Last Thursday's trading displayed some evidence of “exhaustive selling.” The S&P 500 continues to trade well above its 200-day simple moving average. The BULLISH RALLY has not stopped.
Based on historical data, the SPX rallied 15 out of 16 times with a greater than 5-to-1 reward-to-risk ratio. “Emotional selloffs” occur in strong uptrends that have only presented themselves with greater buying opportunities. This is the predominate case we are facing during April.
Wave A is the first of three waves in the corrective phase. Corrections are almost always more difficult to identify than impulse waves and most investors confuse them with interim corrections. Volume might increase in Wave A and volatility will also rise, although not nearly enough to imply a bottom.
Wave B tends to be the most difficult to identify. The volume of Wave B tends to be lower than Wave A. Wave B will consist of three sub waves and should retrace at least .62 percent of Wave A.
Wave C is often very impulsive and marks the end of the current corrective phase. Volume may be higher in Wave C than in Wave A. Wave C is made up of five sub waves and terminates beyond the end of Wave A. Some studies suggest that Wave C should not continue beyond 1.618 times Wave A, but that's not a rule.
The chart below shows the worst-case scenario based on current analysis. The low put in during March could in fact be a bottom as there was a very small A-B-C correct pattern in March.
The momentum oscillators are now working themselves to oversold levels. The SPX is in the midst of its Corrective Wave ‘A-B-C’ that has further to go on the downside.
There is no desire to rally. It appears that SPX is beginning its’ Wave C and should see follow through to the downside in the next couple of weeks. The bond and gold markets will continue to have a very short-term run up, trading with a negative correlation to stocks.
The McClellan Oscillator
The McClellan Oscillator is primarily used for short-term trading. As you can see, when the oscillator closes under zero, the SPX starts to correct.
For now, I'm taking it play by play, but I think this scenario will work out.