Sunday, May 8, 2016

Good News and Bad News

The good news is our "five count" to the April 19th high, including the fourth wave triangle, was 'predictive' in the sense that it predicted a downturn to occur - we called the top within 12 hours of the actual high.

We have since gotten the "triple zigzag" or, I should say, its devilish alternate, a "Leading Diagonal" lower. In this case, the diagonal is best counted as "contracting" as opposed to "expanding" as opposed to that in the earlier post, dated Apr 30, 2016. That's OK with us, we just waited for the triple zigzag/diagonal to complete - which it did this Friday. When we backed off to look at the 4-hour chart - rather than the somewhat myopic 30 minute view - the contracting diagonal appears to have the "right look". And, so that appears to be five minute waves down to Minor wave A of a correction.

The bad news is below the chart.

Five contracting waves down to minor A

So since we said in our last post that the five waves up "could" be the full extent of Primary V in a slightly truncated wave, then we can not assume the downward movement won't break the February lows. We think the evidence does better indicate just a correction lower, but we can not make a very high probability call on it just yet - just a reasonably well educated one.

What is that evidence? The evidence currently resides in following three forms: 1) Leading Diagonals are "usually" A waves when they form. 2) The wave 4 low was not broken on the SP500. That can often be a key clue that only an A wave formed. 3) The market has most-recently made "five waves up", and in Elliott Wave work, that is supposed to indicate the one larger trend -- but this is the iffy one. Fifth waves are five-wave-sequences, too. Yeah. The 'last ones' unfortunately. It's just that in this one, there is that "running triangle" fourth wave 4 -- and the higher minute b wave -- circle b -- is 'supposed' to still indicate bullish market conditions. Such higher 'b' waves did so indicate on the entire rise from 2009, and so there is no reason to think they aren't doing so at this time, too.

So, the bad news is, we are obliged to carry ALT: 1 and 2 labels (i.e. downward) until the high of wave 5 should be exceeded. The further bad news is that 'sometimes' wave C after a diagonal can be 1.618 times the length of wave A. That be quite a scary drop for the bullish camp. But there are still ways with a common C = A wave, that the drop can only make it down to the 38.2% retrace level, which is aligned very well with the 100-day SMA (refer to a daily chart of the ES E-mini futures and place a 100-day SMA on it).

As we have indicated before, if the current "five waves up" to the April high is the "extended first wave in the sequence", then the retracement for wave two can be limited to 38.2%. Since February's wave 2 in this sequence is not the classic 50 - 62% retracement for a wave two, we still think the upward wave is most like a "sub-wave" one of Primary V, and not entirety of it. That's our view, but the market must prove it correct by eventually making a higher high than April's wave 5.

Until then, we endeavor to count the downward wave correctly, and we remain very, very patient and flexible. There is still a good possibility the market does not top until a Fibonacci eight (8) years from the March 2009 low - which would be in early 2017.

On a slightly different note, here is a chart of the weekly US Dollar Index. It has been a long time counting this chart, but we said that this fourth wave could easily take all the time it wants to traverse the channel. It looks like it has done that now. An upside reversal out of the bullish falling wedge (or contracting ending diagonal) would likely confirm a fifth wave (5) in-progress to the upside.

Weekly US Dollar Index - Wave (4) May Be Completed

If a fifth wave begins in earnest, then this may provide headwinds to stocks, and some other assets like Gold.

Cheers! And enjoy the charts.