Tuesday, January 16, 2018

Higher Volatility

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Higher High, Lower Low, Lower Close - Outside Candle
FED Posture: Quantitative Tightening (QT)

The title of our outlook for some time now has been "expecting higher volatility". Today, we were experiencing just some of that volatility. 

In our post yesterday (seen by very few, apparently) we alluded to a situation in the futures which could reflect valuations being out of kilter. If you did not see yesterday's post you are encouraged to review it. Regardless of our opinion, the futures markets were again 'spun higher' in the overnight sessions on the weekend holiday to a level of 2,804. This was up about fourteen (+14) points from Friday's closing level. And, sometimes, one just has to shake one's head, and ask, "Oh, really, what justifies this?" Well, today, the answer was "nothing, apparently".

Shortly after the open, the S&P500 cash index, topped at least temporarily at 2,808, then began to head lower for much of the day. By 2 PM ET, the opening gap had been fully closed, and some selling appeared which drove the market down to 2,769 level (which was down some 39 points from the intraday high). From the intraday low of 2,769 there was a brief rally to 2,782 which faded into the close at 2,777.

In making it's new high today, the S&P500 solidly crossed a level of Intermediate (3) = 2.618 x (1) as we covered in Thursday's post. That level was 2,788, and it has now been bested. We're probably going to have a lot more to say about 2.618 waves in the near future. But for now, we should assume we have three Intermediate degree waves higher in the S&P500. That assumption means there is an alternate count I can clearly see, but there is not enough evidence for it yet.

One chart that does look complete is that of the daily Russell 2000. It is below.


Russell 2000 Futures - Daily - Outside Key Reversal Day Down

Because, unlike the S&P500, the Russell did indeed make an outside key reversal day down, it is now hard to count this wave structure as anything else but completed. If the Russell's daily bars start overlapping or trading below wave (iv), this would likely be confirmation of a turn for this index. This might set up the divergences that need to be seen in some of the other indexes.

Although no claims are made for the S&P just yet, we will note that volume picked up in the ES futures on the down turn. Volume had been running at just 800k - 1.0MM contracts, and today came in at double that on the turn-around day. But, we will also note that the daily slow stochastic on the ES futures is still embedded over the 80 level. So, be prepared for anything including a flat or yet another triangle because there are not, as yet, any invalidating downward overlap yet.

For this reason, patience and flexibility are still needed until there is something more definitive to report. Have a very good start to your evening!

TraderJoe

Monday, January 15, 2018

An Observation

The study below was done to see if casual observations made at the end of the session were borne out in fact. The observation was that as recent days futures contracts were closing at the settlement, they seemed to be trading quite oddly.

Daily Settlement - Futures Discount to Cash

You can see from the above chart that for almost the entirety of the Primary 5th wave, since February 15th, 2016, above, the daily ES E-Mini S&P500 futures contracts had been closing with a discount to cash. That is, on settlement, the futures price settled lower than the equivalent cash price. This is usually thought to be that because the futures have a limited life span, and do not pay dividends like the cash market does, then there is a slightly reduced value to the futures contract.

The chart above is a daily chart. For almost two full years of daily data points, we see this typical relationship held true. Only exceptionally rarely did the futures trade at a greater value than the zero line, and then only minimally so. But only recently, after or coincident with the passage of the tax cut, the futures have been trading at an unmistakable premium over cash.

Is there a sound economic reason for this - as the explanation for the usual discount above? Or is this one of the ultimate signs of froth and excessive bullishness in the market - and that valuations are out of kilter?  If people were figuring the tax cut contributed to S&P earnings, why wouldn't such values be applied cash as well as futures??

Only you can decide for yourself. We can only show the findings.

Have a very good start to your week.
TraderJoe


Thursday, January 11, 2018

A Tale of Three Fibs

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

After noting yesterday's hanging-man candle, we noted that if the market didn't immediately gap down at the open, then the highs could be revisited. That is because like any potential reversal candlestick, a confirming lower close is required to confirm the pattern. A gap lower did not occur. The highs were revisited and new all-time highs were made.

After doing some work on the German DAX in the live chat room today, this chart weekly was posted.

