Most Probably - Expanding Diagonal

In the prior post, we gave a likely route (in black) for prices if the ES was still in an impulsion upward on the ES 4-hr chart. We further indicated that prices had headed lower, possibly in a diagonal, and that price movement downward might not have been over. It wasn't - until about noon. After that, prices rallied strongly in what became an "outside reversal day, up". So, can we answer the question, "what form did the fourth wave take?" Based on the cash SPY index, we think the c-wave portion best fits the form of the expanding diagonal, and probably an ending one. Here is the SPY cash 30-minute chart.

If price did made an expanding diagonal, then its form is most likely the 3-3-3-3-3 form which most often would be ending. That suggests but does not confirm that new highs over the start of the diagonal would be made in less time than the diagonal took to form. Favoring this form is the Fibonacci relationship shown of micro-⑤ = 1.618 x micro-③, which is common in expanding diagonals.

Notice that all of wave (iv) took the Expanded Flat form of an a-b-c Elliott Wave correction. This alternated with sharp second wave (ii) as we suggested, so this is further evidence that a wave (v), up, is being made. Within wave ⑤, down, there is yet another expanding diagonal down into the 522 area for wave (A), then a pair of yin-yang candles for wave (B), followed by the (C) wave drop down on the Chicago PMI news release into the 518.50 area. We have purposely not labeled those waves. Interested readers should locate them as an exercise. Remember, Friday was the end of the month - which often sees the window dressing which likely occurred on the decline. 

Since we had a Flat wave for wave (iv), if /when prices get over the high, then we can consider either the impulse for wave (v) or perhaps the contracting diagonal form if the market wants to drag out the exercise.

As a further reminder: if Friday was end-of-the-month window-dressing, then Monday might see the first-of-the-month inflows from the usual sources we have cited in the past (such as company bonuses, 401K, pension plans, dividend reinvestment schemes, etc.). Still, things can be whippy up here at these sky-high levels, so caution, patience and flexibility can still be valuable, too.

For later on, recall that Ira indicates that the low of an outside-day-up should not be taken out within the next two days or else it would constitute a trap for the bulls. So, the low of Friday becomes a very, very important price marker to remember.

Have an excellent rest of the weekend,

TraderJoe