After the market was sold off heavily during May, I felt at the time that the most likely scenerio would be a V-shaped recovery up towards 4250. From there, the market was at risk of falling back under 4000 to retest the recent low. However, recent price action on the market has made me more negative on the market. As such, I have had to change my outlook.
We did see a relief rally in the market, but it didn't follow through with that extra 100 points that I was anticipating. It was also not as "V-shaped" as I was anticipating. This tells me that we have not seen a low in the market. We are merely buying time before we suffer another savage sell-off.
Below is a chart of our market a year ago.
After falling down to point "0", our market made an "abc" correction. An abc correction is a 3 wave counter trend move. As we can see on the chart, once this correction against the trend was complete, the market suffered another large fall. This fall was 1.6 times the initial fall to point "0", which is a key fibonacci level. Notice the very large reversal on the August low? That is the kind of reversal that we need to see. That is what a low in the market looks like. That is telling you that the market is so cheap and oversold that the big money starts coming in. If the market is cheap and oversold now, then why haven't we seen this type of reversal? Where is the buying?
Below is the market today:
I feel that our market is on the way to completing a "c wave" of an abc correction. If this is like the first chart above, then this "c wave" will be followed by a big sell-off. Remember I noted that the move down last year was 1.6 times the first move? Well if we measure that out, it indicates a 600 point drop once the "c wave" is over. That gives me a level of 3550 on the XJO.
As a result, I have recommended that my clients get prepared to move into cash in the short term, and be prepared to write covered calls and hedge their existing holdings.
