Lower Low, Lower High, Higher Close Day

Market Outlook: Now in Minor 4
Market Indexes: DJIA, S&P500, closed slightly higher; RUT, NDX slightly lower

Today, overall, was a day with a lower low, a lower high and a higher close, as shown by the SP500 Daily chart below. Prices traded lower as the solar eclipse approached, and then leveled off and mostly traded higher as the phenomenon passed.

S&P500 Daily - Moving Average Cross Over

Some will chose to see today as a "hammer" candle near horizontal support on the day of the eclipse, and that's fine. There is room for retracement. We note the MACD histogram traveled lower, and the EMA-13 has now crossed beneath the EMA-34 in a bearish cross. Sometimes this is the location from which a retrace begins, and there certainly is room and time for a retracement.

The solar eclipse has done it's job.

If price moves higher, I would expect the moving averages to provide some resistance to upward price movement before price headed lower again. Volume was lower today. Advance/declines were mixed, and there were more new lows than new highs again today.

From the standpoint of an Elliott Wave Count, it appears we are only in the early stages of the minute ((a)) wave of ((a)), ((b)), ((c)) to Minor 4.

So, remain flexible, open and patient, and have a very good start to your evening.
TraderJoe

Lower Low, Lower Close Day

Market Outlook: Now in Minor 4
Market Indexes: Major U.S. Equity Futures closed slightly lower

Today, overall, was a "lower low, lower close" day, as shown by the SP500 Daily chart below. The major purpose of today from a technical stand point was likely to close the gap left open at the 2525 level from 12 Jul, shown in the black circle.

S&P500 Index - Daily Chart

As long as price keeps making lower low and / or lower close days, it is best to assume the trend direction is still down. While an upward correction of the down trend could start anytime, look at how many gaps there are open on the chart between 18 May and 29 Jun. They are at risk of filling.

A couple of other things to note. The EMA-13 (green line) is at risk of a bearish cross under the EMA-34 (blue line) in the next couple of days, and the MACD histogram (similar in some ways to the Elliott Oscillator) is making new lows, while the MACD line has crossed below zero for the first time in more than three months.

Keep life simple, for now. I am. It's time to start the weekend, and then to prepare for the solar event of the season!

Have a good start to your evening.
TraderJoe

One Gap Open, Three Closed

Market Outlook: Confirmation Obtained that Minor 4 is Underway
Market Indexes: U.S. Equity Indexes Closed Lower

Let's get right to the cash chart of the S&P500 Index - Hourly, as it was discussed in the real time chat room today.

SP500 Cash Index - Hourly

When the gap lower opening crossed below the b wave of (ii), it was possible to begin counting a third wave down, shown as .iii on the chart because a contracting triangle (dotted lines sketched in yesterday) was absolutely ruled out at that point. We counted a flat for wave .ii, and a sharp for wave .iv which shows excellent alternation in this down count. Wave .v is now the extended wave in the sequence, and we do not know that it is over yet, as there has not been a good enough retracement wave yet.

Looking at the oscillator shown at the bottom of the chart, you can see that it has made a lower low than August 11, after making the divergence at yesterday's high. At this point, it only confirms the lower daily price low in the index, but it does also offer confirmation that this down wave is a third wave of some type.

When price began to fill the gap from August 14, then we added the beginnings of a channel, and continued to trade below the mid-line of the channel all day. But, price did not travel outside of the channel today. Therefore, to be completely objective at this time, we can only suggest the count is either (i), (ii), (iii) or, as the alternate, (a), (b), (c) lower.

There is no reason to conclude price movement lower is over, but we must remember, we are now in Minor 4. And, this wave should be a SHARP or a TRIANGLE. But, a SHARP can be a zigzag or a multiple zigzag, lower. So, if we are making the impulse downward, then then down wave should likely become at least a 1.27 multiple, and trade outside of the channel, lower.

But, if a multiple zigzag will be made, then price will have a bounce off the channel, and try to get to the other side. So, let's review The Eight Fold Path Method chart we showed you in our weekend post of The Right Stuff.

SP500 Cash - Three Day Chart - Bearish Engulfing Pattern

So, as you look at the chart, you can see that there is plenty of room to make one of several patterns before getting to the lower channel boundary. So, just remember this is a Minor 4th wave, until or unless proven differently. In one manner or another, price should try to attack the lower channel boundary, somewhere around 2250 - 2330.

But, because it is a wave four, one should remain flexible and patient because we will likely also face The Fourth Wave Conundrum as the market tries to fake us out in which pattern it is most likely trying to make. If it does make a triangle, a triangle can come in contracting, barrier, running and expanding types. And, if Minor 4 makes just a simple zigzag, the market can try to make an ending diagonal wave 5. The smartest people now are "open-minded" and "curious". They seek clues as to which pattern is being made.

