Friday, August 26, 2016

Poke and Joke & Potential Truncation Count

If you followed the markets today, you know that they poked higher briefly when Chair Yellen indicated that the Federal Reserve saw more signs that supported a rate hike this year - unless they needed to again utilize QE because the economy was really in the next recession. If that wasn't enough of a joke, Vice Chair Stanley Fischer pulled the rug out from the rally and said that the upcoming jobs report could provide the signal for a rate hike - unless it doesn't. Regardless, the market slipped a bit like it had hit a banana peel before catching itself and stabilizing in the late afternoon.

All of it would be sheer comedy of course if it didn't affect our investments, and most of us know we were far-sighted enough to see nothing but the folly of the volatility in it - largely still in the form of a triangle.

Figure 1 - SP500 Potential Hourly Triangle
As we clearly indicated yesterday there was no reason the current down wave couldn't have proceeded further. And it did - after the Yellen announcement. Both the DOW and the S&P filled the gap from early August shown in this chart with the green circle. And now the DOW and the S&P have 'roughly' a 78.6% retracement of their up move.

That's fine for a triangle, but much beyond that, and the contracting triangle shape will become strained. We want to say that again - much beyond 78.6%, and something is amiss.

However, the downward movement has caused us to actually eliminate the count of the potential ending diagonal - provided in yesterday's update. There are three reasons why: 1) the downward move from the point market (w) to the point market (c) would now clearly be a complex wave, and diagonals are only supposed to be comprised of simple zigzags;  2) there's that pesky higher high for the ES futures at the point marked circle-b, and it pretty much signals a flat wave at that location - and, again, diagonals are not allowed to have flat waves in them; 3) maybe most importantly the FED could not goose the market high enough today to make the required higher high for the third wave of the potential diagonal.

So taken together, three strikes and you're out! So, we are putting aside any diagonal from consideration at this time.

Now, since the downward wave is a 78.6% retrace, if a triangle is to form properly, we should get a 78.6% retrace upward, as well - or very close to it to make for a symmetrical wave.

If we consider seasonality, often the week before a major holiday, and one which sees the first of the month potential fund flows from pension funds, mutual funds, 401k's, etc., is a positive week. So, just perhaps the triangle will complete properly. We don't know for sure - it is the triangle which must prove it's case.

Other alternatives remain, but there is not good evidence for them yet. If & when that evidence becomes available, we will try to present it. For right now, keep that 24 August chart of Chaikin Money Flow (CMF) versus the S&P front and center. The CMF took another nose-dive today. Volume is leaving the market - even if it's just for vacation.

As a late addition to this post I have decided to add the chart which shows the rationale for the potential truncation count.

Figure 2 - SP500 Rationale for Potential Truncation Count

I had only briefly mentioned in an earlier post that it was possible to see a prior triangle in the ES Hourly Futures. That same triangle can be seen in the cash chart, above, as well. We know that the futures have the higher high at the point marked wave 5 on this chart, but cash does not. Thus, the possible truncation. Now, although we can all criticize the look of the above triangle for being rushed, there is no doubt that it is in fact a valid way to count a running triangle in Elliott Wave terms.

Each wave segment can be counted as a valid three wave sequence, the upward green-b wave is longer in time than the green-a downward wave, and the 'e' wave can also be counted as a tiny triangle as I've shown in many other posts. Perhaps it is the terminal triangle. Further the 'e' wave crosses back down over wave 3, as is required in a running triangle. So, it meets all of the Elliott Wave rules for a running triangle and many of the guidelines. Two guidelines that is does not meet are a) triangles usually take up time, as we said, and b) the outcome of a 'running triangle' is usually bullish, meaning a higher high and not a truncation.

This would be a potentially valid way to have created the dreaded double-top. Yet, because of both the look, the perhaps rushed nature of the count, and the very fact that triangles take time, we must allow that a longer triangle could be in the making.

Still, we just wanted to present our case for why a valid truncation count could have occurred and not just plop those ominous red letters at the top of the chart in Figure 1 without your being able to see the clear and unequivocal rationale, as well. Such a count would only be validated with a low under 2147, and so the market has found a way to keep us counting until then.

Cheers and enjoy your weekend!

Thursday, August 25, 2016

Fourth Wave Conundrum - Triangle, Diagonal, Impulse or Truncation

Because of slightly lower lows today on both the DJIA and the S&P500, we have adjusted our count to show both the new triangle, and new diagonal possibilities.

New Triangle, Diagonal or Possibly Even Impulse

We apologize in advance for the four potential counts, but the downward waves have gotten extremely ambiguous. We are not confused. We know how to handle each situation, but the 'count' is currently ambiguous. Both downward waves can be counted either as threes or fives! Welcome to what we have termed, The Fourth Wave Conundrum. But let's cover each count in detail, so you will be prepared as each count clears up.

