A triangle would work well here

We have overshot the .382 retrace of the big drop from 2800 SPX, but this bounce has done the important work of kneecapping the $VIX. 

A bear would want to see it back off and resolve as a triangle into the FOMC at the end of the month.  We can still find our way back to 2520 in a sensible way, preferably with a $VIX of 18 or lower.

The break from the triangle would be violent, potentially even more steep than what we are counting as the third wave.  But it would mark a climax in the selling that would then reverse in a stronger and more sustained retrace.

At some point this year the real damage is done.

SPX daily

Let's go nowhere for a while

We smacked an important .382 retrace in all of the excitement on Friday.  Since all that matters now are the actions of the United States Federal Reserve, it would be useful for everyone at this point to slow things down, get the $VIX back under 20 (15 would be great), and have the market get dull until the next word from the monetary gods.  We need to burn off all of that option theta everyone bought this month, to make speculation great again.

Nice shoes, Bob.

Let's consider Alisdair Macleod's macro analysis, which suggests that we see a spike in the CPI by the second quarter, which forces the Fed's hand (to raise again), in my opinion, at the June meeting.

To get there, we would have already had 3 Fed meetings where essentially nothing was announced, at the end of January, in mid-March, and in early May.  Each of these meetings would leave the policy and schedule unchanged, but only the March meeting would be received as bullish, as it alone has the follow-up press conference, the sort of meeting where raises are normally made.  The January and May meetings, although not hiking rates, by leaving the Fed balance-sheet reduction schedule unchanged, would each be received as super-bearish, resuming the selling.

ecce homo

The only thing that matters now is Federal Reserve monetary policy, not China, not Europe.  And if Macleod is right, in 2019 Fed members will find themselves trapped by actual price inflation following in the wake of the flood of loose credit.

All through next year, we will witness a crescendo of calls from the desperate FIRE sector for the Fed to cut rates again and roll out QE4.  But this cannot happen until the markets are wrecked and ruined, deflated, when the Fed finally has the freedom to intervene.  Longer-term, we're looking at a debt jubilee and large-scale refactoring of our late-cycle civilization, wiping out all of the unsustainable liabilities.  Our credit-money system, political economy based on usury, can only stand so many trips to the well before faith runs out.  Maybe the survivors can discover honest money one day.

Even with a month of sideways, we could finish the entire bearish crash cycle well before the 2020 elections.  What a hoot that will be!

S&P 500 daily

March FOMC, but not what you think

Conventional wisdom holds that the stop-run from today is another spike that will reverse in a couple of days, so we can finish up a wave 3 down to somewhere around 2250 on the S&P 500.

I want to suggest something a little different, that we are drawing a larger-scale leading-diagonal on the chart, that we are in a wave 4, to correct the crazy crash wave we may have finished today, headed to 2520.  The move up was so strong that it left us only 10 pts away from overrunning the .382 retrace within the wave 3 structure.

We may sell some of this off, but I don't think we will give it all up just yet.  January sets up to let this wave 4 play out, with most of the gains already in the bag from today.  We are still within the narrow channel of the wave 3 dive, but it will only take a few days and a bit of rally to break us out of it.

January then becomes frustrating wave 4 chop, eating put and call buyers alike, since the VIX is still high, until the FOMC at the end of the month.  The Fed is all that matters now in our credit-bubble asset "markets", so why not make all of the significant turns Fed meetings?

The channel puts us right at 2152 into March FOMC.

SPX daily, leading diagonal proposed

edit: adding the classic extended W3 scenario, so we can watch this bounce carefully.

SPX hourly  classic extended W3

First important low at March FOMC

We're clearly in the sub-waves of a big wave 3 down, which will reach the 1.618 extension level of W1 at 2256 SPX.

If we draw some channels and add some fibs, we can propose our first low on all of this is the March FOMC, which also lands on a Full Moon.

SPX proposed low March FOMC @ 2124 SPX

Larger question is whether the real crash phase that comes in Fall 2019 can break us out of a very long term, important channel.  Losing this channel probably means the end of the long-term economic cycle defined by the existence and effectiveness of the Federal Reserve itself. 

I'll let you draw your own conclusions from that proposal.

SPX weekly