Thursday, January 11, 2018

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.


  1. joe,

    with respect to the spx weekly chart - An impulsive sequence requires a valid second wave that retraces 62%. Please identify it.

    so if the w(2)fails in this requirement, then how can this be an impulsive wave??

  2. and here is the RUT chart ending diagonal i was watching, and seems to have legs....we are close....

    and here is the terminal pattern of ending expanding diagonal for the ES

    both these patterns support each other in "finishing" terms

    1. sorry joe, my ES chart sent above was unlabelled.... here is the labelled one.

    2. well we could go another 50 handles on the ES over that trendline, as you say overthrow, don't get bearish yet!!

  3. Interesting work with Fibs. I am not able to crack the short term count of (v) with Neely's degree rules. Any light on that will be very helpful.

    1. From the Dec 2017 low to the Dec 2017 high is 90.6 points. From the Dec 31, 2017 low to the Jan 09, 2018 high in cash is only 86.4 pts. So, I don't see any conflict. If Dec 31 low is minute (iv), then Jan 09 is most probably minuet i, i.e. one wave degree smaller.

    2. I had conficts while counting sub waves of minuet i. But it means there is still minuet iii and v to go before we see some correction.

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  5. Hi Joe,
    Can you clarify the math on (i) x 2.618 + (ii) = (iii). I get a different level and wondering what I might have wrong.

    1. Rick. You'll really have to put more effort into things than this. You want me to clarify your math, but you don't tell me your result or where you started from? I used a Fibonacci ruler from 4 to (i), with the extension on the ruler showing 1.618.

  6. Totally out from the topic but decided to share this anyways..

    I draw this scenary for a long time ago but today noticed that it matches well with Benner Fibonacci series.

    another thing to mention is that it is almost as equal time now from y2000top-y2009bottom and from y2009bottom-today

    1. Great! Thanks for sharing. Every bubble takes 2 to 3 years to bottom, so as long as we start crashing this year 2020/21 should look like a great buying opportunity.