Saturday, October 22, 2016

Pattern Predicts - Not Me

If it hasn't become clear through this site, yet, I try to use Elliott Wave patterns to 'predict' what will happen next in the market. That is distinct from sites who say things like, "well if the market goes down, it could keep going down.", or, "if up movement is going to occur, it needs to get started now", and then it doesn't, of course. It's hard for me to see what good that does readers.

I like all of the Elliott Wave patterns, including impulse waves. And, yet, when one doesn't see clear impulses one must try to assess what the pattern really is.

In our last post we showed you the 'numerous' diagonal patterns in the market, and indicated the predictions that they made and whether they had come to pass. They did. And, unfortunately, we're going to show you one more - this one near the end of the day on Friday. We had showed you the end of the day on Thursday in the previous post. You'll also note we had showed wave 5 as the exact low of the day in that post. Who else does that? The SP500 5-minute chart is below.

SP500 5-Minute Chart on Friday

If the downward wave we showed in the last post was indeed a true diagonal, then it would have had the propensity (not the requirement) to be deeply retraced. And you can clearly see how deeply the pattern has been retraced. Another prediction comes to pass.

Further, during live chat I compared the up channel from Friday morning with the up channel from Thursday morning, and I noted,  "how the corrective waves in Friday's channel couldn't even pop above the upper channel lines, like the corrective waves from Thursday's up channel". Look closely at this. When prices exited the channel to the down side it was clear there was some kind of loss of momentum.

When price again crossed upward over the wave marked as circle-iii, in a failed attempt to recapture the up channel shown, it was a trader in the live chat room named GummyBear, not me, who had the observation that maybe the C wave was forming another diagonal - this time an expanding one! Based on the divergence shown in the Elliott Wave Oscillator, I agreed to count out that wave. And, what do we have? Wave v is longer than wave iii, wave iii is longer than wave i, wave iv is longer than wave ii but does not travel below it, wave iv overlaps wave i, and they are all three-wave zigzag sequences.

Some of you will recognize the expanding diagonal by another name, the dreaded Megaphone pattern. This is not a pattern I was hoping for, but there it is. Further, the result of this pattern as you can see from the Fibonacci ruler is an exact C = A wave sequence upward to a deep retrace shortly before the close .

During the closing sequence, we then got what looks like five waves down, and a smaller three-waves up. Based on the C = A relationship, a potential further expanding diagonal, I then reduced my wave-counting stop from 2149 to 2144.50, cash. That is simply the result of what a C = A, followed by five-down means. If the top of the pattern holds, then we continue lower. If the top of the pattern doesn't hold then we have counted something that doesn't exist in fact, and is part of a larger pattern.

While I don't know what will happen, the ending diagonal pattern says that the start of the pattern should be exceeded lower. That means the point marked as B should be exceeded lower in the upcoming days - and possibly much more than that. Again, that's what the pattern says, and that is the pure purpose in counting waves.

All that can be said is by the close the pattern wasn't exceeded to the upside, and those trying to act on evidence rather than ego have to ask, "why not?". We have to reason from what we don't see, as well as what we do see. Just like Sherlock Holmes in the Hounds of Baskerville, "why didn't the dogs bark?"

So, just for clarity, here is the count on the larger potential diagonal downward.

SP500 30-Minute Larger Contracting Diagonal

The fact is the market is now actually in the best position to make the sub-minuet wave iii of the minuet (c) wave of minute iii (circle iii), lower. A gap down on Monday would largely solidify that possibility. For now, we can only note that price is traveling down the upper trend line of the pattern, and we note how remarkable this is. For all these reasons upward movement is not expected, and almost any upward movement in the cash market would cause us to re-evaluate the count.

In fact, in the evaluations of alternates, we must prepare you for one other possibility - and that is a downward one, not an upward one. What IF we have misjudged wave minute i (circle i) lower, and it is really a 'five' and not a 'three'. We know that in a contracting diagonal wave iii must be shorter than wave i. So, if minute iii (circle iii) becomes any longer than minute i (circle i), we will know at that instance that we are dealing with a full-on impulse down, and not a contracting diagonal.