They are not despondent that a wave 4 & 5 pattern can have lots of unpredictability to them. For, in my Elliott Wave experience, given where we are now, that is the very nature of the beast!

Be careful, and have a very good start to your evening!
TraderJoe

Two Gaps Open, Two Closed

Market Outlook: 98% Probability that Minor 3 has topped
Market Indexes: Marginally higher

Because the futures were higher overnight, the cash S&P, which had closed at 2465 gapped up at the open to 2468, and traded as high as 2475. This closed  the gap from Aug 10, but just missed closing the gap from Aug 9th.

The FED minutes were released but prices had already begun selling off on the news that corporate CEO's were abandoning the President's Business Round Table. The President then shut it down. Prices traded lower on the hourly divergence with oscillator shown to fill the opening gap and down to 2464, before drifting higher again into the close, closing at 2468. As the chart below shows, prices traded on either side of the 61.8% Fibonacci retracement level, and closed below it, forming a doji candle at that level on the daily chart.

In doing so, that now leaves two open gaps on the chart in this immediate vicinity (shown in red).

SP500 Hourly - Doji Day

The advance decline line was slightly higher today, although new 52-week lows exceeded new highs but still on very light volume. We will additionally note that the $VIX has now put it's moving averages into bullish alignment again, with the 10-day higher than the 20-day, and both of those higher than the 50-day.

There isn't much else to say about today, except that we can see scenarios that point lower, and one that might point to the 78.6% retracement level (hint: we have sketched it in with dotted lines) or higher.

All-in-all, the market must now provide enough length to a wave to allow more accurate assessment. We remain patient in the summer doldrums. We hope you do too.

Have a good start to your evening.
TraderJoe

Three Open Gaps

Market Outlook: 98% Probability that Minor 3 has topped
Market Indexes: DJIA up; SP500, NAS, RUT lower

Below is a chart of the S&P500 Index hourly, It is one I have shown before, but updated as much as possible through today's movements.

SP500 Cash Hourly - 61.8%

The thing that will stand out to most people is that three different times the cash market tried to assault the 61.8% Fibonacci level, and, as of yet, hasn't quite done it. From the standpoint of a downward count, if the 61.8% level is not exceeded higher, then I'd conclude the Aug 11 low is minute (i) of A, lower, and the rise over the last two days is minute (ii). So, it's worth watching the overnight to some extent tonight to see how it goes.

Other than being outside of the up channel - alone just a warning signal - there is nothing critical on the chart in the downward direction yet. The 38.2% Fibonacci retracement level has not been exceeded lower, and so we can't rule out another fourth wave of an upward count just yet. Still it is possible to count only three waves upward as a, b, c of a minute (ii) wave, with only a very tiny truncation in the fifth wave of c.

If prices were to head higher - say to the 78.6% Fibonacci retracement level above - then it would be possible to count the Aug 11 low as A of the decline, and we would now be in the B wave up. Either way, nothing says the downward movement is over.

It is interesting that there are three open gaps on the hourly chart. Further, today declines outnumbered advancing issues again, new 52 week lows outnumbered highs again, down volume exceeded up volume again, and the day both opened and closed with hourly outside reversal candles, lower. So the price action is interesting, but not conclusive yet.

Well, that's it for today. Have a good start to your evening.
TraderJoe

The Right Stuff

The featured post in our blog is entitled The Eight Fold Path Method for Counting an Impulse. We have posted it in public view for all to see. This same methodology that led us to conclude we were in the fourth wave in February 2016, seen in the lower left hand side of this chart - and not get ultra-bearish - as some websites were leading their readers over-the-edge with bearish calls, can again be seen here in the chart below. And, it's prediction is similar.

SP500 Three-Day Chart using The Eight Fold Path Method

Here again. Remember, the first step in the method is to pick the time frame that provides between 120 - 160 candles on the chart for the wave of interest. So, in this case, that is the "three-day" chart. The ruler and its flag, shows that this time frame now provides 126 candles on the chart - right in the ballpark for our analysis. I need to emphasize this point because some people only adamantly want to analyze the daily chart, or they only want to analyze the weekly chart. Those selections are fraught with problems. They do not recognize that the market is fractal with regard to time, as well as with regard to price.

Now, some people don't even have the software that allows them to do this. But, yes, there is free software, as above, that can do it for you. Oh well. You can lead a horse to water, as they say...

Next, we plot the Elliott Wave Oscillator, and note where it's high point is. The high point will always be in a third wave of some type when you are counting an impulse - just as it is here. In this case, the high point is on wave minute (i) of Minor 3 because within Minor 3, the first wave is the extended wave in the sequence. You can clearly see, that this is where the "kick-off" momentum is, and where there are the most vertical bars. And, further, as we indicated in prior posts and videos, there is no retrace within Minor 3 that is greater than 38.2% - and this is a hallmark of an extended first wave.

