A Tale of Two Scenarios

As most people know the ES daily futures made nearly a perfect Doji candle on Friday after the payroll employment report. Swift confirmation of that candle  might point the way lower. In the futures, there is a wave down and about a 71% upward retrace. We sketched it out on Friday in the comments (which you can view at this LINK). This posting tries to explain the cash market. If the overnight on Sunday/Monday confirms the Doji with a significantly lower low, then that would lend to this first scenario in the cash market.

SPY Cash - 30 min - Exhaustion Gap

In Scenario #1 a fourth wave ended at the end of the day on 30 Aug. And the question is whether the large gap up on 2 Sept is an exhaustion gap or not. If it was, then the up wave did end as the expanding ending diagonal (E-E-D, above) we sketched out in the futures. In that case, perhaps a downward wave in cash will form as a diagonal. Note that the ES top, so far, actually occurred on the morning of 3 Sept. Wave i down is a "three-wave" ((A)),((B)),((C)) lower, and wave ii could be a 'deep-retrace' wave.

Still, with the very same waves in cash we can sketch out a Scenario #2 in which all of these waves are part of the fourth wave triangle, with a top to come later this week. It looks like this.

We could have waves a,b,c,d of a triangle, and now in the e wave. And actually, the e wave has already crossed back under the center line of a triangle to validate the pattern.

This is one of the essences of what I have termed The Fourth Wave Conundrum. You can still make a lot of different patterns with three-wave sequences. And hopefully, this post shows why there is such a need for flexibility, patience and calm around market tops. Sometimes, unclear or three-wave sequences can be used in both cases.

So if there is this uncertainty in price, can time help us out at all? Well, looking at the expanding ending diagonal we sketched out in the ES futures, it took 67 hourly candles to build. So far, the market has spent only 8 hourly candles making a potential wave i down, and wave ii, up. So, although it does not look like it in the cash market, the ES futures have plenty of time to confirm that the up waves were an expanding ending diagonal by breaking the start of the diagonal in less time than the diagonal took to build. This is just one of the reasons why we always confirm time parameters with the futures, including as we do for degree labeling.

Just as a reminder, here is the diagram of the potential ending expanding diagonal in the ES 30-min chart just as we called it out. It would require confirmation by traveling below 4,512.50 in less time than the diagonal took to build.

ES Futures - 30 Minutes - Ending Expanding Diagonal

And, from this diagram, you can see how much more time left the futures have to confirm this potential ending pattern.

Have an excellent rest of the weekend.

TraderJoe