With an ABC Rally Possibly Completing wave ii, the Downside Potential from here is Quite LARGE

The stock market continued lower much like the USD/JPY and EUR/USD did early this morning in the US session. All indices dragged lower into the close with the higher risk small caps (Russell 2000) and Nasdaqs leading the grind lower by surpassing the blue chip indices' losses on the day. It's quite possible that wave ii of (iii) is complete and the market is now in wave iii of (iii) of 3 of [3] or C. Of course this means relentless selling well below the 1010 level and into the 900s very quickly.

As an aggressive trader, I think it would be a logical trade to be short at current levels with stops just above Friday's highs from an EWP perspective. The only other viable alternative right now to the current count I have shown above is that wave ii is extending into a combination correction, and that today's decline was an X wave that will lead to another 3 wave ABC rally. A break above Friday's highs would put that alternate as a top count.

So remaining aggressively short as long as the market stays beneath Friday's highs seems like a great risk/reward trade since losses can be well managed and the profit potential from a wave iii of (iii) would be quite large.



Although I don't think the X wave scenario is as likely as the bearish wave count I posted at the top of this post, it still is a possibility as long as Friday's lows remain intact (1039.70 S&P). One reason I don't like the X wave scenario is because today's decline is quite impulsive-looking, and not characteristic of a typical choppy 3 wave move that an X wave usually is composed of.

But the one problem the bears have with today's action is the volume we saw today. Coming in at only 817 million shares on the NYSE, it's an extremely light volume day, and that in fact does correspond well to an X wave. If we are in a wave iii of (iii), I would expect volume to have picked up today and spiked into the 1 billion range somewhere.

So although the prefered bearish count above is my top choice and offers the best risk/reward in my view, I think it's important to remain honest in the market and understand that it's possible today's decline was part of an X wave. So keeping risk managed well with stops above Friday's highs would be wise in my view. Breaking below Friday's lows (1039.70 in the S&P) would take the X wave off the table.

Below is a chart illustrating the alternate X wave count mentioned:




PLEASE NOTE: THIS IS JUST AN ANALYSIS BLOG AND IN NO WAY GUARANTEES OR IMPLIES ANY PROFIT OR GAIN. THE DATA HERE IS MERELY AN EXPRESSED OPINION. TRADE AT YOUR OWN RISK.