We are showing the counts in order of preference, but predictability has been lost - so it's just time to put our thinking caps on and pay attention to the details.

All Counts 

At the location shown as circle red 2, we are not saying downward movement is entirely over. It very well may be, but additional downward movement to fill the gap at 2164 is possible. Or the gap may hold. So far, the gap has held, and the ES futures overlapped already upward in the after hours.

Triangle

Straight away because of the downward movement in today's wave, a barrier triangle from yesterday lost the "right look" at the previous location. A barrier triangle is still possible with a new lower trend line sketched in, as shown.

However, another possibility is that we are now making a "running triangle", instead. In a running triangle, waves 'd' & 'e' must 'converge', so if we don't go back to the top tomorrow, look for the possibility of a "running triangle" instead. Remember, in a running triangle, wave 'e' must cross back down over wave 3. The running triangle count has its 'a' wave at the 2 Aug low, so today or tomorrow would finish the 'c' wave down in such a running triangle.

By contrast, the potential barrier triangle has to add a lot more waves yet.

Diagonal

If, on the other hand, if we pop slightly over the previous high tomorrow, then it is possible to be in wave 3 of a diagonal (shown as circle red 3). For the diagonal case, a new cash high must be made. The problem with the diagonal is that flat waves are not allowed in diagonals, and if the ES futures higher high is included in the count, then there is a flat in the wave. So, the diagonal has second priority. The key to this count is that only a marginal new high is allowed, not a 20 or 30 point wave upward.

If wave 3 forms properly, then a wave 4 downward must overlap wave 1, downward, before wave 5 may begin higher.

Impulse

If you remember our previous post of 18 August, we said we had detected a completed diagonal at the point marked circle red 1 on the chart. We said it could be ending or leading. We couldn't tell. And a leading diagonal there is still possible. It doesn't look like an ending diagonal, yet because the downward price movement is not very extreme as expected when an ending diagonal is completed. But, a leading diagonal at that location is still possible, but it would seem very odd to get a Leading Diagonal near a market high.

The Dow came very close to a 61.8% retrace today, and that might be deep enough for a regular second wave with a powerful third wave to follow, depending on Chair Yellen's comments. But, given the over-bought conditions and powerful divergences already, we rate this option as third in priority and probability.

Truncation

Because the futures did make a higher high on 23 August, it is possible to count a properly completed triangle in the futures - and then the higher high - which would result in a double-top truncation for the cash market. This is our least preferred count because it kind of seems like a cop-out, but if we need to accept it, we will. But for this count, fierce downward movement should also currently be in evidence. And while we have made lower daily lows in the Dow, we have not even made lower daily lows in the S&P500.

Summary

The Fourth Wave Conundrum currently prevents a really good market prediction, but we can follow each option and systematically 'rule it in' or 'rule it out' of the current market count.

Best wishes as the choppy market continues. Remember to thank your local Federal Reserve for keeping everyone on pins and needles!

Wednesday, August 24, 2016

What You May Not Know that the Smart Money Does

Earlier this month, in our 20 August post, we showed two charts of the NYSE and NASDAQ weekly summation indexes, and stated that it's possible that these indicators are rolling lower and may take the market with it. Before we update our hourly triangle count on the S&P500 Index, we also want to provide you with a favorite indicator. The chart is below and the chart compares the S&P500 to the Chaikiin Money Flow (CMF). We like to look at a volume indicator when counting Elliott Waves as part of a well-rounded technical approach. Some Elliott Analysts do not consider volume in their work, and then they project stock prices to the moon!

S&P 500 Index Diverges from Chaikin Money Flow
If you look back to March & April on this chart, you can see that the higher highs in stock prices were met with a considerable divergence in Money Flow. Volume was leaving the market at the higher price levels. This divergence resulted in the May decline, and then another divergence resulted in the June decline - apparently, few people wanted to wait around for the results of the Brexit vote.

So now here in August we see another set of divergences. The first one is the difference between the current August price highs and the July high versus the lower level if the CMF in August. But, even more importantly, do you see that red horizontal line? That is showing a second divergence with higher highs from March to August, but a lower overall Money Flow during the same time periods. Volume players appear to be exiting the markets, and that is not especially good in our view.

Yes, we can see from an Elliott Wave counting perspective how a final set of higher price highs could be made in the market on the exit from the barrier triangle we have proposed, as below. But, if that is the case Money Flow says such a price high may not last.

Now let's look at the potential hourly triangle.

Potential Hourly Triangle in the S&P500 Index

So during live chat today we again counted only three waves down to this point in time. In some ways we were surprised by the depth of the decline, until we looked at the 70 - 72 level in the ES futures chart and saw where support might arise.

