We’re now at the big 76s of the 2022 drop, this is where I’d consider a textbook bull trap to end. In this piece we’ll get deep into bear plans and also cover our contingencies. If the classic stuff plays out, this is the end of our bull correction. We’ll also cover how to deal with the risk of further breakouts.
Primary plan is short 3890 (Current price), stop 4408. If this trade fails, short short 4420 with stop 4448. At this time while the conditions for a bear hold true, we’re now going to act as if we’re back into a bear market which is going to ultimately break the l0w made in 2022 (After which it would produce a stronger bear market most of the time).
Please keep in mind that if we’re not making a top here on the 76 we’re seeing some sort of reaction rather than reversal and if this is the case it will be followed by a rip to 4600 area (The 86 fib). These types of moves are commonly news driven and at times of high impact news it’s good to remain aware of this risk.
Let’s start with the broad strokes. Spots where we can define we are likely to have seen a bull break and a bear break and where we can plan our high value entries. The typical norms of a big 76 decision is a break will run to 86 fib and then retest the 76. A break will push through the 61 fib (Usually hitting 50 fib) and then retest the 61.
In both of these instances, the retest trade is our best probability trade. Highlighted for bull/bear.
There’s a big caveat to be considered in trying to pick a top here. That is, we have a really good chance of the top coming in somewhere at or just before the 76 fib. That’s a really common thing in a bear move and can be observed marking out the top of many major bull traps.
The problem is we have now traded very close to the 76 but there’s still a lot of room for it to spike just a tiny bit above the last high and still just be trading close to the 76. These false starts can be difficult to deal with. They tempt the use of wide stops which only dilutes the RR of the bet. We need to be smart in when we exit rallies to short higher.
This could be a top. It does have a toppy feel to it. However, it’s perfectly valid that this trading signal can work but produce a top like this.
In this move, we have a lot of false starts and we need to be smart about how we’re going to deal with this so as to be able to bet at optimal times if we get the spike outs.
We’re going to take a deep dive into SPX trade plans in the latter part of this, but first let’s look at the other indices and risk assets. It looks like we’re starting to get a lot more agreement on big resistance levels being met uniformly over multiple assets (Strong hint of a possible bear).
Nasdaq.
Textbook 76.
RUT.
Local 76 (RUT has never really broken the classic crash pattern. DJI broke it early in 2023 and we switched to a net bull bias when SPX and Nasdaq broke it later in the year - but RUT never did break it. I’d thought RUT would be an easy long in rallying conditions, but it’s really floundered in a range. Not too promising for bulls.
We also have big resistance levels in EURUSD. EURUSD down should equal DXY up. USD correction might be done here.
Let’s get into bear strategy. Actionable ways we can follow a down trending move if it develops while also protecting us against the final stop runs that are possible and the next bull breakout which would probably end up producing a new high (After a bear trap, most of the time).
As with previous big decision levels, failure of bear plans is likely to lead to parabolic moves. It’s very unwise to be stubborn, easier shorts will probably come later if it’s not working here. So while we’re going to get really beary now while conditions suit, keep in mind fading a decade old rally will always have spike out risk.
If there are spikes outs, they will be brutal. That’s just how that goes.
In part 2 we’ll take a deep dive into the bear plans. How to follow the trend near term and out important bear break levels. We’ll send this out now since the market has already dropped over 10 points since the start of writing.