For Wave Counting Only Three Things Matter at this Point

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were mixed to higher
SPX Candle: Higher High, Lower Low, Higher Close - Outside Candle, Up
FED Posture: Quantitative Tightening (QT)

The market as measured by the S&P500 cash index had closed yesterday at 2,822. Prices were higher over night likely on some reaction to political news. As the result, the market gapped up and opened ten points higher at 2,832, and traded further higher to 2,839.  This retraced to 38.2% of the third wave almost precisely. The closes of the candles were, in fact, right on that level. (See chart below).

Before the Federal Reserve meeting results at 14:00 ET, the market made a zigzag lower. After the FOMC report, prices continued lower and closed the opening gap up, shown by the black circle. As the afternoon proceeded, prices continued lower and made the required new low we cited yesterday. One stimulus was an earning's downgrade for Apple's stock. However, the DOW did not make a new low.

Prior to some of the tech and FANG earnings which would be reported after the close, prices re-bounded going into the close slightly into positive territory. That leaves just a bit of quandary at the low. Here is the same S&P500 cash 15-minute chart we showed yesterday. The third wave iii, was 2.618, wave ii was a sharp, and wave iv is a flat, showing excellent alternation.

S&P500 Cash Index - 15 Minutes - Lower Low Day

In the chart above, you can see today's new low, and the potential for an ending expanding diagonal fifth wave. After the bell, some of the tech stocks were lower even though they had modest earning beats. (See PayPal, Facebook and Symantec). So, the potential diagonal could possibly finish tomorrow, before a retrace (or more) upward begins.

So, as of this time, only three things really matter related to Elliott Wave counting. Those three things are:

1. Does the potential diagonal above finish lower in good order?
2. Does the Dow make a new daily low tomorrow?
3. When the retrace begins, does it stop short of the high or make a new high?

Again, as was discussed yesterday, five waves down could be just the c wave down of a fourth wave. Once we know for sure where this wave stops, we will evaluate any overlaps and see what they imply in terms of the longer term wave count.

The above chart has an alternate of the low at .iii because there is a weird way to count a fourth wave within the last downward movement, but it is not the most ideal.

Let's see what tomorrow brings. Remain patient and flexible. This is one of the most intricate wave counting situations I have seen in a very, very long time.

And have a very good start to your evening.
TraderJoe

No Impulse Yet

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

Today and tomorrow are the end of the month. The futures were lower overnight, likely on end-of-the-month window dressing (re-balancing of stock/bond portfolios). The market, as measured by the S&P500 Index, closed yesterday at 2,853, and opened down -20 points at 2,833. After a brief five-point lift to 2,838 prices again went lower and traded as low as 2,818 (or down -35 points). Beginning about 10:15 ET, prices began see-sawing sideways-to-lower, before closing at 2,822 or down -31 points.

Volume as measured by the E-Mini S&P Futures rose to 2.04 MM contracts (remember futures volume had been trading at 700k to 1.2 MM contracts), and the NYSE advance-decline line dropped to 586-to-2,420 by the close or more than a ratio of 1 : 4. This is in the beginning of the impulsive range. And, even though volume and breadth supported an impulsive move, an additional wave downward is needed to claim 'five waves down'. That can be seen on the S&P500 15-minute cash chart, below.

S&P500 Cash Index - 15 Minutes - Three Waves Down So Far

There was a 2.618 extension to the morning lows, as you can see in the peach color, and then less than a 38.2% retracement upward of the middle wave (not shown), and then a 90% retracement to the lows (shown in green).

There is a strong suspicion of a triangle at the lows, but again, the pattern is not proven yet. If the triangle forms properly, and then new lows are made, then the down wave can be a c wave of a fourth wave, with high as the b wave possibility we noted in our post entitled Solo High.

But there are other possibilities (rather than a potential triangle in this wave) for a fourth wave, since the 90% level was reached on the downward move, such as a flat.