But still, the high point of the EWO is within Minor 3, and overall, we know that Minor 3 is the extended wave in the sequence, as it is now longer than Minor 1. So we denote the extended minute first wave within Minor 3 as x (i), meaning it is the extended first wave. And since Minor 3 is the extended wave, it is denoted as x 3. When the first minute wave is the extended wave, then, by definition, wave minute (iii) and minute (v) must be shorter than minute (i), and they are. And, specifically, minute (v), not labeled at the end of Minor 3, must be shorter than minute (iii), and it is.

Next we expect the fifth wave, (v), within Minor 3 to be on a divergence with the EWO, and clearly it is. So, now we would fully expect a wave to form in the downward direction such that EWO will come back to within +10% to -40% of the highest reading within the third wave. Given that this is a three day chart, it may require a few weeks to do that.

The next step in the process is to draw a line from wave 1 to wave 3, and then indicate the channel by drawing the line parallel to it from the second wave, Minor 2. As we expressed in the last few weeks, it is essential to draw this channel so that no part of a line drawn from (4) to 2, cuts off any part of a third wave. This is a guideline from Glen Neely's work in Mastering Elliott Wave, and we want to fully credit him with it. If you dig in to the details, you can see that the minute (ii) location is also the only location that allows this guideline to be met within all of Minor 3.

The purpose of the fourth wave lower, Minor 4, is to attack the lower channel, and to provide some alternation with the second wave in the sequence, Minor 2. So, to get down to that channel, wave Minor 4 may either be a zigzag, a zigzag that starts a triangle, or a multiple zigzag. This is because wave 2 was a "running flat" wave, and a "running flat" predicts a strong up move after it - which it did. And only a sharp or a triangle can alternate with a flat.

Within certain limits, I can have no preference for how wave Minor 4 occurs. This is part of what I have termed The Fourth Wave Conundrum. Fourth waves are inherently unpredictable, except perhaps as regard to depth of the correction, and or alternation. But, that's about it.

In terms of depth of the correction, 38% - 50% of wave Minor 3 is most common. And that provides a range of about 2250 - 2300. Again, if wave 4 forms as a simple zigzag, then wave 5 might expect to be an ending diagonal. And if wave Minor 4 forms as a triangle, then Minor 5 might be one that is a simple quick thrust out of such a triangle. We'll have to wait and see how that occurs. While it will be interesting, it may be frustrating for traders who try to play the choppy waves  that might develop. Remember the very purpose of a fourth wave is to get people to surrender some of their hard won profits from wave Minor 3. And that is probably happening to some already.

I always try to provide an alternate when I see one, and I have already done that several times, but again, there is no evidence for the alternate at this time. The alternate, to refresh people's minds is that 1,2,3 is really only A,B,C of Intermediate (1) of a much larger fifth wave diagonal. The first evidence that such an alternative would be activated is that the 4th wave became larger than 50% x Minor 3, and / or that the Elliott Wave Oscillator (or EWO) went below the level of -40% of the highest point of wave 3. Again, neither of those are in evidence.

So, with that in mind, we remain on The Eight Fold Path, and wish you and yours a wonderful weekend.
TraderJoe

Dead Cat Bounce

Not much to write about today except a 3+ point "dead cat bounce" in the S&P500 Index, so far. Looking at today's structure in live chat, there is no clear "ending pattern" such as a diagonal or triangle (fully formed) at the lows, yet. So, lower lows are possible.

The weekly candle was confirmed to be a "key reversal candle", and probable many people wanted to lighten-up before the weekend. Volume today, on the slim up move, was lighter than on yesterday's down move. Also, declining volume beat out advancing volume, even though there were slightly more advancing issues than declining issues. But, there were more new 52-week lows than there were new highs.

Today's chart is of the daily E-Mini S&P500 Futures. The Bollinger Bands are widening to the down side, and this is the second settlement of the close outside of the lower band.

ES E-Mini S&P500 Future - Daily - Bollinger Bands Widening

We note the 18-day SMA or "line in the sand" is beginning to curl lower, and if it were random chance (which it's not) each day has about a 5% probability of closing outside of the band. So, as each day progresses - as a very rough approximation - you can knock off 1% from that. So, with two days outside of the band, 5% - 2% = only 3% chance for Monday of closing outside of the band.

That's if it was by random chance. But, we know the stock market does not have a typical "normal" distribution like a Bell Curve. In fact, the stock market is known to have a "fat-tailed" distribution. That means that larger price changes happen a little more often that they should otherwise.

That is, in the nut shell, part of the mathematical reason that Elliott Wave counting works. Those larger sized price changes make for big third waves, and big C waves.

So, be careful of the casual mathematics used to describe the chances of being inside or outside of the band. Right now, there is no sign the bands are curling in, and it is possible the 100-day SMA, the dotted green line, will become a price objective since the lower band has not provided support yet. Until then ...

Have a good start to your weekend.
TraderJoe