Weekend ES Review, M-O-B and ALT

Professor Lawrence Krauss (University of Arizona) has often made this statement (paraphrase), "My greatest hope for you is that someday your son or daughter will leave the house, go to college, and have some deeply held tenet of their life completely upended. Because that's what scientists do practically every day. They go to work. They frame a hypothesis. They may work on that hypothesis for years. They may hold it deeply. They test that hypothesis. And if it fails, they don't whine or moan about it. They accept the failure as valid, and they move on to frame a new hypothesis and start the cycle all over again."

While we are not claiming the Elliott Wave Principle is elevated to a science yet, for the last many months we have framed a long-term hypothesis, and we are testing it now. That hypothesis is shown below in the monthly chart of the ES futures contract. The simple hypothesis is that price may be forming the pattern known as the Contracting Ending Diagonal to make a primary ⑤th wave.

ES Futures - Monthly - Contracting Ending Diagonal?

Those of you familiar with the pattern know that in such a pattern, by the rules, Intermediate (5) must be shorter than wave (3), and this must be shorter than wave (1). And, if wave (3) holds to this length, then wave (4) must be shorter than wave (2) and likely still overlap wave (1). We are now testing the limits of wave Intermediate (3) because, after about 78% - 80% of wave (1), the contracting pattern begins to lose its 'right look'. It begins to look more parallel than contracting. But, so far, there is the higher high, the MACD on this timescale is diverging, and price is reacting off the 78.6% Fibonacci extension level. The lower trend line has held well, and the question now is, "will the upper trend line hold, too?"

And still, there is a further interior pattern being tested. And that is, within Intermediate (3), IF wave Minor A was an expanding diagonal, then by the principle of alternation, wave Minor C should be an impulse wave.

So, that brings us down to the two-daily S&P500 chart. And while this pattern, shown as the black count, currently works on the ES futures, I wanted to show that it also works on cash at the moment from the point labeled Minor B. The hypothesis in this chart is that minute-i (shown as xⓘ) is the extended wave in the sequence. This is because of the very shallow retrace for the second wave. And the third wave, minute-iii is currently shorter than minute-i.

SPX Cash - Two Daily - xⓘ wave

So, this provides us with a cash make-or-break level of 5,536 where minute-v would become longer than minute-iii. Beyond that, we must simply accept the result and move on to a new hypothesis. As you can see, the current cash high is 5,505. That new hypothesis - if required - is shown in red as the ALT wave. We're not going to cover it in detail now because the current wave has not broken. But, if the wave lengths turn out incorrect, we'll drop the old count in a hot minute and adopt the new one.

So, that beings us down to the current weekly and daily charts of the ES futures. They appear below with some points of discussion following the charts.

ES Futures - Weekly - Test of Upper Bollinger Band

One can see that the weekly bar popped up over the weekly upper Bollinger Band and made a candle in the form of a Spinning Top - which would still require downside follow-through confirmation to become activated. But look back for the past 100 candles. How many times has the ES been above its weekly Bollinger Band? And yes! That slow stochastic is still embedded. But here is where we said we would translate the current wave degrees from the weekly to the daily chart. This appears, above, and in the daily ES chart, below.

ES Futures - Daily - Test of Upper Bollinger Band

In case you're wondering, it just doesn't make too much sense to do the weekly chart before the end of the week because it is difficult to assess the type of weekly candle until the weekly close is known, especially given a quad-witching on Friday which can be quite volatile.

So, given the usual caveats of caution, patience and flexibility, let's see how things go this coming week.

Have an excellent rest of the weekend.

TraderJoe