Friday, August 26, 2016

Poke and Joke & Potential Truncation Count

If you followed the markets today, you know that they poked higher briefly when Chair Yellen indicated that the Federal Reserve saw more signs that supported a rate hike this year - unless they needed to again utilize QE because the economy was really in the next recession. If that wasn't enough of a joke, Vice Chair Stanley Fischer pulled the rug out from the rally and said that the upcoming jobs report could provide the signal for a rate hike - unless it doesn't. Regardless, the market slipped a bit like it had hit a banana peel before catching itself and stabilizing in the late afternoon.

All of it would be sheer comedy of course if it didn't affect our investments, and most of us know we were far-sighted enough to see nothing but the folly of the volatility in it - largely still in the form of a triangle.

Figure 1 - SP500 Potential Hourly Triangle
As we clearly indicated yesterday there was no reason the current down wave couldn't have proceeded further. And it did - after the Yellen announcement. Both the DOW and the S&P filled the gap from early August shown in this chart with the green circle. And now the DOW and the S&P have 'roughly' a 78.6% retracement of their up move.

That's fine for a triangle, but much beyond that, and the contracting triangle shape will become strained. We want to say that again - much beyond 78.6%, and something is amiss.

However, the downward movement has caused us to actually eliminate the count of the potential ending diagonal - provided in yesterday's update. There are three reasons why: 1) the downward move from the point market (w) to the point market (c) would now clearly be a complex wave, and diagonals are only supposed to be comprised of simple zigzags;  2) there's that pesky higher high for the ES futures at the point marked circle-b, and it pretty much signals a flat wave at that location - and, again, diagonals are not allowed to have flat waves in them; 3) maybe most importantly the FED could not goose the market high enough today to make the required higher high for the third wave of the potential diagonal.

So taken together, three strikes and you're out! So, we are putting aside any diagonal from consideration at this time.

Now, since the downward wave is a 78.6% retrace, if a triangle is to form properly, we should get a 78.6% retrace upward, as well - or very close to it to make for a symmetrical wave.

If we consider seasonality, often the week before a major holiday, and one which sees the first of the month potential fund flows from pension funds, mutual funds, 401k's, etc., is a positive week. So, just perhaps the triangle will complete properly. We don't know for sure - it is the triangle which must prove it's case.

Other alternatives remain, but there is not good evidence for them yet. If & when that evidence becomes available, we will try to present it. For right now, keep that 24 August chart of Chaikin Money Flow (CMF) versus the S&P front and center. The CMF took another nose-dive today. Volume is leaving the market - even if it's just for vacation.

As a late addition to this post I have decided to add the chart which shows the rationale for the potential truncation count.

Figure 2 - SP500 Rationale for Potential Truncation Count

I had only briefly mentioned in an earlier post that it was possible to see a prior triangle in the ES Hourly Futures. That same triangle can be seen in the cash chart, above, as well. We know that the futures have the higher high at the point marked wave 5 on this chart, but cash does not. Thus, the possible truncation. Now, although we can all criticize the look of the above triangle for being rushed, there is no doubt that it is in fact a valid way to count a running triangle in Elliott Wave terms.

Each wave segment can be counted as a valid three wave sequence, the upward green-b wave is longer in time than the green-a downward wave, and the 'e' wave can also be counted as a tiny triangle as I've shown in many other posts. Perhaps it is the terminal triangle. Further the 'e' wave crosses back down over wave 3, as is required in a running triangle. So, it meets all of the Elliott Wave rules for a running triangle and many of the guidelines. Two guidelines that is does not meet are a) triangles usually take up time, as we said, and b) the outcome of a 'running triangle' is usually bullish, meaning a higher high and not a truncation.

This would be a potentially valid way to have created the dreaded double-top. Yet, because of both the look, the perhaps rushed nature of the count, and the very fact that triangles take time, we must allow that a longer triangle could be in the making.

Still, we just wanted to present our case for why a valid truncation count could have occurred and not just plop those ominous red letters at the top of the chart in Figure 1 without your being able to see the clear and unequivocal rationale, as well. Such a count would only be validated with a low under 2147, and so the market has found a way to keep us counting until then.

Cheers and enjoy your weekend!


  1. Nice work. thanks. you too have a good weekend!

  2. Post Fed days often reverse at least some of the losses/gains so a bit more up is possible, however I think we are in a intermediate topping pattern.

    BTW- Caldero has now gone full BULL, new bull market just started. this is after he said the Bear market stated last summer, then flipped to Joe's 5th wave which he had dismissed, and now he says we fly higher. Complete reversals and his little minions still laud him. Sheesh

  3. As always... not a matter of being right or wrong... but just learning.... thanks Joe!