And then - as if by magic - the declined stopped just in time to not take out the A wave lower, so until now the potential triangle remains in tact although we will admit it looks a bit funky at this point.

And - other than the fact that we don't really believe in magic - that is almost all we can say at this point except two things: 1) if for some reason this current wave trades lower than the fractal marked as the A wave, then we would have to look for whether a larger triangle or even the beginnings of a larger diagonal were being formed - but in no case could either of those patterns exist if price trades below the August low of 2147. And, if a larger triangle or diagonal forms, then we have to start the whole process all over again. 2) if the 2147 low is taken out, then the possibility exists that we have entered the second wave of an impulse, and we would get into much more detail on that alternative should the need arrive.

Right now - near a major market high - flexibility and patience are still needed especially as we await the results on Friday of the Jackson Hole Conference and Chair Yellen's speech.

Again, best wishes to all in a choppy market.


Tuesday, August 23, 2016

Day's Recap

Well, with 134 candles now on the daily chart, well over the 120 candles required by The Eight Fold Path methodology, the best Elliott Wave count we can offer at this time is the following one. It is based on the fact that the ES E-mini futures made a new high today, and cash did not. Therefore, our proposed Ending Contracting Diagonal shown previously, was a fifth wave that ended a third wave, and we are now apparently making a barrier triangle, as follows.

Figure 1. With 134 Candles on Daily Chart - Time to Look for a Fourth Wave
The choppiness of the waves, the extremely long intraday times between waves, and the very low volume are other factors that lead us to this conclusion. Because wave (2) was a clear flat - the way we count waves - with the ES E-Mini futures making a new high at B prior to the Brexit vote results while cash did not - then a triangle or zigzag is needed to alternate with it.

Here is how we posted the hourly chart in the live chat room today. Please ignore the degree labels, they are place markers only in this case.

Figure 2. S&P500 Cash Hourly - No New High Today - Possible Barrier Triangle

The diagonal fifth wave ends at 3, then there is a swift A wave down to the low on 17 Aug. This wave is ambiguous and can be counted two ways: as a 'three' or as a 'five'. But there is a triangle and large hump in the very center of the wave, so it 'looks' better as a 'three'.

Then, yesterday in live chat, we counted out the sideways triangle that is clearly marked within the B wave, up. And we said if it was a 'b' wave, then it could result in a 'c' wave up for today which it apparently has. Immediately prices faded, and we counted a five-wave down sequence, as shown below.

Figure 3. SP500 5-minute Chart - Five waves Down

We again based the location of iii of 3 even in this five-minute chart, on the location of the low point in the Elliott Wave Oscillator. So now, most likely, we have the 'a' wave down of the C wave of the barrier triangle.

Note in Figure 2 that since cash did not close with a new high, and now there are five waves down, there is no evidence, yet, to support that an ending contracting diagonal is in progress for this wave. But, we see many signs of a barrier triangle. In a barrier triangle, wave 3 must, itself, be part of the barrier, and no hourly wave should close above the barrier - although small excursions are allowed.

Further supporting the case for a barrier triangle would be the fact that the B wave is longer in time then the A wave, which is most often the case in contracting triangles.

We are thinking this barrier triangle might be a 'pre-Yellen' triangle - prior to her speech at Jackson Hole. And, if her speech is met with a yawn, then perhaps the fifth wave out the triangle would be on the first of the new month, when the inflows from pension funds, mutual funds, and 401k's again becomes available.

The potential barrier triangle, must still form properly in every detail - like all triangles. For the barrier triangle to form properly, its wave 'e' must close back down over wave 3. And, like all triangles, the best alternate for it is a 1-2-i-ii (upward  in this case but there is insufficient evidence for that, as well, at this point).

This is all we're comfortable with at this time. Again, a triangle must play out properly if it is to be correct. We don't see the evidence for a diagonal - or we wouldn't hesitate to show it. Like all fourth waves, it is subject to "The Fourth Wave Conundrum" as we have cited in our video, A Critique of Elliott Wave for Trading.

Best wishes in this hard to navigate chop.

Saturday, August 20, 2016

Summer Doldrums

Well, August is upon us and with it the attendant light volume which is often vacation related, particularly in some countries in Europe where the month of August is the month for time off.

While we are waiting for further directional signals, here are a couple of charts that may be of some interest.

NYSE Weekly Summation Index Has Stochastic Cross
NASDAQ Weekly Summation Index Has Stochastic Cross

And, while both of the above indicators have indeed led to substantial declines in the past because of flagging market breadth, there have often been modest price recoveries before they do.

And here is the recent daily S&P500 Index cash chart.

SP500 Daily Cash Index

While the lighter volume in August is plain to see versus July, we also note that there are two gaps now above the market. The market spent most of the day Thursday trying to fill the first gap down but couldn't quite do it. And then, there was a repeat performance on Friday - also without a gap fill.

