I originally wanted to wait till we had a potential low in place, but I feel that this is important enough to now put down in writing so readers may have some ideas going forward.
I want to stress I am not a big fan of these large macro wave counts, at WPT we specialize on shorter term time frames from days to weeks, using wave counts of many year magnitude is in the authors opion not really that beneficial, as being wrong for 2-3 years is not really going to help your account balance.
Being right overall but 2-3 years to late is still wrong imo, as if you're broke from trading and being on the wrong side of the markets, then what's the point of being right if you are broke?
One thing that just keeps bugging and every time I look at this chart is the divergence between the DAX and SPX, it's so obvious is just causes me issues with any bearish case on the US markets, hence I still like the idea of a new yearly high and a flat on the SPX could be nearing its conclusion, the pattern in the DAX suggests a potential reversal, for a 4th wave of an ending diagonal pattern (ED), and we go up to test new yearly highs for the 5th wave.
It's possible we might have topped on the markets, but the lack of follow through in the DAX and the choppy price action is certainly not screaming out an important high has been seen, as some are calling for, with the potential for a new high with a 5th wave for the ED idea, it's something that I think the bears do have to respect, as from here it won't take much to convince me of a bearish tape, as breaking 7000 hard and seeing heavy sell side price action will get us short anyhow.
However I still want to point out the potential for a reversal and a 5th wave of this ED towards 7700. The DAX has yet to break its 200DMA and this ED idea only starts to look wrong below the 6950 area, so whilst this market stays above the 6950-7000 area, I kind of think the bears need to be cautious above betting the farm here on much more downside.
If the market topped (I am not fully convinced just yet) then it won't need much from here to really get bearish.
Is it not better to wait a little for heavy price action under 7000 1st before you commit to getting aggressive on the short side?
One more high would setup a divergence as well with the RSI.
The market may have topped, but with the lack of follow through and the choppiness in the FTSE and US markets I tend to think defense wins the game here. Unless this starts to accelerate under its 200DMA (7000-6950) the door is open for a new move higher in a 5th wave to new yearly highs, and you don't want to be selling that, do you??
I have not been totally convinced that this market has topped either, and watching a potential triangle taking shape, the good thing is that risk can be controlled here to 5596, as the wave [c] low cannot be violated, but even the triangle idea is not really broken till under 5510, the low might well be in, if wave [e] has put in its low, and I noticed the market hit its trend line for the triangle and a tweezer bottom low, although I not an expert on Japanese candlestick patterns I think that's called a tweezer bottom. So like the DAX a reversal here could see a move to above the yearly high around 6150-6250 for wave 5.
The alternative is that wave 5 truncated and we have topped, but the great thing about where we are is that it won't take much to find out if bearish or bullish, the market is at a point where it needs to decide.
Does it want to put in new yearly highs or have we topped? from here the rewards on the US and European markets look good for a low risk buying opportunity, as if the bullish idea of new yearly highs is wrong you simply switch bias and get short as if these markets don't deliver much in the way of strength and strong bounces from the 200DMA test then they are going to be in trouble anyhow and more downside is looming.
Looking at the evidence, combined with the US markets, there is a very good chance that a low is in place or almost in place if the US markets have to put in a marginal new low as per the ED ideas on SPX and R2K etc
We could dip a little lower early next week if the US markets pin a new marginal low, but from what I have seen I would say that it's a great case for a very low risk/high reward trading setup, that if its wrong won't take much to find out, if your right here and new yearly highs, then it's a summer move for a few months and substantial gains to be had.
Bottom line is that the markets in US and Europe are testing or vibrating their respective 200DMAs, the bearish ideas come into play if the markets start sinking lower and break those 200DMAs, or we only see a weak bounce, but if the bulls want new yearly highs, here is where I suspect it happens.
Until next time.
Have a profitable week ahead.
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