Such a c wave might coincide with the beginning of the new month in February, and potential inflows from pension funds, 401k plans, etc. and the employment report due out on Friday. However, if the down wave travels too far, and overlaps other important waves, it may invalidate a c wave and create a first wave lower.

Let's take it a step at a time, and see how it goes.

Have a good start to your evening.
TraderJoe

Futures Go Where No One Has Gone Before

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Lower High, Higher Low, Lower Close - Inside Candle (Harami)
FED Posture: Quantitative Tightening (QT) 

Early Sunday night there was some left-over buying from Friday's rally, and the futures opened up higher and made new all-time-highs. When the cash market opened in the morning, however, futures had surrendered all of the overnight gains, and cash opened lower.

The market as measured by the S&P500 Index zigzagged back and forth lower throughout the day, and settled with a loss of -19.53 points. In doing so, they left a daily gap above the current market location. Apparently, the market clearly knows that 2.618 Fibonacci extension we wrote about on Friday and Sunday is there.

Although there was some modest point loss, going along with our expectation of increased volatility, there is no damage to the up trend pattern yet, nor a confirmation that a down trend has begun, nor a significant trend line break. There is still a possibility this see-saw is part of a fourth wave - especially with the Fed meeting, and the employment report this week - or part of a fifth wave in progress.

The daily slow stochastic of the ES E-Mini futures is still embedded over the 80 level, but, interestingly, even with the overnight pop, prices failed, so far, to make their target of the upper Bollinger Band.

This is where things get tricky. It's worth watching for any lower daily lows, and we will try to make sense of them as best as possible. So, patience and flexibility are still needed.

Have a good evening, and a good start to the week.
TraderJoe

From A Man Named Elliott in 1938

In the year 1938, an accountant and business consultant by the name of Ralph Nelson Elliott wrote and published a book entitled, The Wave Principle - copies of which can still be obtained. This was obviously long before Frost & Prechter reviewed and revamped aspects of the work. The charts below are based on Elliott's original steps in chart construction. And remember, this is from a book published nearly 80 years ago.

Figure 1 : S&P500 Cash Index - R. N. Elliott's "Base Channel"

Once waves 1 & 2 are identified, Elliott says, in The Wave Principle to draw in the "base channel" shown here in the dotted parallel lines. Next Elliott indicates in Figure 37 of that work, that when a FLAT correction appears as wave 2, then it indicates a "Strong Market". This is because the upcoming strong third wave is so powerful, that it distorts the b wave of correction before it and causes it to exceed the high. (This 1, 2 flat scenario was how this wave was identified on this site going back to posts dated in September 2017, (http://studyofcycles.blogspot.com/2017/09/). The reason we initially chose this arrangement, is that it places waves 1 & 2 on the extremes of the channel boundaries - that is, wave 2 is the farthest wave to the right-hand side of the channel.

Modern day Elliott analysts recognize that when the flat correction subdivides in 3:3:3 as this one for wave 2 did, it should more properly be labeled w-x-y just as we did in September. Time and time again some people tried to get us to label it as 1,2 (i), (ii). We tried a few counts that way. None worked out. We stated several times this was likely an "exact smaller fractal" of the 2009 - 2012 move which also predicted a very strong market to follow it. The 1,2 (i), (ii) arrangement is currently the way that Elliott Wave International (at last monthly publication), and several popular websites are labeling the bottom. Elliott showed in another book, Nature's Law, diagram labeled Figure 50, that the overlapping waves in this manner would be "incorrect counting" due to the similarity in the lengths of the waves from the bottom.

Now, we showed on Friday of this week, such a "flat second wave" arrangement results in a 2.618 Fibonacci extension very near this level. Impressive.

Regardless, Elliott says, referring back to The Wave Principle,  the next step in charting is to revise the channel once wave 3 is located. Well, we are not certain wave three is over. But, with a 2.618 extension very near by, Friday, we took a stab at revising the channel. Based on that work, let's look at the sequence as Elliott might have.

