Gap Close

Yesterday, we counted only three-waves-up to a lower high in the cash market. This suggests a leg of a triangle or diagonal. After some initial price moves higher for the futures last night on the re-opening of the U.S. Government, prices subsequently headed lower, and down through the 18-day SMA. The daily chart of the ES futures is below.

The close of today's bar will likely be in the lower fourth of the bar - which represents weakness. During the session a prior cash gap up was closed. Still, by the end of the day we could only count another three-waves-down. So, a lower low would likely be needed in the next two days in order to claim an impulse formed lower.

IF prices continue lower, then the lower daily Bollinger Band is still a target, and, if that is significantly exceeded lower, then the 100-day SMA would be the next target.

With today's three-waves-down, there is a low probability of a triangle to this point since all the legs since the high on 09 Oct can be counted as three-wave sequences. But the look and the measurements are not the best for a triangle. Still, if that's what happens, we'll accept it. Otherwise, we continue to count downward.

For now, the daily bias is still down, and that should be respected until and price closes over the daily 'line in the sand'. Intraday, the market has not even yet closed up over the 18-period SMA on the half-hour chart.

So, this could be whippy action requiring patience and small positions (if any) until the market makes a few more local decisions.

Have an excellent start to the evening,

TraderJoe

Local Degrees and Count - 2

For the ES futures today, we were expecting further up movement today both because we have counted a five-wave-down sequence on Friday, followed by one up wave, and because there appeared to be some movement on the government shutdown talks, let alone renewed called for direct government subsidies to individuals for tariff-caused inflation. Up movement did occur with a gap-and-grind scenario that left the market at the day's high in quite a strange manner. The wave in cash doesn't channel from Friday, it wedges currently.

The oddity of the wave, and the lack of retraces only suggested an alternate to the second wave up scenario and that would be the fourth wave, (iv), of a diagonal as below.

Please note that some of the terminals used to draw this potential diagonal are different than those used to draw the impulse. I need to note that this pattern has its significant drawbacks which is why it is only an alternate at this time. Some of those draw backs are the following:

• Wave c of (i) looks like three waves, but the 4-hr bars might obscure five waves.
• Wave (iii) is much longer in price than wave (i) when usually in a diagonal they are often very close in price.
• Wave (iv) is a very, very deep wave already.
• We don't know that upward price movement is over.

We show the pattern for completeness, and because the EWO was on a low on Friday's low. Hopefully, price movement will either validate it or invalidate it soon.

Have an excellent start to the evening,

TraderJoe

Local Degrees and Count

Yesterday, we suggested that a short position might find "bad positioning" being initiated too low in the wave count - except for the ultra-nimble. By the close that seemed to come true. Today, using the ES futures we'll show again what we think the local degrees are, and what the wave count is. First, here is the scenario from the Minor A wave high, using the ES 8-hr futures, as shown below. The minute ⓑ wave high is at the 150% level on minute ⓐ.

ES Futures - 8 hr - Minor B Overall

Overall, we are trying to complete minute wave ⓒ of Minor wave B. Friday's down wave portion may have completed minuette wave (i) of that wave. There should be five sub-waves of minute ⓒ, and they should be (i) through (v).

The local down count of minuette wave (i) appears to be a non-overlapping impulse, but one that is a complete mess because waves ii & iv formed in reverse order of typical with wave ii as a long-in-time complex Flat wave, and wave iv as the relatively short sharp for alternation. So, that count appears on the ES 2-hr futures chart, below.

ES Futures - 2 Hr - minuette (i)

Because it is very clear that waves v and iii are clear impulses, I assume that wave i was also and it can be counted that way. Wave v is the longest in the sequence, followed by wave iii, followed by wave i as the shortest. The waves do not channel exactly, but that's what we expect from an impulse. Further, wave Ⓒ of ii was a true diagonal as its low was exceeded in less time than the diagonal took to build.

I have looked at the cases for both contracting and expanding diagonals, but they wound up not following the rules or guidelines. Wave two in a diagonal simply may not be a Flat, or the rules are broken. It 'must' be a zigzag. To me the down waves of the Flat are what I call guard bars in that they actually prevent overlap with wave i by acting as resistance against the up move. I won't break the rules, first, and the guidelines are applied secondarily.

Yes, I too initially thought we were making some kind of diagonal downward. But the market had a different idea in terms of price lengths and formations. Specifically, the up-wave portion of Friday's move is the largest up wave in the sequence thus far, and, hence, it may represent a turn of degree.

The impulse does suggest that we will eventually go below the low of the minute ⓐ wave of the overall larger expanded flat wave - and perhaps substantially so (i.e. 1.618 or 2.618 x from the minute ⓑ wave).

Have an excellent rest of the weekend,

TraderJoe

ES Lower Low Day - 2

With today's lower low the swing line indicator continued lower. Further, the daily bias flipped to down, and this establishes a down trending wave as per the ES daily chart below.

The daily slow stochastic has not broken the 50 level as of the cash close, but neither is it in over-sold territory. If the downtrend continues, the lower daily Bollinger Band would be a first target, and the lower gap close a second target. (There are further targets below that if activated).

For the moment, because of the overlapping structures, we are counting a diagonal downward, currently as a contracting diagonal, but if we need to, we will switch to an expanding one, or a later impulse. More on that as the days progress.

