Tuesday, August 16, 2016

Diagonal Validated

While many other sites were saying things like "middle of a third wave" or even "Primary III ahead" (<gulp!>, hook line & sinker), we have been wondering just how the market will "slip it to us" in the light summer volume, and to that end, on Friday posted what looked to us like it could be a diagonal formation.

The updated chart of the diagonal is below. Because it was validated today by trading below the low of wave (iv), a diagonal has, in fact, completed correctly.

ES 2-hr Futures - Diagonal Validated
This wave completion even occurred on the S&P 500 30-min cash chart, as well, so you don't think games are being played with the futures. That chart is below, too.

SP500 30-Minutes - Diagonal Validated
Isn't interesting how the 120-minute futures mimic the cash half-hour? We had noted that for you before. But the question is not whether we notice things, the question is do you? Do you have the market curiosity to investigate what works, and stay away from what doesn't? Do you go on line to read everybody's wave counts, even those market commentators who rarely get it right, but don't take the time to learn the rules and guidelines for yourself? Not to impress, but to be more confident in your wave counting, predicting and trading?

And, if you're like most, you are probably asking, well, "what's next?" Well, we have a validated diagonal, as best we can tell. And, as we said before, we can not tell specifically yet, if the diagonal is Leading or if it is Ending. We won't know that for a fact, until the low of 2147.58 in cash is taken out lower.

In the meanwhile, in the light choppy action, we'd suggest reading the daily ES chart perhaps the way Ira Epstein might.

Daily ES Futures
Price traveled up to the upper Bollinger Band, where the "Smart Money" usually takes some profits. There is a clear double-divergence on the chart between price and the daily slow stochastic, with the market making higher highs in price, but the slow stochastic making lower highs. Very often when the slow stochastic has been embedded - as it has - and then becomes un-embedded by traveling below the 80 level, then "often, not always", often, price and  the 18-day moving average will find a way to come together. In this case, because price made a low below Friday's low, the "swing line" study - proprietary to Ira - is no longer in an "up trend". There is "no trend" on the swing line study, and yet, there is 'positive bias' because price is still above the "line in the sand", the 18-day SMA.

Usually, Ira does not recommend "buying new" against an upper Bollinger Band because that's where the Smart Money is taking profits, and the retail buyer would be bucking the big funds trying to exit. But, says Ira often, there is a world of difference between taking profits, and putting on shorts. He does not recommend that unless price is trading below the 18-day "line in the sand".

Nothing above is to be construed as trading or investment advice - just a recap of how I think Ira Epstein would analyze this chart.


  1. good stuff tj. you are really good at this.

  2. This is a great teaching forum. I just wanted to let you know it is appreciated. Regards Mark

  3. Thanks TJ, appreciate the thoughts you have shared.

    I would like to ask if throw-over is common or rare when we have a diagonal. And you could have came across "wolfe wave" and "harmonic patterns" before. Do you know think we can increase the probability of trade if we integrate these 2 patterns with EW analysis?

    1. A throw over is common in a diagonal. It's happened in about 80% of the diagonals I've seen in real time. The other 20% are failed fifths in the diagonals, where wave (v) of the diagonal doesn't make the new high. The latter mostly occur as "c" waves before a strong third wave down. I have come across both Wolfe and harmonic patterns before, and am obviously not using them for a reason.

  4. Thanks Joe , appreciate your analysis.

  5. Great analysis! Really appreciate it!

  6. Waiting to see how this diagonal unfolds. Thanks Joe!

  7. Waiting to see how this diagonal unfolds. Thanks Joe!