DOW Joins S&P

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were higher; DJTran lower
SPX Candle: Lower High, Lower Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

If you followed the market today (and didn't get whiplash), you know that the DOW opened higher on a gap, then in the second hour made a lower daily low to join the S&P500 Index with a countable five-waves down.  The Dow and the S&P continued lower into the mid-day, and, then at about 13:00 ET began a turn-around to close the day higher by about +330 points. At the low the Dow had been down around -490 points.

Yesterday, we wrote, "You can easily count five waves within wave ((5)), and wave ((5)) may not be over yet." 

And in an impulse count we were not done. In the live chat room we posted a chart of the S&P500 cash index and said that the target of ((5)) = 0.618 x net [ ((1)) through ((3)) ] would be met at 2,555. The market hit that level on the downside, and then exceeded it slightly to 2,533. Because of that breach, it caused us look for a count that might travel slightly lower.

Therefore, this count was posted as a very, very good possibility. I rate the odds as about 60:40 with the impulse count. It is the count of a potential contracting diagonal downward. This same possibility also applies to the S&P500 - but I thought I would look at it the way that R. N. Elliott might have.

DJIA - Half Hourly - Potential Contracting Diagonal

So, this count is potentially supported by the divergence on the Elliott Wave Oscillator at the lower low, and the strong up-wave at the end of the day. But further, this count is more respectful of the concept of degree, because the impulse count has a very large fourth wave compared to the second wave. Strictly by the rules, either count works. Again, this one is also considerate of the guideline of wave degree.

As with all potential diagonals, a wave ((4)) must remain shorter than wave ((2)). Using the S&P500 we are able to give you a precise level for that invalidation: above 2,667.30 and the diagonal would invalidate, and the impulse wave applies. If the invalidation level holds, and there is a fifth wave down, then, it would have to remain shorter than wave ((3)). I like it when there are precise measurements; it really helps one to know the position of the market. Again, I don't care which pattern forms.  Keep your balance, remain patient and flexible.

Let's see how it goes. Have a very good start to your Friday night.
TraderJoe

S&P500 Cash Lower Low

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower;
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

Although it was the only index to do so, the cash S&P500 Index made a new lower low today. This goes along with yesterday's warning of what if yesterday was "just a minute (iv)th wave up". Apparently, that's what it was. Here is a chart of the S&P500 Index - 30 Minute as it follows the majority of The Eight Fold Path Methodology.

S&P500 Cash Index - Half Hour - And The Eight Fold Path Method

First, there are about 120 candles on the chart (116 so far). Second, wave ((3)) is located on the minimum of the Elliott Wave Oscillator - this is the deviation; usually it is wave iii of 3. Wave ((3)) ends at a Fibonacci extension of 4.236. If some of you have not heard of this extension level, it is the next one after the 2.618 level.

Wave ((4)) comes back up to attack the upper channel, and it does so in a manner to leave the part of wave ((3)) with the most momentum below the channel. The Elliott Wave Oscillator or EWO on Wave ((4)) is also within the limit of +10% to -40% of the wave three peak. And, a potential wave is headed down, made a lower low, and looks to be on a divergence, so far. Wave ((2)) is a two-and-a-half day FLAT, and wave ((4)) is a one-and-a-quarter day SHARP for alternation. You can easily count five waves within wave ((5)), and wave ((5)) may not be over yet.

For confirmation, the EMA-34 crosses through every significant numbered wave. The RSI (14) is also currently on a divergence.

The presence of the impulse wave down would tend to suggest that the EWI-style Fifth Extension Wave Count (as modified by me for wave degree) is the correct view of how the market terminated it's Primary [5]th wave up. It is not conclusive yet, but the evidence is clearly gaining. Since all indexes did not make lower lows today, then more evidence would be that the majority of indexes made lower lows tomorrow to get in synch with the count.

Be very careful and deliberative. Let's all hope the U.S. government can agree on a budget, as the slide at the end of the day likely had to do with expressed disagreements on that topic.

