Day Three

Today is the 3rd day of the daily slow stochastic re-embedding in the ES E-mini daily futures, as in the chart below. Price is still above the 18-day SMA so the bias is still up.

The sole active up (green) fractal was hit. There are three local active down (red) fractals and numerous gaps below the market. Up progress can still be made by triangle or diagonal. Downward progress could only be made at this point by a failure top (today) but this is less likely.

Have an excellent start to the evening,

TraderJoe

An Original Fibonacci Study

Here's an original Fibonacci study done today on the Dow. I have not seen this idea elsewhere - just to expand the Dow 1929 top from its origin in the first prices available and 1932 bottom in "log Fibs" and see what that gets us. So, I worked this one up this morning and it has some interesting 'hits'. They absolutely are not 'precise', mind you, but they are very much in the neighborhood.

Keep in mind, regardless of the degree symbols used (I just chose these as if I was preliminarily studying any other chart) that the peak RSI is usually on the third-of-three, and the divergence is on five-of-three.

Further, we are up to and slightly past the 2.618 "log" expansion not to mention that price is squeezing out of the upper log trend line, depending on how you draw it (Gulp!).

Have an excellent rest of the weekend,

TraderJoe

Non-fatal Daily Dogi - Yet

With the government shutdown, the non-farm payrolls were not announced today. In the lack of serious news, equity prices - as measured by the ES E-mini futures - headed higher and attacked the upper daily Bollinger Band, exceeded it, and touched the 6,800 level, exactly, before backing off in the oft-cited round-number psychological something-or-other. The day created at Dogi candle, but didn't have a lot of power to it, yet, as on the chart, below.

The problem is that nothing significant has been downwardly overlapped, no significant prior daily lows have been exceeded, and no downward daily fractals are broken. While the daily slow stochastic is still over-bought only, price is still above the 18-day SMA. And so, yet again, the bias remains up.

There is an interesting pattern that might develop Monday morning. It is an expanding diagonal - if it forms properly with a longer fifth wave than third wave. The problem with that, of course, is that these patterns can be ending patterns as well as beginning patterns. So, even if the pattern forms properly, there could be a stiff partial or full retrace following it. So, higher highs might still be possible, and such might happen if important announcements occur, like the re-opening of government, etc. You can see this potential pattern in the comments for the prior post

Further, while it is speculative, it is also possible that NVDA is in the third wave of its fifth wave higher. This might drive other prices higher without the need for announcements.

So, we're taking it slowly and wave-by-wave. Also, we like to examine some of the data over the weekend, but it certainly appears like we are in the neighborhood of a top. Even though higher highs are possible, our assessment remains that the risks are skewed to the downside.

Have an excellent start to the evening,

TraderJoe

ODU

U.S. equity prices - as measured by the ES E-mini futures - declined overnight on the news of the government shutdown. On the daily chart, they closely approached the 18-day SMA, as in the chart below.

As we suggested yesterday, the "first-of-the-month" money had been front-run yesterday after the window-dressing. Then, today, after the cash open, the passive inflows began in earnest, and the ES futures made an outside-day-up (ODU) to a new higher high and near the upper daily Bollinger Band on a divergence with the slow stochastic, which is not embedded.

The higher closes are dragging the 18-day SMA up with them. And, yes, there are ways to be considering a top in this vicinity, but the daily bias is still up - until it isn't. In this instance, the low of an outside day up should not be taken out in the next two trading sessions, or it constitutes a trap for the bulls.

Because of length considerations, it is possible to consider a ivth wave located on the 25th Sep low, or a triangle in the futures that ended this morning as a ivth wave. It is also possible to consider an upward diagonal starting anew from the 25th Sep low, but this will have to be monitored in terms of overlaps and depth of any retraces.

In any case much better reversal signals are needed, along with a close below the 18-day SMA to consider that prices are serious about trading lower for a period.

Have an excellent start to the evening,

TraderJoe

Tri or Di

During the day today, we noted how the market just ping-ponged back-and-forth between the intraday Bollinger Bands, likely delivering whiplashes galore. The futile volatility, likely due to the end-of-month window-dressing we noted continued until about 2:00 pm at which time, the futures decided to front-run the likely first-of-the-month money with a vengeance, before backing off a bit. Today is the end of the month, the end of the quarter and maybe the end of continuous government (just kidding, we don't know about a government shutdown or not, yet). We said that an upward triangle or diagonal was still possible. It still is. Here is the ES futures 4-Hr chart showing two very 'loose' possibilities.

It seems like a triangle might take a lot more time as price is nowhere near the apex. The complex leg of a triangle 'could' form. A diagonal could take less time, but it could also have much wilder internal waves. For the contracting diagonal, upward, price would need to make a higher high, and this third wave would need to stay shorter than the first. For the triangle, price needs to stay above that prior Ⓒ wave - which is pretty darn deep already.

And yes, a top could be in place, but then the diagonal would be downward, not upward, and that is not even close to being on the board, yet.

So, for the time being, both patterns could represent something of a no one's land until something recognizable forms. We'll watch and try to suggest, but it could be quite tricky. In short, it's The Fourth Wave Conundrum, and it happens at every degree of trend.