German DAX - Weekly

My operating premise was, "if you cover the name of the chart, and just count it like any other Elliott Wave chart, what would the count be?". The above chart results from the fact that within wave (3), wave 4 was likely a FLAT wave to alternate with the sharp wave 2, and to equalize the net distance traveled distance by wave 4 with wave 2. And, it should be noted that wave 4 now takes much more time than wave 2 - as is most often the case.

In the DAX, there are a clear three-waves down from wave (3), and then a retrace towards the high. But, it is clear that when a parallel channel is drawn in this manner, no wave has yet come back down to attack the weekly channel line. When or whether this happens remains to be seen.

I then decided to take the exact same approach with the weekly S&P500 Cash Index, as in the chart below. But, with one difference. I applied a Fibonacci ruler three different times to see if the Fibonacci hits made sense. Here is that chart.


S&P500 Cash Index - Weekly - Three Fibonacci Ratios Applied

The result of doing this is obviously that price is only about 20 points away from (3) = 2.618 x (1), a location where we must tip our cap to the power of a third wave. (See left-most Fibo ruler). Further, you can see that wave 3 is just shy of the ratio where 3 = 1.618 x 1, and yet minute (iii) is exactly 1.618 x (i), when measured in this manner. This picture of a chart-in-a-channel, allows the extremes of waves (1) and (3) to be currently located on the outer channel boundary which is just terrific. Whether price exactly makes the 2.618 extension seems pretty immaterial at this point - but it could - and we will watch to see if it happens. Right now, it is "close enough for government work."

Further, the lower channel boundary should give some guidance as to where wave (4) will form - when and if it does. Students of the technical indicators know that at present they are all currently just about maxed out - as is sentiment. That should indicate that we are indeed in the extended third wave.

When charted in this manner, one finds that the degree labeling in this index works out just fine. And, from a Neely perspective, the only thing one has to swallow is that in the cash index, partial bars of wave 2 chop off a line from the origin through wave (2). Well, all I can say is that Elliott formally called it an "under-throw" which often started an extended wave. So, it's a question of who you believe. The chart right now says to believe Elliott. I also think that this chart makes the alternate of the expanding ending diagonal wave much, much less likely, and will not revisit that chart until or unless something goes awry.

It is also worthwhile keeping an eye on Crude Oil at this time as it is finding some daily resistance at the monthly trend channel line we showed in the weekend video.

Have a very good start to your evening.
TraderJoe


Wednesday, January 10, 2018

Gap Lower Day and Rebound

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower; DJTrans, RUT futures higher
SPX Candle: Lower High, Lower Low, Lower Close - Hanging Man Candle
FED Posture: Quantitative Tightening (QT)

Most U.S. Equity Indexes (except the DJ Transports) made daily lower low candles, and then retraced much of their initial losses. The market as measured by the cash S&P 500 Index had closed yesterday at 2,751. With the futures lower overnight, the market gapped six points lower to open at 2,745 and continued trading lower down to 2,736 by the first half-hour of trading. With the all-time high (ATH), so far, at 2759, this was down -23 points from that level. The market then rebounded in three-waves 2,747 - 2,741 - 2751 to a 62% retracement, before beginning to fall off again slightly to 2,743, and then trading up to close at 2,747.

All-in-all, there is not too much to get excited about, yet. The ES futures really only just spent their first full day back inside the Bollinger Band, but the daily slow stochastic is still fully embedded. If the market gaps lower tomorrow, it might start a more countable downward sequence. If not, revisiting the highs is well within the realm of probability.

So far, the only larger waves we have are 2,759 (ATH) - 2,736 - 2,751 - ??

So we remain patient, and flexible until further clarity appears. Have a very good start to your evening.
TraderJoe

Tuesday, January 9, 2018

Russell Done?

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher; RUT, NQ (futures) DJ Util lower
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

It's not for sure yet. There still is some room. But, if the Russell 2000 were making a diagonal instead of a triangle, then it 'can' be counted as completed.

Russell 2000 Futures - Daily - Completed or Nearly Completed Diagonal

Remember, in such a count, wave (v) must remain shorter than wave (iii). In the above count, the b wave of (i) is a flat, but the a,b,c within (i) would be a zigzag. The other waves seem like pretty clear zigzags. In the above count each of the waves (i), (iii), and (v) does make a higher high than it's predecessor - showing their motive character.

