Big SPX Butterfly Will Probably Dictate Trend Direction.

22 февр.

It does not feel like it, but bears have finally gotten to the point where we have the most value betting on a big reversal. But with that comes the fact we're also very close to the levels where bears would probably be best to forego bearishness for a considerable amount of time.

Let's start with the obvious objection to being a bear now, we're making new highs. Which in indices has historically meant the rally has a strong chance of going on. Shorting into the new high from the 2020 drop would not have been any fun. However, it's also a fact that in many tops there's a nominal spike out of the high before the real turn.

This was the case the 2007 high and has been something we could have known to look for from as early as Feb of 2023.

Click below to read more on those.

Indices are at long term resistance levels. The 2022 sell off came from a 4.23 extension of the 2000 - 2008 crash range. This was a unique event in our times. The last time this big version of a short signal fired was in 1929. There was a strong reaction to the 4.23 possible reversal level. We're above it again now, but we've just covered the spike outs thing.

Read more about that here.

If we draw a fib from the high to the low of the March 2020 drop we're now at the 2.61. Previous high was around the 2.20. So this has been implied as a possible big resistance level since the 2020 bull breakout.

Then completing in the area of this resistance we have the big butterfly pattern. Coming in with a 2.20 right where we are now (And I think 2.20 is a good spot for trading a butterfly). This is a butterfly built up over a couple years. it has multiple swings in it. Each one of those had to be exactly the size it was for the 2.20 to be here agreeing with all the other resistance levels.

Odds of that happening in a random walk are not big. So it's worth paying attention to the butterfly.

A successful butterfly would see this strong looking bullish action dwarfed by huge bear candles.

An early shock big move. A shallow bounce and then relentless selling. In the last leg of a harmonic (D) leg, it's expected for super strong bullish moves. But if the harmonic is successful - the bear move eclipses the bull move.

The successful harmonic could be the trigger that starts the downtrend spoken of after a spike out in 2023.

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Bears here have their ideal confluence of setups for a short in the 5100 zone. Some extra tolerance for spike outs is needed but the range for where bear signals are valid is really small now, offering high RR.

But if this strong confluence of bear signals fails - we're probably going to see an aggressive uptrend. The failure of a bat and butterfly pattern both would imply strong upside moves. Even in a scenario where the market was close to making a high there'd be an explosive upside move to the next resistance (Filling the crab pattern).

I think at this point in time bears have everything they could ask for in a short setup. Now's a great time to take attempts at swing shorts. But now is also the time to get really definitive about the levels shorts fail. If the trend continues, it's likely to only get stronger. Trends don't weaken. They get stronger and stronger and die in a burst of glory.

If this isn't the burst of glory- you don't wanna be short during it.