Saturday, August 6, 2016

All-together Now?

Even before the open of the market on Friday, it was clear that a expanding diagonal downward was not going to occur, as the futures had traveled higher than a potential wave (ii) which invalidated such a pattern. So, on Friday, several indexes made new highs although the Dow Jones Industrials was not among the list.

But, as we had indicated, if the S&P500 made a new high then it would break the C = 0.618 x A potential Fibonacci relationship in that index, and that relationship is now broken. So, that leaves the next most likely relationship as a potential C = A relationship. And, if that is to happen this next chart seems particularly relevant.

Possible Measured Move in the Weekly Russell 2000 Index
Regardless of what the Dow and S&P do over the next several weeks and months, we know that the small caps tend to be seasonally stronger in the 3rd and 4th quarters of the year. This, in fact, was a third factor we had built the case for a Primary Vth wave in the first place.

Secondly, there is that large gap on the weekly chart, and such a gap could fill, and a C = A move, sometimes known as a "measured move" could fill that gap. If so, this could place all indexes in the position of being able to make either an Ending Contracting Diagonal or a continued impulse higher.

Again, while we see higher highs are possible, we are 'not' particularly bullish at this time. This market is only about 5% away from new all-time highs, and, if that is a possible 'reward', then there is also certainly a lot of risk. Some sentiment indicators as you likely know are now nearing somewhat more extreme levels.

Volatility Index ($VIX) = 11.39, a new yearly low, and vs. a 2014 low of 10.32
Put-Call Ratio ($CPCE) = 0.52, in the very speculative range, and vs. a 2014 low of 0.38

And, while trading or investment advice is not intended or given, keeping some 'powder dry' seems like a smart thing to us at this point in time.


  1. Is there a limit to the c wave before it becomes an impulse vs diagonal? Thanks for your explanations of the market.

    1. Good question. So, in the diagonal count, there are 'usually', or 'most often' only 'marginal' new highs for waves (1), (3) and (5). If the S&P500 and the DOW exceed C = A, then the odds of the diagonal begin to diminish very rapidly. Unfortunately, there is no point where one can 'completely rule out' a diagonal in formation because we don't know where wave (2) is, as we also don't know where wave (1) is yet.

    2. Thanks TJ. The ftse went over 6800 but has fallen back. Would you consider 6800 as holding with this brief break or does it indcate higher highs on the ftse?