Friday's candle pattern is 'potentially' a hanging man candle. It has to be confirmed by lower close candles and lower low candles. Without such confirmation, the candle could be a hammer candle.

The bottom line is that while there is the lower high component of a down trend visible since the 15 August high, the lower low component of a down trend is currently not in place.

Therefore an update of the specific Elliott Wave count requires a break of either 15 Aug high, or the 17 Aug low.

Regardless, the downward move so far has been quite slow with small point change, and, so far, if one also considers the presence of gaps at the highs, we think the down move will eventually turn out to be corrective. Even if it gets more impulsive to the down side, it may only be the start of Minor A, of Intermediate (2).

Are new highs possible from here? Yes, they are - so again, from a counting perspective, we are largely neutral awaiting more confirming information.

Tuesday, August 16, 2016

Diagonal Validated

While many other sites were saying things like "middle of a third wave" or even "Primary III ahead" (<gulp!>, hook line & sinker), we have been wondering just how the market will "slip it to us" in the light summer volume, and to that end, on Friday posted what looked to us like it could be a diagonal formation.

The updated chart of the diagonal is below. Because it was validated today by trading below the low of wave (iv), a diagonal has, in fact, completed correctly.

ES 2-hr Futures - Diagonal Validated
This wave completion even occurred on the S&P 500 30-min cash chart, as well, so you don't think games are being played with the futures. That chart is below, too.

SP500 30-Minutes - Diagonal Validated
Isn't interesting how the 120-minute futures mimic the cash half-hour? We had noted that for you before. But the question is not whether we notice things, the question is do you? Do you have the market curiosity to investigate what works, and stay away from what doesn't? Do you go on line to read everybody's wave counts, even those market commentators who rarely get it right, but don't take the time to learn the rules and guidelines for yourself? Not to impress, but to be more confident in your wave counting, predicting and trading?

And, if you're like most, you are probably asking, well, "what's next?" Well, we have a validated diagonal, as best we can tell. And, as we said before, we can not tell specifically yet, if the diagonal is Leading or if it is Ending. We won't know that for a fact, until the low of 2147.58 in cash is taken out lower.

In the meanwhile, in the light choppy action, we'd suggest reading the daily ES chart perhaps the way Ira Epstein might.

Daily ES Futures
Price traveled up to the upper Bollinger Band, where the "Smart Money" usually takes some profits. There is a clear double-divergence on the chart between price and the daily slow stochastic, with the market making higher highs in price, but the slow stochastic making lower highs. Very often when the slow stochastic has been embedded - as it has - and then becomes un-embedded by traveling below the 80 level, then "often, not always", often, price and  the 18-day moving average will find a way to come together. In this case, because price made a low below Friday's low, the "swing line" study - proprietary to Ira - is no longer in an "up trend". There is "no trend" on the swing line study, and yet, there is 'positive bias' because price is still above the "line in the sand", the 18-day SMA.

Usually, Ira does not recommend "buying new" against an upper Bollinger Band because that's where the Smart Money is taking profits, and the retail buyer would be bucking the big funds trying to exit. But, says Ira often, there is a world of difference between taking profits, and putting on shorts. He does not recommend that unless price is trading below the 18-day "line in the sand".

Nothing above is to be construed as trading or investment advice - just a recap of how I think Ira Epstein would analyze this chart.

Monday, August 15, 2016

Follow-Up to Weekend Post

Here's a follow-up to the previous post of Friday August 12, 2016, and the 'potential' of a diagonal in the ES 2-hour futures.

'Potential' Diagonal in the ES 2-Hour Futures

So far, we have (v) less than (iii), (iii) less than (i), (iv) less than (ii), and (iv) overlaps (i). The Fibonacci ruler shows that wave (v) is currently less than wave (iii). Further, price has made the correct time signature for a diagonal in the futures, in that (v) takes less time than (iii), (iii) takes less time than (i), and (iv) takes less time than (ii). If prices trade below wave (iv) before it again trades above wave (v), a diagonal will have formed properly, and will likely complete properly.

There is 'some' evidence of downward overlap in that the 'a' wave of (v) has been overlapped, but, so far, waves (iii) and (i) have not been overlapped. The more overlaps there are - even in the overnight - the greater the potential for the diagonal to complete properly.

At this point, a further 'expansion' of the diagonal would not be allowed, such as tilting the upper trend line further higher, because that would imply that wave (i) or wave (iii) is not on the upper diagonal trend line, and wave (v) would become longer in time than wave (iii) - which is not good form.

Trading above wave (v) before trading below wave (iv) would imply that an impulse, higher, is forming instead of the diagonal completing, as it should.