Figure 2: S&P500 Cash Index - R.N. Elliott's Revised Channel

First, note that I placed a red diamond at the top right of the chart to indicate that wave x3 (the extended third wave) may not be over yet. Now, Elliott says that "this wave three must sub-divide as five smaller waves". The five smaller waves are the five waves of one lower degree. I can not find any particular reference yet - and I am still looking -  that says that each of these waves must be shorter than Minor wave 1. As I say, I just can't find it - implied though it may be.

Next, I often said in these posts that, based on Neely, when a wave retraces less than 32.8%, it is a good candidate for an extended first wave.  In particular, I said it often in the sequence of the rise from the November, 2016 lows. So, perhaps the five-wave sequence labeled as .i to .v is the five waves of minute i, which is the extended wave within the extended third wave. You can note as labeled that wave .v is very nearly the length of wave .i - a very common relationship among Elliott Waves.

With regards to wave degree, yes, this wave i is longer than wave Minor 1, but it's sub-components are not. And, after all, somehow wave 3 must become longer than wave 1. Exactly how this process happens is not at all clear to me yet. Elliott was quite nondescript on this topic, as are all later books with regard to degree. There are no clear rules for what is legal and what is not at this stage - and this topic would be fertile ground for future Elliott analysts to explore. There is no reason to assume that progress in Elliott work is over.

Then, there is another flat but very shallow retrace for wave minute ii. Again, using Elliott's comment from his book The Wave Principle, this would also indicate "a strong market", with it's higher b wave.

This minute i, ii arrangement may best explain what I referred to on Friday as "the right hand turn".

Clearly, the market re-accelerates into the end of 2017, in what is likely a third wave, or part of a third wave, currently labeled as minute iii. It was this clear, strong re-acceleration that cause me to write to Elliott Wave International and question the degree labeling issue, with the comment that "something seems wrong" and some suggestions for change.

Finally, in 2018, there seems to be another re acceleration at even a steeper angle which may be the fifth wave blow-off within extended wave three (x3) as recognition of the 2.618 Fibonacci extension grows. Again, the third wave may not be done yet, but we should be getting close.

And if wave i is the extended wave in the sequence, then wave iii is shorter than i, and wave v should be shorter than wave iii.

With regard to timing, and time-frames, this chart best indicates to me that we might be getting close to the end of a third wave.

Figure 3: S&P500 Cash Index - Fibonacci Time Relationships

What the above chart suggests is that the length of time of wave x3, would be near a 2.618 extension of the length of time of waves 1 & 2 combined. This is the most compelling time relationship I can find among the various peaks and troughs. So, one would have 2.618 in price, and 2.618 in time.

If and when wave x3 should end, then the chart in Figure 2 indicates there may be a wave 4 target location not only near the bottom of the channel, but also by the wave iv of one lower degree.

Will all this come to pass? As of this writing, we don't know. If it should, it sure seems like it would be a fitting tribute to a scholar, original thinker, and perhaps genius from 1938, and before.

Once again, the clear alternate for this count is A,B,C to Intermediate wave (1) of a diagonal.

Have a very nice weekend.
TraderJoe

Measurements

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

It's hard to argue with measurements, so I'm going to present some. For the time being, pretend the Elliott Wave labels are not on the chart below.

S&P500 Cash Index Weekly - Channel - With Some Measurements

If a channel is drawn on an arithmetic scale, it can currently be seen to touch the relevant border points. In fact, some of the lower bodies of the candles in August 2017 are just beginning to be cut off. This suggests there may be a bit of resistance near this level. Whether that happens remains to be seen.

And a third wave (currently shown as minor 3) is just a hair's breadth from the 2.618 Fibonacci extension.

The weekly candle shows no sign of a topping tail. Nor does the daily candle. Nothing downward can be counted without lower daily lows.

If we ignore the topic of wave degree for just a moment, we can see that all of the labeled wave 3, also falls such that no part of a trend line from the origin at 0, through wave 2 cuts off any part of the third wave. This is Glenn Neely's guideline on a large scale.