Time will tell, but Monday has the power to clarify much in this wave count! Enjoy your weekend.

Friday, October 21, 2016

Good Grief!

I know that Charlie Brown of Peanuts fame would probably use an expression like this to describe what is currently going on. There are a number of you who are (to say the very least) skeptical of diagonals and triangles in waves. That's why I'm posting this chart in near real time to show you the counts that have been presented in live chat, and some of the predictions that have resulted.

First, over to the left of the five-minute S&P 500 chart, we even blogged on here that we had found an ending contracting diagonal on the five minute chart. The contracting ending diagonal is perfect in every aspect. Wave (5) is shorter than wave (3). Wave (3) is shorter than wave (1). Wave (4) is shorter than wave (2) and overlaps wave (1). Each wave is a zigzag, and there is the characteristic throw-over of the wave (1)-to-(3) trend line by wave (5). Try to study this formation. You will learn a lot from it.

SP500 5-Minute Chart : Three Diagonals
So, on Wednesday the 19th Oct, that diagonal led me to predict in live chat that "the origin of the diagonal, the point noted as 0 should be exceeded lower no later than noon on 20th Oct." It was in the opening hour of Thursday's trade. Then, the wave was retraced to a very large degree, and, rather than forming a parallel, looked like to me to be another diagonal. But this one would be an expanding diagonal of the 5:3:5:3:5 variety. And, it too, formed to perfection in every detail. You see, these two diagonals taken together can represent what some see as either "Butterfly or Gartley" patterns when the market is looked at through those lenses.

After the expanding diagonal formed at (5), with wave (5) longer than wave (3), wave (3) longer than wave (1), wave (4) longer than wave (2), and wave (4) overlapping wave (1), then a deep retrace was likely. Once we had gotten the five waves up to the (A) wave, then I clearly stated, "Five waves up are detected. Another pop is probable". And, shortly thereafter, the strong (C) wave up began, and retraced right to the upper descending trend line of the diagonal and the 78.6% deep retrace level.

So, next, after having drawn in the channel for the upward zigzag wave sequence, when the lower upper rising channel line was broken and the red triangle (denoting the fractal at that location) was exceeded lower, then I resumed the downward count. This is what led me to conclude in last night's blog post that, referring to the SP500 30-minute contracting diagonal, lower, "At this very moment there is no reason to abandon the count."

Further, at the end of the day yesterday, I started yet another diagonal downward due to the again overlapping waves, and the three-wave sequences, and look how this diagonal completed in perfect form this morning!

Yes! You don't often see this. Yes! It is rare. But it is guaranteed you won't see it if your Elliotician is not looking for it, or if you, yourself, are not disposed to look for triangles and / or their cousins, the diagonal, where they can be.

The point of this post is not to toot our horn. One purpose of it is to show you how diagonals and triangles have such exacting internal requirements that they can help the Elliott analyst set clear and unequivocal  invalidation points - just as we have in the last many posts. Another purpose is to help "shake loose" the Elliott Wave cob-webs that some people have - which have become so thick as to literally put blinders on them when it comes to wave counting. But, yet another purpose, is precisely to show how waves can form. After the initial expanding diagonal which we called the (a) wave down in last night's post, there is now yet another expanding diagonal, lower, which is probably the first wave of the (c) wave of minute iii (circle iii). And, still, the diagonal provides a very clear invalidation point for the downward movement in that the (C) wave high, above, at 2146, should not be exceeded higher if the count is to be correct: that is the high of the (b) wave on the SP500 30-minute chart.

Thursday, October 20, 2016

All Along the Watch Tower

So, we were expecting downward movement for today, and that's what occurred initially. First here is the continued potential diagonal, as we counted it today in live chat. Price is still following down the upper diagonal trend line quite nicely. At this very moment there is no reason to abandon the count.

SP500 30-Minute Potential Diagonal Count Still in Progress

But what happens if price surprises us in a big way to the upside in the next few days? Well, we just need to be on the watch out. Today, during live chat I showed this alternate - which I think has the best possibility of playing out in the event a large seemingly unexplained movement upward occurs.

