We anticipated the current downward move, and while we might have expected some more significant upward retracements since June, 21st things are going mostly according to script.  As expected in a third wave, continued selling pressure is now battering bulls into submission and will continue to do so for as long as they attempt to buy the dips.  That’s what third waves need to do: convince people that what had worked before doesn’t work now. 

As more traders begin to pile into the short side, the risk to bears will no longer come from dip buyers but from short-covering rallies.  We don’t expect that any such pops will alter the longer-term view, but they can develop quickly, move a long distance, and cause lots of pain to short-term positions.  So while a nice bounce might be welcome as a milestone to benchmark wave progression, it would be unwelcome to traders with short-term traders unable to take the heat of a several hundred point run.  Keep in mind, some of the biggest up moves can take place within bear markets.

The overall point here is to be aware that relentless selling we’re experiencing should naturally lead to a short-covering rally at some point even if we cannot predict when.  The trend has shown itself to be down and we should trade accordingly, but those trades also need to contemplate swift, surprise bounces.

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