The reason I asked you to pretend the Elliott Wave labels are not on the chart are as follows. First, notice that the Elliott Wave Oscillator is as green as can be and is rising like all get out. Suppose - just suppose - that if we are in a Primary fifth wave, that there would be an ending diagonal on a very large scale. Then waves 1, 2 ,3 can also be just A, B, C of wave Intermediate (1) of such a diagonal. Remember, if 3 = C, then C waves often show no or little divergence before ending.

Further, (I said I would have more to say about this topic) it is often precisely in triangles and diagonals where we see 2.618 wave relationships. So, if this is wave (1) of such a large diagonal, then the Fibonacci length of 2.618 might make some sense. Another reason to ignore the current wave labels is that I have another idea which is more intimately involved with the concept of degree, and may better explain why price lived under the middle line of the channel shown for more than a year from November 2016 to December 2017, and then pops up over the mid-line on the passage of the tax cut. I'm going to reserve that idea for the time being until there is more evidence for it. But for me, one of the most curious aspects of the chart is why it "folds over to the right" or makes a "right hand turn" in July and August, 2017.

Keep in mind, we are not quite to the 2.618 relationship yet, and sometimes price can just put "tails" above that level if it proves to be resistance. These are characteristics to watch for until something more certain develops. There are numerous Fibonacci relationships in this wave, and I am pointing out one.  I showed another such relationship in the live chat room for participants there, related to the "extended fifth wave scenario". We are, after all, dealing with scenarios and probabilities. So patience, caution and flexibility remain the by-words.

Have a very good start to your weekend.
TraderJoe

Solo High

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were mixed; DJIA new ATH
SPX Candle: Lower High, Higher Low, Higher Close - Inside Candle
FED Posture: Quantitative Tightening (QT)


The morning started out with the futures higher, supposedly due to good earnings from Caterpillar  - a member of the Dow Jones Industrial Average, and an unchanged policy on interest rates from Mario Draghi of the ECB. The market as measured by the S&P500 Index had closed yesterday at 2,838; and the cash market opened up +8 points to 2,846 and continue to trade up to 2,848. At that point, the market reversed again, and prices traded lower - closing the opening gap again. Prices traded down to 2,834 (or -14 points from the high of the day) and then turned higher again. 

In the price turn higher, only the DJIA made a new all time high - invalidating the potential diagonal in the process. Neither the S&P500, nor the ES futures, nor the Russell 2000 futures or the NASDAQ 100 futures made a new all-time-high in the process. The Dow Transports sank. With three waves down in most markets yesterday, we have labeled that wave as a likely a:3 wave of a flat or triangle fourth wave, as shown in the hourly chart below.

S&P500 Cash Index - Hourly

Prices then traded sideways to lower, and did pierce the lower channel boundary again, but made nothing of it this time although a new intraday low was made at 2,831 (or about -17 points from the high of the day). Prices again reversed from the low, and traded up into the close, which was marginally higher than yesterday at 2,839.

So, with the marginally higher close the Doji candle from yesterday was not confirmed with a closing lower candle today.

After the ECB Meeting, at the World Economic Forum Treasury Secretary Steve Mnuchin said, "he welcomed a weaker U.S. Dollar." Then, later in the day, President Trump said, "I want to see a strong Dollar", and he said that the Treasury Secretary's comments were misinterpreted. The U.S. Dollar rose, the Euro sank, and Crude Oil came of it's highs on the latter comments. Regardless of any motives behind the comments, the U.S. Dollar made a hammer candle in what could be a truncation low on the hourly time scale. Like all candlestick patterns, it is best if it is has the validation of a higher closing candle in this case.

In the S&P500 hourly chart, above, the EWO is still red and declining, so a larger fourth wave may still be in the offing. But, like all fourth waves (and like the DJIA today), new highs are possible within fourth waves.

We hope to have more on that later. But for now, have a good start to your evening!
TraderJoe
 

Pop Out of Smaller Triangle and Turn-around

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower; DJIA higher
SPX Candle: Higher High, Lower Low, Lower Close - Doji Candle
FED Posture: Quantitative Tightening (QT)

Today was an interesting session from several vantage points. We had shown you on yesterday's hourly chart of the S&P500, the potential for a smaller triangle than the previous one, and indicated it it could signal the 'last wave in a series dead-ahead'.

