P is commencing the 3rd wave down, we will be adding shares of ProShares UltraShort S&P500 2x leveraged short the S&P500 (SDS).

As I have described in several other articles, using leveraged ETFs can be lucrative, but if not properly entered and managed, can be hazardous to your account. We like to enter leveraged ETFs at points in the price pattern where the risk is finite – stop out levels are tight, and we focus heavily on confirmation of the downside pattern coupled with multiple timeframe squeeze indicators to confirm equities are in the heart of the expected move. We like to exit leveraged ETF positions in advance of the 4th wave. Since a C-wave's are always 5-wave structures, we would not want to sit through a wave 4 in a leveraged ETF. The leveraged ETF exposure will help to supercharge our performance during that portion of the move that happens quickly. Since C-waves are notoriously fast and furious, shares of SDS can provide some incredible performance during the exaggerated portion of the move.

Concluding Remarks

  • The S&P 500 is near completion of the move off the pre-Christmas low, and once complete is setting up for one of two potential downside target regions.
  • We favor the lower of the two downside target regions into the 2,357 to 2,187 region.
  • Assuming we are correct about the lower of the two targets, it will come in the form of a C-wave drop, which will occur in a fast and furious fashion and feel very much like a mart crash.
  • Upon completion, most long term investors will exhibit reluctance to go long, which is precisely when we will seek to exit shorts and toggle back to long term long equity positions in a host of ETFs and individual stocks offering the most upside potential.

Shortly, we will be introducing a Marketplace service called The Active Investor, for those who are following the S&P 500, gold, crude oil, natural gas and Bitcoin, and who are looking for a consistent flow of high reward relative to risk opportunities to allocate capital.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Looking to short in the higher target region discussed herein.