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Squawk Morning Briefing: Bear Market Playbook

We may be in the late stages of a a five-wave move down from the beginning of May in U. S. equity markets. Even so, the late stages may continue significantly lower to go if we are in an extended fifth wave. What is important to remember is that bear markets have their own unique character and if this is just the first five wave move down then we need to be ready to hang onto the bear market playbook for awhile.

If any reminder is needed, Thursday’s intraday bounce should help to refresh your memory. We are viewing it as a small degree second wave bounce. And it is informative to see how quickly it developed as shorts were squeezed. Yet even though it was very rapid, it had a corrective structure and ran to a Fibonacci retracement area before turning down almost as quickly. This is what bear market rallies look like and if we are just starting a protracted downturn then we should expect more of them.

If we are in the late stages of the first five-wave decline then we should be preparing for a larger-degree version of what happened on Thursday. The trick is figuring out when it might begin. This is addressed in Today’s YM video. One complicating factor is the idea that the fifth wave might extend. We discussed the fifth wave extension several times, most recently in the May 31st briefing.

The point here is to recognize a change in character of the markets and be prepared if trading techniques which worked in other environments don’t perform as well now. Most importantly, be prepared for the potential of a fast moving bounce once a five wave move down is confirmed and begins to reverse.

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