Squawk Morning Briefing: Relief

Both bull and bear markets eventually need to rest. In the context of Elliott waves we refer to these are our corrections and they are an opportunity for markets to work off overbought and oversold conditions before resuming a trend move. There can be a number of technical indicators which can hint that markets may have gone too far too fast; we kept looking at many of them a few weeks ago heading into the early March decline. One challenge is that these indicators don’t tell us how long a stretched condition will last.

Heading into Tuesday’s decline we were starting to see the signs of a market that was moving straight up again and that argues that some sort of relief would eventually be forthcoming. When the selling finally comes as it did on Tuesday (or when buying finally comes in the context of a protracted bear market), we then need to question whether it is just a pause or whether it is the beginning of a turn in the opposite direction. Elliott wave analysis gives us tools to help address this.

By watching for five-wave moves we can look to identify the direction of trend. A move down becomes more plausible one a trend move up counts complete. And we can work to confirm that change when moves in the opposite direction start to extend to five waves instead of three. This is how we will monitor the current situation to look for a confirmed change in trend. For now, there hasn’t been any evidence that the one-day decline we have seen is anything more than the market resting. However, the move up is reaching a point where it can count complete so we will be alert to signs of a reversal.

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