The big news of the day is that members of the Senate are scheduled to have lunch tomorrow. Fancy that! Maybe on full stomachs they will vote to re-open the government. In the dearth of other economic news, one might want to mind one's stops especially closely, as whipsaws might occur in the "we're gonna open; ooops, oh no we're not" scenario or vice-versa.

Have an excellent start to the evening,

TraderJoe

ES Lower Low Day

The interesting features of today's daily ES futures chart are shown below. As most know in the after-hours last night a number of tech stocks were affected by earnings news. That contributed to a gap down in the cash markets. For the futures, it resulted in a lower low day, as below.

The lower low day turned the swing line lower and made a pattern of a lower low and lower high. The problem is that this pattern is still neutral as the pattern is over the 18-day moving average of closes. The bias is up until it isn't. But as we suggested one of the two futures gaps did close today.

Further, price got very near to that 18-day average, and almost tagged it, as the embedded status of the slow stochastic was lost today. The only day it can be gotten back (without rebuilding the whole three-day sequence) is tomorrow.

Another observation of this market one can make is that the New York Composite Index (NYA) did not make a higher high in mid-to-late October as did the indexes that include the Mag-7 stocks, as below.

This is a very telling intermarket divergence that should be respected until or unless it can be shown to be broken. This index has the classic look of a B wave that rises to 90 - 100% and has since headed lower.

Have an excellent start to the evening,

TraderJoe

ES Inside Day

On the ES futures daily chart, today was an inside day, holding closely to the center of day. As such, and with the higher close, it can temporarily change the swing line indicator to up again. Price is still above the 18-day SMA, so the bias remains up, and the daily slow stochastic is still embedded.

We also note that neither of the two downside futures gaps have closed yet. We'll be watching closely to see if and/or when those gaps might close. For the moment, a higher high remains possible, and a (b) wave up can complete whether there is a new high or not. The eventual expectation is that the futures gaps will close, as gaps in the futures typically close faster than those in the cash market.

It seems somewhat odd that the market did not have a more robust upside response on the major news of deals with China and/or the FED feeding the reverse repo market - especially given today's position of the first trading day of the month. Even if a new high is made, are these signs of a tired market? We shall see.

Have an excellent start to the evening,

TraderJoe

DOW Ekes Out its Own Alternate

Regular readers of this site simply know by now that we have been counting out a contracting ending diagonal for the Dow and the SPX for months and months. That Elliott Wave count comprised of three-wave sequences is shown on the 2-weekly chart of the Dow futures in log scale format below in blue. Because I have gone over it time and again, I won't spend much time on the count details. Readers should review it.

Dow Futures (YM) - 2 Wk - Diagonal Count

The reasons the above count 'works' to the extent it does are the following: First, in log scale, reflecting inflation over a long time, wave (3) is much less in price than wave (1). The Fibo scale on the upper left shows that (3) is less than 0.786 x (1). Second, wave (4) overlaps wave (1) and is shorter than wave (2) on this scale. Third, in 147 bars, the count follows The Eight-Fold-Path-Method with the EWO dipping below zero for wave (4). And fourth, there are no time or price degree violations in the count which seems to agree with the degree definitions as well.

But The Principle of Equivalence says we must at least be aware of potential similar counts and see what they suggest in terms of eventual market progress. And, to honor that principle, we note that just this week the Dow and its futures eked out a longer wave on an arithmetic scale than its wave (1). We commented on this several times back in January that the S&P500 had made a longer wave up, but the Dow hadn't. It seemed odd. With that in mind, here is the alternate in the Dow.

Now note that, again on arithmetic scale, wave (3) is now slightly longer than wave (1). So, that would suggest the alternate of an expanding diagonal, rather than a contracting one, but again, only on arithmetic scale. So, automatically, one factor against this alternate count is that it doesn't account well for the considerable experienced inflation over the five-year span. Second, to count this wave there would be a degree violation that we have written about repeatedly that circle-ii, or ((ii)), would be longer in time than Intermediate (2), the next higher degree wave in the same direction, and this would seem to be a degree violation. Third, this count would not reflect a fourth wave where the EWO drops below the zero line in April of this year.

So, The Principle of Equivalence suggests that we keep the original diagonal as the main count. We have done "due diligence" and looked at the alternate suggested by the arithmetically longer wave (3), but it still has a number of drawbacks and is not as compelling at this time. So, we stay with the main count, with a sharp eye on the alternate in the back-of-one's-mind. Why? Because there is no clear evidence that price has started retreating yet, as it will inevitably do one day. Also, while Elliott said to chart in both arithmetic and log scales, he did not say how to resolve conflicts between the two.

Further, if there is a recession and/or the FED does something unexpected, as they did on Friday, by easing the situation in the reverse repo market yet again, then it could further bend or morph the count by changing the value of the yardstick further, creating the false impression of higher prices, relative to GOLD, say.

Lastly, we have not seen the impact of inflows that might occur as of the first trading day of the month, even though many sentiment indicators are getting red-hot in terms of the percent bullishness. So again, patience, caution and flexibility continue to be vital tools in understanding this market.

Have an excellent rest of the weekend,

TraderJoe