So, the market as measured by the S&P500 Index had closed yesterday at 2,840. Prices gapped up +5 points at the open to 2,845, and continued higher with small pull-backs to 2,853, another new all time high (ATH) at around 10:30 ET, making a pretty clean 'five-waves-up" to that point. At 10:30, however, the Dow refused to make a higher high at that location and truncated. The market then turned sharply lower and filled the opening gaps on the S&P500 and the Dow, trading as low as 2,825 or a -28 point intraday swing by about 13:15 ET. At that point a rally started that lifted the S&P500 to a deficit of only -1.59 points, while the DOW eeked out a gain of 41 points. The S&P500 closed out the day at 2,838.

Here is the updated hourly chart of the S&P500 Index.

S&P500 Cash Index - Hourly - Divergences

In the process of making today's new all-time high, the divergences to both the Elliott Wave Oscillator (EWO) and RSI (14) were respected. The EWO is currently red and declining. Prices initially breached the hourly channel shown to the downside, and then, recovered to approximately mid-channel.

One of the interesting things about today's price action was the potential contracting diagonal on the DOW would have invalidated if prices crossed the level of 26,393.26 and invalidation did not occur today. The highest price reached was 23,392.80 - a miss by only a few hundredth's of a point! (Thanks go out to Tony in live chat who helped insure the correct invalidation point!)

I had noted in prior blogs that if a diagonal in the DOW completed successfully, without invalidation, that I would post it here. That chart is below.

Dow Jones Industrial Average - Cash - Half Hourly Potential Diagonal

The significance of this chart is that the Dow can be counted in two ways to a wave ((5)) high. One is this way as the diagonal. (The other way is with a triangle ending at (B) of ((5)), and then the same five-waves up 1-5 shown. You should try to diagram this for yourself, with (A) and (B) of ((1)) as just a larger wave one & two). In any event, note that wave 1, up, within wave ((5)) has already been overlapped in the downward direction. 

So, while nothing is proven yet, the action of the last several days means that there are no gaps above the market at the current price, and all of the gaps are currently below the market. Given that today was a Doji candle, then it is usually required to have a lower closing daily candle for confirmation.

Even though counted correctly, the above potential diagonal must still survive the next few days without invalidating. If it does, then a more rapid price drop than we have seen in a while might be in store. All we know now is we can count both the Dow and the S&P to a fifth wave top to within one bar - the one that truncated on the Dow today.

As the Dollar Index moved to new lows this morning, as indicated by the hourly triangle we noted yesterday, Crude Oil popped to new highs above the $65 level. Gold, too, made a new local high, and may attempt to equal or better it's weekly highs.

Interesting day! Have a good start to your evening.
TraderJoe

Smaller Triangle

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher; DJIA & DJTA lower
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

Stocks as measured by the S&P500 Index had closed yesterday at 2,832. They gapped up three points at the open to 2,835, and continued higher to 2,840 making a new all time high. At that point they reversed to close the opening gap, trading down to 2,831 before heading higher to make a second new all-time high at 2,842. Then prices began a slow sideways drift very reminiscent of a triangle. In fact, in the five-minute DOW we were able to precisely count a triangle in real time. By the end of the day, the S&P500 tried to pop up out of the triangle but did not (yet) make another new high, and closed at 2,840.

Here is what the hourly S&P500 Index chart looks like below.

S&P500 Cash Index - Hourly - Two Triangles

The higher highs are currently occurring on a divergence with Elliott Wave Oscillator, and with the RSI (14). The presence of two distinct triangles, and the divergences are suggestive that a wave set is coming to an end. We can also still count a potential ending contracting diagonal on the hourly DOW - which - if it comes to pass - we will show when completed. Today, it got up to it's upper diagonal trend line, but did not make the often expected throw-over of the trend line. We'll see if that happens tomorrow and maintains the required length relationships needed within a valid contracting diagonal.

