For context on this post, please first see: The case for a macro bear has now fully developed. (substack.com)
In the above free post I’ve explained the macro case for a massive bull market termination using the Elliot Wave theory.
Now I’ll go into more depth on would be a likely outcome if I have this pretty much right in theory but woefully wrong in practice and how we can deal with this (And the move outlined in this post would be maximum profit move if dealt with correctly).
First let’s define some traits of wave 4. Wave 4 is can be a very choppy and confusing wave. During this wave price is usually contracting in a range but this is very hard to spot in real time. In real time, it presents itself as a series of false breakouts. Most trading strategies break down in wave 4. Producing multiple false signals.
A key trait of wave 4 is it usually terminates with a false breakout. Typically ending somewhere around 38% retracement. During this false breakout the market should appear to be obviously reversing, but actually it is setting up for the strongest and most consistent burst of the trend so far.
Out of wave 4 we usually see the market going parabolic in wave 5 and this is around a 1.61 extension of the wave 4 move.
My working thesis to this point has been that from 2018 through to 2020 we had wave 4. A horrible period of false breakouts building up to a big fake crash.
From which the market went directly up and the move died out a bit above the 1.61 of the 2020 drop.
And this would support our case for the full bull cycle being complete.
The case for a macro bear has now fully developed. (substack.com)
If it is complete, the ABC correction has started. We’d be in the high of the B wave now.
The forecast C leg (Which is always a crash leg) would not stop until at least breaking under the low of wave 4 (2020 low).
And this makes a lot of sense. So much sense that it’s worth betting on it but we should also be careful because we might end up in the horrific situation of being just right enough to think we must be overall right - and end up being most confident in the crash forecast at the worst possible time.
If the theory that we’re late in a big Elliot cycle is correct but we’re actually in wave 4 and not wave 5 - this would be the worst situation to be caught out in. Because the market will make a couple big fakes at doing what we expect and then really rip hard into a new high.
After that, we’d be right - but probably shy about betting on it.
We can be in wave 4 and see the market act very consistently with our recent break forecast of a drop to 3800.
Forecast of SPX Crash Leg to 3800 (Starting Next Week). (substack.com)
And then turning into something very different.
First rallying back to close to the high and then breaking the last low. Overall, it’d just be a contracting range with a false breakout. But in real time, people are going to be looking for the big clean break. Crashes at lows and blow off at highs. Both assumption being chopped to bits.
Our first big warning here would be us hitting the next swing down close to perfectly but then the bear momentum dying out. A big choppy range forming and starting a rally to 4500.
From 4500 we drop to around 3200. This is the most consistent sell-off we’ve seen in indices. It’s not a “Crash”. It is just down week after week after week. A string of small consistent bear candles. We’re talking absolutely minimal bounces. Steady downtrend move and then a break of 2022 low.
The failure of the new high, the phenomenal consistency of the drop and the taking out of the previous low would have the masses expecting a crash. It would look like the most obvious short setup ever. Further move, people will have tried to knife catch and call a low in the steady downtrend so much no one listens to bull forecasts.
During this drop, a hell of a lot of money could be made. The steady trending nature of it would allow for massive position building with trailing stops.
By the time we were around 3200 there’d be predominately bearish forecasts. The call for a spike high popular today would have been beaten down to the point of mockery.
People would see it as there’s only one direction the market can go.
And then it would consistently uptrend. Picking up momentum as it goes and then exploding through the high to a 1.61 extension of wave 4.
During the fake break and the rally we’d see the same pattern as we’ve seen in 2023.
Overconfident bears making themselves look silly over and over until when it actually makes sense to bet on the bear move again, no one wants to listen.
This would be a dream move for those prepared for it:
4200 - 3800.
3800 - 4500.
4500 - 3200.
3200 - 6000
6000 - 2000.
There’s no point thinking about this too much right now. It could be 2021 was the wave 5 and if it was we absolutely want to short for wave C. Even if we’re in a big wave 4 we should expect to see the market hit 3800. if 3800 fails as a support, we probably want to then make a second leg of bets on a crash.
If 3800 holds as support, then 4500 holds as resistance and then we have an incredibly consistent downtrend to 3200, it’s worth making insanely speculative bets around 3200 that 5000 is broken. At the time, this would look like the dumbest idea in the world. Which is why I am outlining the conditions and case for it now.
Because if these swings come in as so, I am going to be making bets around 3200 that the market comes close to doubling over the following year. People will think I am a complete idiot - and they may or may not be right. I am comfortable with that. I just want my readers to know before hand I am not making uncalculated decisions.
This is very much a contingency plan for now. It largely serves as a reminder not to be cocky if things look good. If we see the 3800 dump, chop and early stages of a rally - then we’ll revisit this analysis. If we see the 4500 dump and then the 2022 low break, in the small area we’d expect a wave 4 low this will be the primary trade plan.
In terms of opportunity, this would be the best possible sequence of moves. A sizable amount of money can be made in any one of these swings. The compounded gain of hitting them all could be astronomical. The cost of being exceptionally wrong on any one of them could be tragic.
It pays to be prepared.
Again, if we’re already in wave C then all of this is just overthinking. The sequence of breaks will be fairly simple and I’ve explained that in great detail already.
But it’s better to be overprepared than under-prepared. Only a fool bets on events that happen once a decade, or further, apart without a backup plan.