Thursday, February 2, 2017

A Wave Counter's Nightmare

Wave counters do have nightmares, sometimes. This situation is not that bad, but it does remain a bit murky. From the 2301 high, as I said, it is possible to count five waves down in the SP500, as is shown on the chart.


SP500 15-Minute Currently in Limbo Land

First, in the SP500 15-min chart there is a very badly shaped contracting Leading Diagonal, downward, which can not be counted this way in the DOW because wave (v) of the diagonal never makes a new low. That would be wave i in the SP500, with a too-small ii, up, the large gap for iii, down, a too long double-zigzag for wave iv, up, and a contracting diagonal downward for wave v, and remember: if wave i is a diagonal, then wave v should not be but what do we see? So we have a count downward that violates a lot of guidelines but not rules* (* see note below).

Then, we have the situation when the DOW made a new low late in the afternoon on 31-Jan whereas the S&P did not. So, the Dow and the S&P don't even agree on a count that doesn't follow guidelines well.

So, one must ask the question, "Is the down wave really a :5, or is it a :3 instead"? Very difficult to say.

Beyond that, on the S&P500 chart, the waves leading up to, and including, today, also form a "poorly shaped triangle". It's not the worst triangle there ever was. But, it is not the best, either.  About the only thing good about it is that the a,b,c down to today's low stopped at exactly the 78.6% Fibonacci retracement level - often a sign of a potential triangle. And, the EWO is relatively flat again, making more signs of a potential triangle.

You can also see sketched in on the S&P chart, a very tentative up channel (in dotted gray), which hasn't been broken, lower, yet, either.

So what's all the fuss about? Well, tomorrow is an important employment report. And, there is the potential for a lot of different things to happen. It could be a snoozer. Or it could generate a lot of volatility.

If the potential triangle holds, we have the possibility of a larger (a), (b), (c) downward - degree to be decided yet. But, if the overall down move to 31-Jan is corrective, and the triangle busts upward, then there is realistically the possibility of this inverse head & shoulders pattern that could play out using the Dow as an example.


DJIA 30-Min Potential Inverse Head & Shoulders Pattern

Now, as I said in live chat today, I am not a fan of Inverse Head & Shoulder patterns - especially near an all-time high. But, I can see that possibility of a measured move as shown above.

So, what is to be done in such circumstances? What I like to do is wait for the cash market to open and just see which of the patterns invalidates first. That way it is the market informing me, rather than me guessing.

Well, anyway, it lets me sleep at night while the count becomes clearer.

(*Note: the possible way out of the diagonal, and Dow, S&P mismatch at the top is that perhaps they  are both rare 'running flat' waves. That would mean there was no diagonal at the top, and the diagonal at the bottom would better follow guidelines. Still not perfect though.)

Best wishes for your success.
TraderJoe

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