The U.S. Dollar Index also has a distinct hourly triangle at this location as well. That triangle has already validated by making lower lows this afternoon.

However, we need to caution the S&P's intraday triangle, above, has not yet validated with the needed higher highs. For this reason, as we stated in the live chat room, with regard to wave counting, be patient, cautious and flexible. Suppose a higher high is not made. Would it be a truncation or a (b) wave overall?? Again, Elliott wave analysts think in terms of probabilities, not in terms of absolutes - until there just are no other options. 

So, if there is a downward gap tomorrow that breaks the potential triangle lower, rather than a gap up - as the potential triangle would predict - don't let that throw you. Accept what the market offers and remain somewhat fluid.

Until then, have a very nice start to your evening.
TraderJoe

Continuation Higher

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher
SPX Candle: Higher High, Higher Low, Higher Close - Trend Day
FED Posture: Quantitative Tightening (QT)

We had noted in Friday's post that while it was 'possible' to conclude an up move was over, there was no reason not to think that the first wave out of the triangle - on Friday - was anything more than sub-wave one of such a move out of a triangle. With today's stronger move, that case was proven, in what is likely the third sub-wave of such a move.

Given the length of today's move, it makes a minor change to the count, changing the locations of waves .3 and .4 for two reasons: 1) first, so that the length relationships within the waves is still acceptable, and 2) that the pattern of alternation is maintained.

The continued hourly chart of the S&P500 Index is below. The pattern of wave .2 is still a sharp, and wave .4 is still a Flat - just a complex flat.
 

S&P500 Index - Hourly - Still Counting Five Waves

There is currently divergence with the hourly Elliott Wave Oscillator (EWO), and with the RSI. The alternation in the count also gives wave .4 much more time in correction than wave .2, as it typical.

The Russell 2000 also made a marginal new high today. This invalidated the potential ending diagonal. We are trying to count five-waves up from the exit of a similar triangle - instead of a potential diagonal - in this index too. Right now, we appear to be in the third wave of that sequence, as well.

Have a good start to your evening.
TraderJoe 

Pop Out of Triangle

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher; DJUtil lower
SPX Candle: Higher High, Higher Low, Higher Close - Trend Day
FED Posture: Quantitative Tightening (QT)

Regardless of the news background today, prices as measured by the S&P500 Index completed, in good form, the potential hourly triangle that we showed yesterday, and then popped up out of the triangle on word the minority leader was meeting with the President regarding the budget. The hourly chart of the S&P500 Index is below.

S&P500 Cash Index - Hourly - Pop Out of Completed Triangle

So, the issue is that while a legitimate claim can be made that there is a completed count, we must recognize that is a 'probability' only. Clearly, the first pop out of the triangle could only be the first sub-wave of -v. We must await the possibility of further upward price movement. At this point, wave .5 is not longer than wave .3, so there is still some room.

Further, even though we don't like to take a nice 'picture' like the one above and stomp all over it, we must also allow the possibility that this wave is forming an ending contracting diagonal. That is because it is 'plausible' to count one in the hourly DOW, where it is not possible to count the above triangle in the Dow. If it comes to pass, we will show that count. The fact that we are willing to do this - we hope - shows the commitment made to thinking in 'probabilistic' terms. This should be considered a requirement for success in Elliott Wave work.

For now, have a very good start to your evening.
TraderJoe

Higher Volatility - 3

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower; DJTA and NDX higher
SPX Candle: Lower High, Higher Low, Lower Close - Inside Day
FED Posture: Quantitative Tightening (QT)

We should note before updating the chart that the Russell 2000 future actually made a new low over yesterday's low by the settlement. It's daily slow stochastic is also below the 80 mark.

As far as the S&P500 Index, we are currently seeing a lot of three-wave sequences. That means a triangle could be forming. Looking at the hourly chart, below, suggests the potential count shown.

