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Many of us are excited about the ever-elusive P3 wave down that would confirm this rally as a bear market rally. Is this it? If this is the start of P3, things can get nasty pretty fast and bulls are toast. It may very well be, but the contrarian to my contrarian is molesting me. What if this isn't it? What if in the bigger picture, we are at the foot of another bull run? I investigate what could happen (and has happened) if we really are in a new bull market (which I highly doubt).
First of all, I want to thank katzo for mentioning before that topping processes can be tough to swing trade and several times he pointed to the 2004 example where SPX put in a nice triple top and then corrected in a negative channel. He has also been making some sweet calls this week, so thanks katzo!
When we look back at a chart from 2003-2004 and compare it to 2009-2010, the similarities are pretty surprising.
+ The first major move up from the March 2003 lows (almost to the freaking day) was topped in early 2004.
+ The wave structures look fairly similar.
+ The ranges are fairly similar. In 2004, we topped around 1150 (like now). However, March 2003 lows were 800ish.
+ After that "local top", we had two sequential days with moves more than 2sigma (1sigma = a standard deviation) to the downside. To give you an idea, a 2sigma event occurs approximately once every 44 (trading) days (~2 months). The chances of getting 2 sequential 2sigma events are one in 1,936 (trading) days (~7.7 years). If you'd like my standard-deviation TOS script, Download MyStdDevSTUDY.
-We arrive at a similar trendline in both cases. In 2004 we broke it and wiggled around it before leaving its vicinity. Today, we are very close to breaking the analogous trendline from 2003-2004.
So if P3 is bogus, we could see similar action to 2003-2004. We have seen so much similarity so far, so why shouldn't it continue?
But when we face the situation of fundamentals, aka reality, I laugh at the ridiculousness of the contrarian to my contrarian because the economic situation today is nowhere near what it was in 2003-2004. A correction is starting and a sideways-ish mildly negative-sloping channel correction is all the bulls can hope for if this isn't P3.