Bullish Divergence at Support

The chart above is an hourly chart of SPY. Some of the subtleties of the recent decline suggest to me that it may be an "impulsive" decline in Elliott Wave terms. This means it occurred in 5 waves. But more importantly it should give us some key guidelines as far as how high any subsequent rebound could go and suggests that there will indeed be more downside below today's low.

First the RSI at the bottom of the chart shows a nice bullish divergence which suggests we should see a rebound. The gray box on the chart is equal in time to the recent decline. In this case if the recent move down was a 5 wave move (1 or A) then the next wave should be less than a 61.8% retracement and should not end until it takes at least as much time as the decline took. That doesn't mean it can't go below today's low though, because in either a "running" correction or a triangle that could occur but we should expect sideways to up movement over the next week in this case.

Also, from a mean reversion standpoint, the short-term indicators I track suggest we are very likely to see a rebound imminently. Additionally, I have shown before a common pattern that after an important high is made, the market will quickly retrace the last leg up, and then typically bounce or retrace that decline by about 50%. So that is also in play here as today's low touched the late Nov low. So on that basis, a rebound here would fit that common pattern. Also, that decline was much faster (about 5 days) compared to almost 2 months for that last leg up. So this is the type of price confirmation that I have always harped on about seeing at a trend change.

Also, a couple weeks back I posted about the ascending triangle on the Nasdaq and also about what to expect after the thrust out of the triangle completes. And I noted that often you will see the market return to the breakout level of the triangle before the apex of the trendlines is reached from a time perspective. So you can see on the chart above that the move back down to the breakout came right at the apex of those trendlines.

And as absurd as it sounds (but I've said it before) whenever the top of the recent advance is in place, I think it is likely the market will retrace all the way back to/near the July lows in about 1/4 to 1/3 of the time as that advance took to form. So that would mean about 2 months or less and we could down 20% or so. So, as long as there are no new highs in the indexes, I want to maintain the intermediate term trade even on sharp rebounds as long as we see lower lows coming soon.

As some side notes, GRU was stopped out today. I will be looking at GRU, DBA, and JJG as possible retries on this trade, but if prices go much lower, then some of the rational for that trade will have waned. On another note, the US Dollar index rebounded the last couple days and closed over its 200 day moving average. This could lead to some add on buying from a technical perspective. So I will also be following it as a possible trade.

Bottom line, expect a short term rebound in stocks and considerable weakness after that.