Current Elliott Wave Structure:
We are currently tracking the 5th and final wave of a larger Elliott Wave cycle, specifically within Wave 4 of Wave 5 of the broader structure. Despite recent market activity, we believe that Wave 4 has not yet completed, and further downside potential remains.
Looking closely at the development of this corrective Wave 4, we have identified an A-B-C correction. The significant drop, which we refer to as Black Monday 2.0, likely marked the completion of Wave A. Subsequently, the recent upward surge can be classified as an overshooting Wave B. This move seems to have been fueled by a euphoric market reaction, largely driven by expectations of a Federal Reserve rate cut.
Expectations for Wave C:
- Following the overshooting Wave B, we anticipate a sharp and aggressive decline with the formation of Wave C, completing the larger corrective Wave 4.
- Our target zone for Wave C is highlighted in the chart and aligns with key Fibonacci retracement levels. This area lies between the 38.2% to 50% retracement levels, which is roughly in the $5,100 – $5,200 range.
- This drop could occur rapidly, as market participants begin to recognize the temporary nature of the Wave B rally.
Fibonacci Levels and Potential Support Zones:
The critical Fibonacci levels to watch during this correction are:
- 0.382 retracement at approximately $5,350, which could offer some initial support during the decline.
- 0.50 retracement around $4,936, a more significant level that may mark the bottom of Wave 4 before resuming the final leg of Wave 5.
Technical Indicators and Bearish Divergences:
- RSI Divergence: On the chart, we observe strong bearish divergences in the RSI, signaling that the current price action lacks momentum and is likely unsustainable in the long term. This divergence suggests that the market may be overbought and ripe for a significant correction.
- Market Sentiment: The current sentiment is overwhelmingly bullish, driven by the anticipation of Federal Reserve rate cuts. This euphoria is reflected in the overshooting Wave B, where investors seem to be dismissing underlying risks. Historically, such sentiment extremes often lead to abrupt reversals.
Strategic Positioning:
- Short Position: We initiated a short position at $5,650, which remains active as we expect the market to reverse soon and begin forming Wave C. The market’s current optimism, in our view, is detached from economic fundamentals, and the bearish divergence strengthens our conviction for a pullback.
Risk Factors and Caution:
While the charts and technical analysis point towards a bearish setup, it is important to acknowledge that no analysis is foolproof. The potential for unexpected central bank interventions or geopolitical events can always introduce volatility. Nevertheless, given the confluence of Elliott Wave patterns, Fibonacci retracements, and technical indicators, we believe the risk-to-reward ratio favors staying short as Wave C unfolds.
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