S&P500 Cash Index - Hourly

In the last wave, after wave .4, there is still not downward overlap in the cash market. So, one would be justified in assuming that a fourth wave that is longer in time is forming. If it does form as a triangle, then it might be signalling 'last wave dead ahead'. But that remains to be seen yet.

A triangle may be forming in 4-Hr Crude Oil, as well. And the U.S. Dollar may also be in a small degree fourth wave. 

Have a good start to your evening.
TraderJoe

Higher Volatility - 2

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

The Russell 2000, NQ futures. and Dow Transports had an inside day. The Dow made a new all-time-high (ATH), the ES futures made a new ATH, but S&P500 Cash did not, at least not as of yet. At the end of our post from yesterday, we said, "So, be prepared for anything including a flat or yet another triangle because there are not, as yet, any invalidating downward overlaps yet."

So today was that kind of "kitchen sink" day. Different indexes did different things, and the volatility index closed slightly higher.

No one chart will best show the market's position, although the S&P500 Index can still be seen to be in an hourly channel from the first of the year, as below. The count shown reflects, the best alternation and a non-overlapping fourth wave, in which the purpose of the Flat wave was to equalize the net distances traveled by waves .2 and .4.

SP500 Cash - Hourly - Potential Five-Wave Count

However, the market will have to prove the case for this count. Because wave .3 is shorter than wave .1, then wave .5 would have to remain shorter than wave .3, and then the market would have to overlap wave .1 near 2,758. Those might prove to be tall orders, but let's see how it goes. (Note: there are only 77 candles on the chart on this time frame. There was no intent to show The Eight Fold Path Method here in this summary chart).

Have a very good start to your evening.
TraderJoe 

Higher Volatility

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Higher High, Lower Low, Lower Close - Outside Candle
FED Posture: Quantitative Tightening (QT)

The title of our outlook for some time now has been "expecting higher volatility". Today, we were experiencing just some of that volatility. 

In our post yesterday (seen by very few, apparently) we alluded to a situation in the futures which could reflect valuations being out of kilter. If you did not see yesterday's post you are encouraged to review it. Regardless of our opinion, the futures markets were again 'spun higher' in the overnight sessions on the weekend holiday to a level of 2,804. This was up about fourteen (+14) points from Friday's closing level. And, sometimes, one just has to shake one's head, and ask, "Oh, really, what justifies this?" Well, today, the answer was "nothing, apparently".

Shortly after the open, the S&P500 cash index, topped at least temporarily at 2,808, then began to head lower for much of the day. By 2 PM ET, the opening gap had been fully closed, and some selling appeared which drove the market down to 2,769 level (which was down some 39 points from the intraday high). From the intraday low of 2,769 there was a brief rally to 2,782 which faded into the close at 2,777.

In making it's new high today, the S&P500 solidly crossed a level of Intermediate (3) = 2.618 x (1) as we covered in Thursday's post. That level was 2,788, and it has now been bested. We're probably going to have a lot more to say about 2.618 waves in the near future. But for now, we should assume we have three Intermediate degree waves higher in the S&P500. That assumption means there is an alternate count I can clearly see, but there is not enough evidence for it yet.

One chart that does look complete is that of the daily Russell 2000. It is below.

Russell 2000 Futures - Daily - Outside Key Reversal Day Down

Because, unlike the S&P500, the Russell did indeed make an outside key reversal day down, it is now hard to count this wave structure as anything else but completed. If the Russell's daily bars start overlapping or trading below wave (iv), this would likely be confirmation of a turn for this index. This might set up the divergences that need to be seen in some of the other indexes.

Although no claims are made for the S&P just yet, we will note that volume picked up in the ES futures on the down turn. Volume had been running at just 800k - 1.0MM contracts, and today came in at double that on the turn-around day. But, we will also note that the daily slow stochastic on the ES futures is still embedded over the 80 level. So, be prepared for anything including a flat or yet another triangle because there are not, as yet, any invalidating downward overlaps yet.

For this reason, patience and flexibility are still needed until there is something more definitive to report. Have a very good start to your evening!

