Saturday, September 10, 2016

Tick .. tick

We wanted to update the daily S&P chart as of the end of the day, Friday, with a Fibonacci ruler showing the potential retrace levels for wave Intermediate (2). Here is that chart.

SP500 with Retracement Ruler
You may often hear that the waves 'within' a diagonal are very deep retracements - like 61.8% or 78.6%, but that is not necessarily true. In fact, if you study the contracting ending diagonal that ended Intermediate (5) of Primary III in May, 2015, you will find that such retracements simply did not exist. In fact, Frost & Prechter do not have a rule about deep retracements within a diagonal : the suggestions are only part of the guidelines. And, given the relatively few diagonals that have ever formed in the weekly charts, the number of samples to have studied is exceptionally low.

Below is a chart showing that 2015 Ending Contracting Diagonal, as we called it, showing the retracement for wave (ii) was only 38.2%.

SP500 Weekly Ending Contracting Diagonal Showing Only 38.2% Retrace for Wave (ii) in 2015

And while we don't 'know' exactly how this one will form, we have to keep our eyes on the Fibonacci levels, because, in the case of the last one, prior support and a Fibonacci level ended wave (ii) pretty nicely.

Keep in mind, that just like a triangle's trend lines are not defined until the a-c and b-d points are known, this diagonal's trend lines will not be determined until the (1) - (3), and (2) - (4) points are known - which they are not at this point in time. We have only sketched in tentative diagonal trend lines to indicate where waves might find support. They are not inviolate.

And please recall all of the rules regarding diagonals: wave (5) must be shorter than wave (3); wave (3) must be shorter than wave (1), and still make a new high over wave (1); wave (4) must be shorter than wave (2) and can not travel below wave (2), and wave (4) must overlap wave (1). Each of the waves in the diagonal must be a zigzag, and the B wave in the zigzag can be almost any three wave structure as long as it does not exceed the start of wave A of such a zigzag.

Further, it is very likely that, from a time perspective, wave (5) will be shorter in time than wave (3), wave (4) will be shorter in time than wave (2), and wave (3) will be shorter in time than wave (1). Of all of the diagonals rules and guidelines, the time relationship is the one which is the most forgivable.

We also want to quickly indicate two things: 1) as of yet, there is no evidence we can find, yet, that wave Intermediate (2), in the 2016 chart, is over yet. There is simply no evidence for a turn. 2) It is worth noting that the ES E-mini S&P futures are only 'one tick' from downward overlap for those still looking for a 'fourth' wave at this location - which we are not. Here's the chart.

ES E-Mini S&P500 Futures One Tick from Downward Overlap

So, any continued downward movement would likely clearly indicate that the diagonal count is in progress.

In terms of an actual count lower, it will eventually wind up to be an A-B-C. The question right now is did the A wave end already and this is the C wave? Or, are we still in the A wave? That question is a very, very difficult one to answer at this point. So, once again we need to be flexible and do our best wave counting job possible. As I have said before, and emphasized in recent videos, counting either triangles or diagonal is exceptionally tricky, and I expect this one to throw a few surprises at us, too!

The problem from a trading perspective is the market just just created a situation of exceptional trading risk at this point. The number of points needed to validate either upward or downward waves has just expanded greatly.

One clue will be when the daily slow stochastic on the ES daily futures turn up, possibly from a divergence. But, at present, the slow stochastic is still headed lower.

We also want to use this ES chart to show you how the Bollinger Bands are absolutely not predictive of price, but rather follow it. If you observe both the June bottom, and Friday's price bar, you can see how far price traveled 'beyond the band', and that nothing about having a dotted line representing a Bollinger Band calculation "stopped price in it's tracks". No. Unfortunately, Bollinger Bands are an indicator derived from taking an 18-day or 20-day moving average of price, and applying calculations about each day's range to determine the 2-standard deviations that represent the band. So, it is price that determines the Bollinger Band's width and path, and not the Bollinger Bands that determine the price path. In fact, it is a hallmark of impulse waves that they will travel outside of the bands, sometimes quite violently as Friday's excursion showed.

By-the-way, people ask about alternates to this count. Because of the C = 0.618 x A Fibonacci relationship within the first wave, we actually think another way to end the bull market would be with an 'expanding' diagonal, rather than with a contracting one. But, there is absolutely no evidence for that formation, yet. It would take much more time, and possibly extend beyond the 8 Fibonacci years in which the bull market could end. So, we'll take things only one step at a time. To be clear, I think the ending contracting diagonal is the one and only pattern to be concerned with at this time.

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  1. Hi Joe, where are you videos posted? im new to your site

    1. You can find the YouTube videos at this link. Cut and paste it into your browser.

      You can find an integrated set of learning materials about Elliott Wave on the Tutorials page of my web-site, below.

      Again, cut and paste the URL into your browser's address bar.

      Take things slow. There's a lot to learn.

  2. one most thing: do you mind provide a count of your generic view on the RUT? thank you

    1. RUT is the same overall count, but did not make a new low in Feb. Therefore, Jan - early Jun = A, mid-Jun = B, and late Jun - Sep = C, where C = 0.618 x A with just a bit of overshoot.

  3. Hi, Joe!
    Was there a Leading Diagonal up there in SPX?


    1. No - because in a contracting leading diagonal, wave three must be shorter than wave one.