Shanghai connection: Moment of truth!

Ok folks, this week i believe is the moment of truth! Most folks out there, including analysts i follow and respect are calling this phase of the current decline, a wave 3 - implying more rapid downside towards 1000 on the S&P. And i concede that the decline last week definitely "looks" like a wave 3! And for sure, its far safer to be short at this point than long. While i have no doubt we've started a medium term downtrend, i have a nagging feeling this decline is not gonna go all the way in the short term, and we may have just reached the end of wave 1, with sluggish w2 up to come. Thanks to the Shanghai connection, and the oversold RSIs (Beware: RSI's can remain oversold for a long time in bear markets!)

The Shanghai Connection (recap)

Last Friday's post theorised on a possible Shanghai connection. The short version: Shanghai appears to lead the S&P by 4-5 months, and Shanghai experienced a very similar drop (although of different magnitudes), as shown in the charts below.





With friday's masssive selling, the decline on the S&P has reached the same relative point as Shanghai, and there was a nice rebound in the last hour of Friday's close. So what the market does next week is crucial to determine if there indeed is a Shanghai connection!

How do i trade this

Since the primary trend is down, i'd continue holding some shorts, and some cash. We would not want to bet against a wave 3 - go with the trend. Afterall, the Shanghai connection is just a theory! But, IF there is a convincing break of that downtrendline, i will be closing my shorts. I have also drawn some possible lines of resistance(red and green) on the chart below.



Good luck!