A relief rally is what you would expect when people are in a state of euphoria. The S&P 500 rallied yesterday, I thought the rally would start from lower levels yesterday, it did not. I can see euphoria is still present because the decline ended early, there is an urge to buy and the pattern is distorted.
A 3% decline is not enough to change people’s attitude, in fact they see this drop as an opportunity to buy. You need a larger decline or a prolonged period of stagnating prices to kill the bullish mood. My own indicator tells me sentiment is bearish so the euphoria should disappear. It should because when the BTI is declining the stock market tends to go down, and when markets go down and the longer they go down we get the opposite of euphoria which is pessimism.
As long as my sentiment indicator is declining we are looking to sell the rallies and timing will be crucial because these counter trend rallies could be large. The first counter trend rally of a new downtrend is always large, therefore we are looking at a 61.8% upward retracement or more before selling.
Global growth will be affected by the coronavirus, already Starbucks (NASDAQ:SBUX) closed 2000 shops in China. More bad news will emerge, this is why bond yields are sliding, when yields slide you know it is bad news for the economy and for the stock market. The dollar too should go down but right now the dollar is strong, it is a safe haven a bit like gold. I still expect the dollar to go down because the Fed will ease more to respond to slower growth. This dollar decline will boost GBP/USD and it will weigh on the FTSE 100.
We had a bounce in three waves [wave w] in the S&P 500, a pullback [wave x] and a rally in three waves [wave y] ending below 3301.8. This is a critica l level, if the trend has turned down the rally will end below that level.The rally is a fourth wave and the fourth wave cannot overlap the first. The next move is wave (v) down, the target is 3210.
A move above 3301.7 would cancel this forecast. You can see the pattern is distorted, waves down appear to be in three and not in five. Wave (i) is in three and wave (iii) appears to be in three too. People are so eager to buy that they don’t let the decline unfold in five waves.
