Yesterday, prices broke for a bit, retraced down to the 78.6% Fibonacci retrace level almost exactly, and then rebounded strongly in the last half-hour. This type of sharp whipsaw action is characteristic of a possible triangle in formation. A suggestive chart is below.
|ES E-Mini S&P 500 Index Futures - Hourly - 'Possible' Triangle|
Such a scenario is still in keeping with the "Volatility Crush" we noted in recent blog posts. Such a triangle might be trying to right the situation shown where the previous two peaks both have "double tops" - representing poorer alternation - a create a wave that does have better alternation.
Does a triangle have to form? It does not. The cash market is not even open yet, and the potential d ? wave could be a second wave in the downward direction. So, the first thing to do is to see how prices react to an upward 78.6% retrace. If they exceed it by quite a bit, a possible barrier triangle is yet another common and realistic option.
In short, the game of chicken continues until confirmation occurs of a completed wave set in the upward direction. The S&P500 cash index did indeed try to break it's upper wedge line yesterday, and then prices quickly fell back into the wedge. So, it is something to keep an eye on. The definition of a 'possible' triangle is useful in that it provides some rather exact invalidation points to help in establishing the true nature of the current count.
Prices should not travel below the c wave to remain in a triangle configuration. Yes, it is also possible for such a triangle to morph into an ending diagonal wave, as well. We just have to keep our eyes on things as we are likely in a smaller degree Fourth Wave Conundrum - and they happen at every degree of trend.
Have a good start to the day.