Referring to chart below, some of you may know we have been thinking from the many multiple overlaps in the ES 4-hour futures that perhaps a running triangle is under construction.
|ES 4-hr Future Potential Running Triangle|
So before we explain the further rationale for the triangle, we want to explain the opposite case, first, and why the opposite of a triangle is 1-2-i-ii. Imagine in your mind for a moment that the top (b) is instead the highest high of the move, rather than the (b) wave of a triangle. If you label (b) as the "top", then wave a, down, becomes wave 1, in five waves, wave b, up, in three waves becomes wave 2, wave c, down in five waves becomes wave i, and a next set of upward three waves comes wave ii, up.
In other words, it is precisely because a triangle is constructed of zigzags, which are counted as 5:3:5 that if a sideways triangle breaks lower rather than higher, that an impulse down could have been started.
But, here is why we think that would be a premature conclusion at this point: If you look at the c = a leg of (c), you'll see that the c wave down couldn't even make it to exactly c = a. So, that shows some signs of not being able to make downward progress. It falls short of the 100% mark. We have seen many zigzags where c is slightly longer than a, or even c = 1.618 x a. And the question to ask is, "why doesn't this downward leg show the needed power to do some damage to the triangle pattern?". It just doesn't at this point.
Secondly, look at the slow stochastic, and what do you observe? There is a clear divergence on wave c versus wave a. Again, this is a sign of "upward" strength, not downward strength.
Thirdly, there are two patterns for extension waves that the Elliott Wave Principle describes. So, here we are taking about the i wave in 1-2-i-ii . In the first variety of extension, the wave i is 'longer' than wave 1, letting one clearly know they are in a third wave extension. In the second variety, wave i is much shorter than wave 1, and doesn't even crest beyond wave 1. This wave would seem to fit neither of those two cases, making an 'extension' wave seem less likely: not impossible, but less likely.
And lastly, while there are now clear two-bar fractals at the waves labeled as "a", and "x" at this point which 'have' been broken lower, there is also a two-bar fractal at the red triangle on the chart. This fractal has survived the downward movement, so far. Only if it breaks - along with the current c wave of (c) fractal - would it suggest that a triangle is 'not' playing out*.
Now, we have always maintained that, like diagonals, triangles are patterns which must 'prove' themselves. As the Elliott Wave Principle by Frost & Prechter states, "a triangle can not be determined until all five waves of the pattern have completed". That is the case here too. A (d) wave in the upward direction 'must' form properly, and failure to do so would likely indicate a downward resolution.
What do we mean by 'form properly'? During live chat room, we were able to determine that the (c) wave down was a perfect Fibonacci 0.764 ratio to the (b) wave, up. That means that 'most likely' a (d) wave would be a 0.764 retrace on the upward wave, targeting the 2060 level in the June futures. If that level should not be made in the next three trading sessions, then it spells trouble of some variety.
In either case, upward or downward resolution, we are about to learn something significant about the longer term market direction. From the market technical indicators, volume is now declining - which matches with an expected triangle, bullish sentiment is still just barely less than 50% bullish (49.7% bulls by our measure), and the put-call ratio is back to 0.75, not showing wild speculation at this time.
So keep that in mind as we move forward. There are still a number of legitimate Elliott Wave patterns that can play out, as described in our earlier blog posts. So being open, flexible and patient at this time remains the best posture in our opinion.
* If you are unfamiliar with fractal terminology, please go to our website at the studyofcycles.com and click on the Tutorials tab, and find the Bill Williams video labeled, "The Practical Fractal".