Friday, November 4, 2016

Reality Reflects Reality

I have never been a big supporter of the idea that an Elliott Wave count predestines the fate of an election or vice-versa. As an example of that I will spend some time in this update to argue utilizing the facts at hand.

First, I have no idea how the election results will turn out on Tuesday. The market does not either.

To make this case. Here is a chart showing my call this morning in the live chat room that we had likely finished a five-wave sequence down to the lows - when considered from the (e) wave of the barrier triangle which was the subject of previous posts. And, the recognition of an expanding ending diagonal, in perfect form, is what prompted the call of a completed impulse lower.

SP500 15-Minute Chart with Completed Five Wave Sequence from the Triangle E wave.

That chart was made at 10:47 am. Here is the result with the rest of the trading day on the chart.

SP500 15-Minute Chart : After the Close

As you can see, the upper down trend line of the diagonal was broken in a three-wave sequence higher, and then the move was retraced to the lows. In fact, by the close the DOW made a lower low. And after the close, the ES futures made a lower low, too. When you examine the upward sequence you'll find the c = 1.618 to the tick. So we are quite confident of the wave sequence.

But, unfortunately, with only three waves up, the market has left us with two distinct possibilities. Initially, when the fourth and fifth waves upward failed to form, it actually left us with three possibilities, including that of a double-zigzag upward. But that possibility was eliminated by the DOW's lower low and that of the futures.

So, now, with three waves up, we either have 1) a small second wave (a wave retracing about 32%) - which is not very typical unless the market is extremely weak. Or, 2) with the marginal lower low in the futures we might have had three waves up to (A) of a FLAT, and the downward movement in both the DOW and the S&P is the (B) wave of that FLAT, with a subsequent (C) wave up to follow.

If we have the small second wave, the market can keep impulsing lower on Monday. If we have the small flat, the impulse direction would be upward!

These possibilities allow the market to impulse either higher or lower on Monday, or both!

As you might know, the cash S&P500 has now traded all the way down and is sitting exactly on it's 200-day moving average. If you recall, the 50-day and the 200-day SMA's are what the banks and larger financial institutions use to help identify trends. The significance of price being at the 200-day moving average is that institutions can have their cake and eat it, too! If price is to go lower, those wrong on the move can say, "well, see.. we at least sold down to the 200-day in advance!" And, if price is to go higher, those wrong on the move can say, "see we recognized the 200-day as support".

So, with very satisfying count possibilities demonstrated above in either direction, we need to be clear that if one is betting on the election, one is doing just that! It is not a bet based on wave counting because the count clearly can go either way on Monday / Tuesday. And, while we do think in the short run price is eventually heading a bit lower, the path between here and there is what is a bit unclear.

In other words, the election is uncertain. And that uncertainty is reflected in the most likely count possibilities. While the current trend of the market is down, and the DOW's lower low today indicates it may not be over, we simply take neutral wave-counting position until we know more. Remember, the election could happen in three different ways: 1) Trump could win a clear victory, 2) Clinton could win a clear victory, or 3) no one could win a clear victory. And, in the latter case, the lack of a clear result, and the resulting uncertainty, could spell short or long term trouble for the market.

So, let's see what happens Tuesday.


  1. Thanks ET. As you mentioned the drop could have been a b wave of a flat or start of another impulse lower... but what are your thoughts on the internal structure of the possible 'b' wave down. Was it overlapping or looked impulsive?

    1. GB .. right now it is three non-overlapping waves down. But, nothing says it's over, as is. Nothing says a wave has to end on Friday at 4 PM ET. But, it could have.