With regard to the S&P500, today's gap up wave becomes very important. We were able to count a five wave impulse upward today that could finish the wave, but downside price movement was not enough to create an outside reversal day down. So, while price movement could continue lower tomorrow, the failure to close the gap today leaves a possibility of a higher high, yet. More on that one later.

Tonight, the ES futures settled above their upper Bollinger Band for the fifth consecutive day in a row The odds of this happening (assuming stock prices are distributed normally) are exceptionally low - about 1%. Of course, we almost all know stock prices are not distributed normally, and instead have "fat-tailed" distributions. The large prices movements - both positive and negative ones - happen more frequently than the normal distribution would predict. This is why an occurrence of this type, with only about 1% odds of happening by random chance, can happen right in front of your eyes.

Tonight might be another one of those good nights to check in on the futures a couple of  times to see if anything invalidates in the after hours.

Have a very good start to your evening.
TraderJoe

Monday, January 8, 2018

Geometry Test - Answer

Although one person tried valiantly, and came up pretty darn close to the correct answer, below is the actual answer to the test wave count published over the weekend. The count overall has not changed. My intent was to check your reasoning in an Elliott Wave format. Few people decided to stake a stab at it. I will explain the answer after the chart.

ES E-Mini S&P500 Index - Futures - Correct Test Answer

First, the supposed "Leading Diagonal" wave a was not a leading diagonal at all. That is because it could not be counted as zigzags (the tell is that there was no smaller a-b-c within (i)). Secondly, a real leading diagonal most probably would have had some type of deeper retrace. None seen. So, this suggests that wave iv is actually a "running flat". Now, while a running flat is relatively rare, the very purpose of the running flat was to equalize the net distance traveled between the real wave ii, and wave iv. Notice how the distance from iii to iv's end, is now almost identical to wave ii.

There also was no deep pull-back after wave ii where it was shown. That was the last (e) wave of the triangle shown. This is a common problem wave counters have - deciding where the last wave ended to begin the new count.
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Now, the alternate for this count remains a-b-c equals a larger i, ii, iii upon exit from the triangle. But the 23.6% pullback seems to suggest that is less likely. Still, I want to give a big shout-out to Kaviraj Chopra, in yesterday's comments, who made a real good attempt to answer the challenge question.

Now, the bulls have to answer the question of why, in real time in the live chat room today,, we were able to count "five waves up" which included yet another, but smaller, triangle as follows.

S&P500 Cash Index - Impulse Wave Counted

Notice how within this wave there was another triangle that not only did we call in real time - before price exited it - but how we were able to project an exact price target from the triangle. That target was hit rather exactly.  But, beyond that, in the last five waves up on the chart, (-i to -v) we were also specifically able to outline the alternation within this last wave as a sharp for -ii but a FLAT for -iv. We also noted that wave -iv had a 38% retrace, without overlapping wave -i. Further, so far, wave -v is having a tough time cracking the mid-line of the channel, showing a loss of momentum.

The point is with a pretty clear five-waves up of this type, we should expect at least a three wave down sequence now. Maybe more, but let's see if how this goes.

Yes, patience and flexibility are still required. Have a great start to your evening.
TraderJoe


Saturday, January 6, 2018

Geometry

The only purpose behind this weekend post is to show some geometry on a chart. Then we might be able to ask some questions.

ES E-Mini S&P 500 Index - Daily - Geometry

A few questions one might ask are these: 1) why are the waves in a fairly exact channel? 2) why is there a FLAT wave (.a, .b, .c) after the apparent diagonal wave a shown? 3) why does the downward wave after wave a retrace only, and actually slightly less than, 23.6%?, 4) how would a 23.6% wave be a second wave at that location? 5) if wave ii of a makes a deep pull-back, why doesn't the wave after b have any sign of a such a deep pull-back?, and 6) are leading diagonals more often a waves or are they 1 waves?

Often times, not always, it is C waves that have little retracement in them at all, and 'take off like a rocket'. The alternate remains i, ii, iii. One can not count waves that are not on the chart, yet.

Have a good weekend, and remain patient and flexible. Let's see if anyone is awake out there in Elliott land. Take care.
TraderJoe