5-3-5 or 3-3-5 corrective? It appears we have a 5-3-5 "zig zag" corrective wave down to the QE-era trendlines .( TLs ) The idea is invalid if it breaks out of the pitchfork trigger line. There are only 3 types of corrective waves, 5-3-5, 3-3-5 & 3-3-3-3-3. Since this correction started with a 5 wave down it should follow the 5-3-5 pattern.
However, there's also a decent chance the 3 wave is the first leg of a 3-3-5 "flat" corrective wave. Still a short here for 3 waves down at least. Plotted some scenarios in yellow. 3-3-5 would obey the inside pitchfork more, which will be watched closely near the fibs and bottom.
Technical Analysis:
We've had 3 weeks of resistance and failed the YTD daily chart bull TL. Volume dropped off sharply near the top indicating reversal. Weekly Stoch is rolling over. Failed the daily linear regression curve shown in orange. Anytime it crosses under the reg curve seems to be a safe short swing for 2+ weeks out. Sometimes it chops sideways for a week or so after first crossing under from a bull run. However, during the bear market it has always continued further down after first break. If it does violate this trend, then it's an indication the bear market really is over.
Fundamental analysis:
-DXY had a healthy bounce off the 50% retrace and broke the bear trend. It's looking to test 110 next. It's been 5 months of selling, mostly exacerbated by $80T in FX swaps that got trapped and capitulated. That's mostly settled now.
-Oil and NG both seem to have made support near trend lows. Oil's 20+yr fork median is around $70 and it's been ranging 70-80. NG is under it's 33yr POC of $2.57 and under the years long VAL. Both look like good investments. near the bottom of the current ranges.
-Some food commodities are still rising in price YTD, such as: eggs and egg products; coffee ; cocoa , & sugar
-Housing prices have dropped over 10% since the Summer and it could snowball into a bigger problem that forces people to finance at higher rates. Mortgage Backed Securities look like they're taking another leg down. Meanwhile personal Savings are near all-time lows and credit card delinquency is nearing ATHs. Along with slowing growth, layoffs and poor guidance; it sure sounds like a recession!
-CPI from the previous month was revised up then both CPI and PPI came in hot. Then Bullard mentioned 50bps rates still being on the table, which would indicate a misstep and panic on the Fed's part if that happens. The market currently has the terminal rate of 5.25% priced in, but that obviously isn't happening anymore. I would expect 6% terminal rate if they keep 25bps hikes extended or 7% if they go back to 50bps.
As the market slowly realizes the light at the end of the tunnel is much further away, they will panic and finally capitulate. It most likely bottoms around Sept Trip Witch if we get 50bps. Maybe late spring early Summer if just a few 25bps extensions.