SP500 4-hr ALTERNATE - still in a barrier triangle

Because the minute-d (circle d) wave lower did not make a new closing low, then this count would still follow the rules and guidelines for a barrier triangle. This triangle suggests it is 'possible' to pop higher in a minute-e wave (circle e). But, then, if that is the case minute-e must cross back up over the minor A wave to be corrective to it.

If any any time a four-hourly bar closes below the barrier, then a barrier triangle would likely not be the count, and something more indicative of lower prices would be. We would cover those options later - should that occur.

For now, other than keeping a close eye on things, the current diagonal count lower is acceptable. But most people will agree price is quite whippy. We will also provide that the daily moving averages are currently in the bearish configuration, with the 10-day lower than the 20-day, and the 20-day below the 50-day, as below.

SP500 Daily - Bearish Configuration of MA's

While we are getting conflicting intraday signals, today's movement was all about whipping prices about the 10-day SMA, with the close right on it.

So, patience and flexibility are still needed - especially when we can see two very clear options.


Wednesday, October 19, 2016

Right Look

While there are still no major overall changes to the count - I'm still expecting the SP500 to trade below 2111 in the next several days, during live chat today, the diagonal count was updated to be the following, even though the level of 2149 was not exceeded higher.

SP500 30-Minute Adjusted Diagonal Count for the Right Look

The only reason for this change is that it provides a potential diagonal with more of the Right Look for a diagonal. There is only the smallest of a truncation for wave minuet (c) of minute ii (circle ii), and the diagonal would have looked 'strained' if wave ii were at the 2149 level.

This count does allow the 2149 level to be exceeded slightly if the up wave to (c) of minute ii is not completed yet. But, it is very possible that it is because we counted out a very small ending contracting diagonal in perfect form on the five-minute chart to v of (c). So, I'm expecting downward movement tomorrow, overall.

Hope you understand!

Tuesday, October 18, 2016

Still No Changes

Below is the SP500 30-minute chart, which is still counting the contracting diagonal, lower, to below 2111 in the next few days.

SP500 Counting Down to a Diagonal Still

On 10/14 & 10/17 is the contracting diagonal (a) wave we referred to in yesterday's post. Measuring the (a) wave, within it you'll find that wave .v is shorter than wave .iii; wave .iii is shorter than wave .i; wave .iv is shorter than wave .ii, and wave .iv overlaps wave .i. Again, the wave follows all of the rules and guidelines for a diagonal.

Netflix earnings provided the 'pop', and the rest of the day was spent grinding (lower, I think). We have labeled the up wave as the (b) wave because, so far, it has gone nowhere, and didn't break the wave (ii), high. As a matter of fact, today looks like the deep retrace of yesterday's (a) wave diagonal, ending in the territory of it's prior wave .ii.

Late in the afternoon, we got confirmation of a lower high from the RSI (shown as the second circle), and no subsequent cross upwards as of yet.

So, tomorrow's gap direction becomes critical. If we gap down, a lower low than minute (i) would be minute (iii) of a potential diagonal. If we gap up significantly enough to cross wave minute (ii), a diagonal would formally invalidate, and we'd have to look for an alternate. Given the waves we have now, an alternate is not clear, yet.

Monday, October 17, 2016

No Changes

With today's slightly lower low that did break below the low of Thursday's (b) low, we made no changes to the overall count during live chat. We are still expecting a marginal lower cash low below S&P 2111 this week. We did however, post an internal alternate that applies only to how minute iii (circle iii) lower might form. For that alternate, we would place minuet (a) of minute iii, at today's low. This allows the possibility of yet a (b) wave up, before the (c) wave down.

The reason for placing the alternate is that it is 'possible' to count the waves from 2149 down to 2123 as a contracting leading diagonal in it's own right, following all the rules and guidelines, and we do not have a significant gap on the chart to clearly denote a third wave or a c wave.

Saturday, October 15, 2016

Isn't It a Pity?