TraderJoe

An Observation

The study below was done to see if casual observations made at the end of the session were borne out in fact. The observation was that as recent days futures contracts were closing at the settlement, they seemed to be trading quite oddly.

Daily Settlement - Futures Discount to Cash

You can see from the above chart that for almost the entirety of the Primary 5th wave, since February 15th, 2016, above, the daily ES E-Mini S&P500 futures contracts had been closing with a discount to cash. That is, on settlement, the futures price settled lower than the equivalent cash price. This is usually thought to be that because the futures have a limited life span, and do not pay dividends like the cash market does, then there is a slightly reduced value to the futures contract.

The chart above is a daily chart. For almost two full years of daily data points, we see this typical relationship held true. Only exceptionally rarely did the futures trade at a greater value than the zero line, and then only minimally so. But only recently, after or coincident with the passage of the tax cut, the futures have been trading at an unmistakable premium over cash.

Is there a sound economic reason for this - as the explanation for the usual discount above? Or is this one of the ultimate signs of froth and excessive bullishness in the market - and that valuations are out of kilter?  If people were figuring the tax cut contributed to S&P earnings, why wouldn't such values be applied cash as well as futures??

Only you can decide for yourself. We can only show the findings.

Have a very good start to your week.
TraderJoe

A Tale of Three Fibs

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

After noting yesterday's hanging-man candle, we noted that if the market didn't immediately gap down at the open, then the highs could be revisited. That is because like any potential reversal candlestick, a confirming lower close is required to confirm the pattern. A gap lower did not occur. The highs were revisited and new all-time highs were made.

After doing some work on the German DAX in the live chat room today, this chart weekly was posted.

German DAX - Weekly

My operating premise was, "if you cover the name of the chart, and just count it like any other Elliott Wave chart, what would the count be?". The above chart results from the fact that within wave (3), wave 4 was likely a FLAT wave to alternate with the sharp wave 2, and to equalize the net distance traveled distance by wave 4 with wave 2. And, it should be noted that wave 4 now takes much more time than wave 2 - as is most often the case.

In the DAX, there are a clear three-waves down from wave (3), and then a retrace towards the high. But, it is clear that when a parallel channel is drawn in this manner, no wave has yet come back down to attack the weekly channel line. When or whether this happens remains to be seen.

I then decided to take the exact same approach with the weekly S&P500 Cash Index, as in the chart below. But, with one difference. I applied a Fibonacci ruler three different times to see if the Fibonacci hits made sense. Here is that chart.

S&P500 Cash Index - Weekly - Three Fibonacci Ratios Applied

The result of doing this is obviously that price is only about 20 points away from (3) = 2.618 x (1), a location where we must tip our cap to the power of a third wave. (See left-most Fibo ruler). Further, you can see that wave 3 is just shy of the ratio where 3 = 1.618 x 1, and yet minute (iii) is exactly 1.618 x (i), when measured in this manner. This picture of a chart-in-a-channel, allows the extremes of waves (1) and (3) to be currently located on the outer channel boundary which is just terrific. Whether price exactly makes the 2.618 extension seems pretty immaterial at this point - but it could - and we will watch to see if it happens. Right now, it is "close enough for government work."

Further, the lower channel boundary should give some guidance as to where wave (4) will form - when and if it does. Students of the technical indicators know that at present they are all currently just about maxed out - as is sentiment. That should indicate that we are indeed in the extended third wave.

When charted in this manner, one finds that the degree labeling in this index works out just fine. And, from a Neely perspective, the only thing one has to swallow is that in the cash index, partial bars of wave 2 chop off a line from the origin through wave (2). Well, all I can say is that Elliott formally called it an "under-throw" which often started an extended wave. So, it's a question of who you believe. The chart right now says to believe Elliott. I also think that this chart makes the alternate of the expanding ending diagonal wave much, much less likely, and will not revisit that chart until or unless something goes awry.

It is also worthwhile keeping an eye on Crude Oil at this time as it is finding some daily resistance at the monthly trend channel line we showed in the weekend video.

Have a very good start to your evening.
TraderJoe