Have an excellent rest of the evening,

TraderJoe

The Very First Rule

While we are waiting some internal resolution of the current hourly up sequences in the ES futures, I thought I would touch on a basic topic, but in a way that you probably have not seen or heard before. That is the First Rule of Elliott Wave. I have a lot of respect for Glenn Neely. He has had some excellent clarifications of EW theory. But there are some places I disagree with him, plain-and-simple. He claims his rule-base for Elliott Wave is more extensive than EWI's. That is partially true. It may also be true that he has "added" patterns that don't follow the rules. In other words, he may also have decreased the rule base of Elliott Wave, and he won't tell you that or look at it that way. Let's start with an in-depth review of the very first rule in Elliott Wave. You know that rule is as follows:

Wave 2 may not retrace more than 100% of Wave 1.

That rule is diagrammed on the left below.

The First Rule of Elliott Wave

Implicit in that first rule is the fact that wave 2 will, indeed, have a retrace on wave 1. This is clearly supported by the impulse wave "guidelines" that the second wave retrace will typically be 50 - 62% on the first wave.

In Mastering Elliott Wave, Neely does away with this convention and argues for a "running second wave" where the c wave of 2 does not overlap on wave 1. An example of this appears in the diagram on the right. There are two logical traps with this approach. The first one is diagrammed below.

The first logical trap is this: If the lower degree b wave is less than the total length of the larger degree wave 1, as prescribed by degree definitions, then what is to separate the purported running second wave on the left, from a further impulse where the first wave is the extended wave (as shown on the right)? Thus, Neely has created more confusion in this rule set and actually decreased the rule-base of Elliott Wave.

The second logical trap is this: What is the meaning of the depth of a "retrace"? Is it the travel of the "c" wave, or just the travel of the "a" wave? Neely's "running second wave" would seem to suggest that it is only the "a" wave in this case as that is the only thing that overlaps wave 1. But, if that is the case, why isn't that also the case in the very first diagram, where the retrace is measured to the end of the "c" wave and can't go below the start of the first wave? The last-wave-in-the-retrace view is supported further by the rule that states the (e) wave of a running triangle "must" overlap its prior 3 wave or its prior B wave.

Do you see the issues this creates? To have a rule set, definitions must be consistent. In fact, I will even go one further and suggest that in a true "running second wave" the "c" wave would likely have to be longer in price than the "a" wave, overlapping wave 1, or else the pattern could also be confused with a contracting diagonal.

I have long argued that only way to see whether Elliott Wave is working or not is to "follow the rules". If you don't follow the rules, you don't know if the count is working. Still, there are many people out there who won't take the time to internalize the rules well enough to know why they make sense. And, it has even gotten worse.

According to some on-line information, Prechter has now changed the rule for the third wave in a contracting diagonal and now says in some circumstances it can now be the longest wave, precisely contradicting the definition of a contracting pattern. A contracting pattern means 5 < 3 < 1 or e < d < c < b < a. Pure and simple.

In both cases (Neely and Prechter) it's my opinion that the original rules are just fine for the task, and both are currently being fooled by just plan-and-simple but unprecedented monetary expansion, though I will agree that on a log chart the rules should be consistent, and on a short-term arithmetic chart, the rules should 'also' be consistent.

That said, there are still problems with the "rules" for Elliott Wave. For example, what is the definition of a "first wave" up? How does one "know" it is the first wave up, and not the assumed retrace of a part of a bear market? How is this made consistent across all stocks, indexes, commodities, crypto's etc.? 

This is only the first rule. And that is partly why this is so much fun. 

Have an excellent rest of the weekend,

TraderJoe

Bounce off 18-day SMA

U.S. Equity prices, as measured by the ES E-mini futures contracts, went down to the 18-day average of closes, and bounced, as shown in the ES daily chart below. As so often happens, this was accompanied by the loss of the embedded status of the daily slow stochastic, as shown below. The down (red) fractal on the FOMC report date of 17 September was not yet exceeded lower.

ES Futures - Daily - Bounce from the 18-Day SMA

Intraday, thus far, with 105 candles on the ES 30-minute chart, we can only count three-waves down following the degree definitions. The essential problems for wave counters are that 1) wave Ⓒ, below, is actually longer in price than wave Ⓐ; 2) wave Ⓑ - while shorter in price & time than wave a/i, is not at all in five waves; 3) the absolute length of wave ④ is longer than either Ⓒ or Ⓐ; 4) wave c/iii is longer than wave a/i in price & time; and 5) the waves appear at this time to form an exact parallel.

ES Futures - 30 minute - Three Wave So Far

So, the problems seem to be solved by designating the "running b/ii wave", and by suggesting that wave ④ is a flat wave to bring its net travel in line with the prior correction. However, that clearly leaves the count with only three-waves down into the c/iii divergent low.

The EWO now appears to be heading up, and a true non-overlapping fourth and fifth wave are needed for a downward impulse wave, probably within 120 - 180 half-hour candles. If this does not occur, then any downward wave would have to form by diagonal instead - if one is to form properly or at all.

Price closed the session above the 18-day SMA. So, the daily bias is still up. The only day that price can get the embedded status of the daily slow stochastic back is tomorrow. Closing below the 18-day SMA might change the bias to lower and create a longer down wave than prior down waves, but that has just not happened yet.

The "running b/ii wave" was a significant sign of weakness. We have not seen one of those in a while. For that reason - and others - no amount of downside would be surprising to me. It would be a matter of counting it properly. But, right now, the downward wave count is governed by The Principle of Equivalence and has two commensurate meanings. That means an upward diagonal or a triangle could still form here and make higher highs and these must be considered equally with downward counts until the market rules out one set of circumstances.

For our part, we count & we measure. And that is compared to the rule-based logic.

Have an excellent start to the evening,

TraderJoe