The ES E-mini S&P futures at one point Friday were sporting a 17 point gain in the early going - only to have it erased by the futures close at 5 PM ET (not the cash close). During live chat, we counted that up movement as an ending diagonal C wave. If you're interested to see the count on this wave just as we posted it in live chat, it looked like this.

SP500 5-Minute Chart  with Ending Diagonal (c) wave of Minute ii (Circle ii)

So, it looked like we had (a), up, in five waves, then the (b) wave down, and the (c) wave up in five waves to minute ii (circle ii on the fifteen minute chart, below), followed by five more waves down.

Further our measurement on the (c) wave showed it to be 0.786 x the length of the (a) wave. While this is a little uncommon for a (c) wave, it is at a Fibonacci extension virtually to a pip. But, more importantly since fifth waves are usually 0.618 extensions, it does help avoid confusion with a fifth wave up to the high. It also just happens to match the (c) wave down of the minute wave i (circle i) earlier in the week which was 0.786 times the length of it's (a) wave, as well. I invite you to do some independent studies to verify the same. It is likely you'll marvel, as I did.

But even more importantly, we see that wave minute ii hit the projected 62% retrace level of minute i quite exactly.

If we did, in fact, have an ending contracting diagonal (c) wave upward to finish minute ii, then that means that there should not be any further price movement above it's high - at least for the next few days. You might term this a "wave-counting stop" - meaning that any price movement above Friday's high means the wave count is incorrect. This is not trading or investment advice. This is what I mean by the fact that some other Elliott analysts don't even seem to show concern for invalidation levels. But, as always, an ending diagonal is not proven until it's origin has been exceeded lower. The origin in this case is the (b) wave low of Thursday. So far, that has not happened just yet, but likely will on Monday or Tuesday.

And, as for that slightly larger time-frame picture - here is how things appeared at the end of Friday on the fifteen minute chart.

SP500 15-Minute Gap Closed in the Settlement

Because the five waves down from minute-ii did not fill the gap, we think they are the (a) wave down. Then we either have had - or are still having - the (b) wave up, to be followed by a strong (c) wave down to the likely minute-iii of a potential ending contracting diagonal for the C wave of Intermediate (2). Again, improved confidence in this count would occur if 2130, the low of Thursday's (b) wave, is exceeded to the down side.

In all, to form the larger contracting diagonal on the 15-minute chart properly, minute iii (circle iii) must be shorter in price than minute i (circle i) and would likely be shorter in time, too. This again provides another valuable invalidation point. If minute iii should become longer in price than minute i, it just means there was a flat wave instead from (a) of minute i to the high of minute ii, which would make (a), the impulse minute i count instead, and the high of minute ii still the end of minute ii (circle ii).  That is the very best alternate we can see at this point, barring an unusual surprise in the market. This is the alternate because second waves are usually zigzags (sharps) and not flats.

We are still counting downward with the short term trend because the Elliott Wave Oscillator is still below zero, red, and declining, because daily MACD and slow stochastics are still crossed lower, and because volume has been increasing on down days recently. But, even so, price excursions higher are still possible. B waves, as a class, can be difficult to count, so we can't say for sure that minuet (b) above is done. It could form a triangle or a flat wave, itself. There's really no telling - one will need to keep an eye on the overnight futures.

In the meanwhile, for true Elliott wave students: you are invited to study the (a) wave up of minute ii, (circle ii) in the five-minute chart, above. It counts as minuet i, ii, iii, iv, v - where minuet i is a perfect expanding leading diagonal that we recognized in real time. This formation at the bottom of a retracement is often a clue that a large upward wave is to follow, and it did. Next, notice that minuet iv did not overlap minuet i, and that sub-minuette wave 4 (circle 4) did not overlap it's sub-minuet wave 1 (circle 1), either. In fact, what you are looking at is the case where when wave minuet iii is only slightly longer than 100% x minuet wave i, then it is possible for wave v to be the extended wave. This is  the case, and in spades. We recognized it, and called in out in real time once the SP500 crossed 2133, the point where those nested ones and two's lower were no longer possible - as we cited in our previous blog post.

We hope this helps clarify the situation in some detail. Otherwise, have a great weekend!