Have a very good start to your evening.
TraderJoe

Poor Close

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower; DJTA higher
SPX Candle: Higher High, Higher Low, Lower Close - Inverted Hammer Candle
FED Posture: Quantitative Tightening (QT)

It's not the end of days by any means, but equity markets did have a poor close today. Many equity indexes opened slightly lower, traded much higher intraday, and beginning around 11 AM started selling off to close the day lower.

SP500 Cash Index - Closing Lower After Trading Higher

For an upward Minor 4 triangle to form lots of patterns (like flat waves or internal triangle waves) can form overlapping structures. So nothing about today's action rules out a larger Minor 4 triangle fourth wave yet. But what if this is a minute (iv) correction, with minute (v) downward to follow? Price has not upwardly overlapped any critical waves, and it has not crossed the 62% upward retrace level that we might expect for the minor 4 triangle.

The EWO is red, and still below the zero level, and, as of this time, there are only three waves up - portions of which overlap downward. The downward overlaps are not critical, yet, and do not rule out further upward movement. But downward movement is not ruled out yet, either. So, patience and flexibility are still needed in the continued choppy conditions.

Have a good start to your evening.
TraderJoe

Volatile Enough Yet?

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Lower High, Lower Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

The futures were sharply lower in the overnight on follow-through selling from overseas markets after the large down day yesterday. The overnight downturn was sufficient for the ES futures to make a bit more than a 38% retrace on a minor 3rd wave, and to solidly challenge the lower channel line. That is shown in this chart that was posted this morning.

ES E-Mini S&P500 Index Future Exceeds 38%

The retrace is still in the acceptable category for a fourth wave (particularly if it turns into a relatively short triangle). But, there is still no confirmation a downward move is over, and two other alternates can equally apply. Again, they are the extended fifth wave that we posted yesterday (meaning the bull market would be over). And an ending contracting diagonal where the waves 1,2,3 are A,B,C of Intermediate (1) of a contracting diagonal, and this down move is part or all of an Intermediate (2) wave downward.

The Elliott Wave Oscillator (EWO) on a daily chart of the cash S&P500 and the daily ES is now at 2.2 and -1 respectively, within +10 to -40% of zero, but on the wrong time frame. So, given the length in time of a minor wave 3, then more time may be needed for the EWO to develop across the weekly time scale.

Again, stay patient and flexible as The Fourth Wave Conundrum draws the market to a countable wave. And have a very good start to your evening.

TraderJoe

No Assumptions

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

If you watched the market on television near the close, you know the Dow Jones Industrial Average closed down more than -1175 points. In Friday's post, we indicated we were likely in a third wave lower. That view was borne out in today's trade. Prices gapped down and largely traded lower all day.

Today, we offer this weekly chart of the S&P500 Cash Index, and we make no assumptions. None. That's why there is a big 'ole question mark by the potential wave 4, shown.

 

S&P500 Cash Index - Weekly - Making No Assumptions

Although today's move is more than a 23.6% retrace of wave 3, it is not yet a 38.2% retrace of Wave 3. Could price drop further? Sure. Is there anything magic about a 38.2% retrace? No. Could the 4th wave be over here? Possible, but it seems the momentum is still strong to the down side. Could there be a 50% retrace on Wave 3. Yes. Could wave 4 not be over by long shot, and could it form a whippy triangle? Yes.

Could waves 1, 2 and 3, be only waves A, B, C of Intermediate (1) of a large contracting ending diagonal? Yes, they certainly could be - in which case the retrace could be 50% or 62% or more.

Could the bull market be over in it's entirety? Yes, that is possible with the correction to the Elliott Wave International count that I provided to that organization - to try to help correct the situation with wave degree. As a reminder, here is that chart, updated with the chart correction.

Dow Jones Industrial Average - Extended Fifth Wave - As Corrected for Wave Degree

Clearly there is a quite a large down wave underway, and  the difficulty from a wave degree perspective is now this: How in the world would this wave pair with wave 2, unless it forms a very large triangle? Is a triangle possible? Sure. But there is virtually no evidence of one yet. Yes, Neely says the first wave of a triangle can be the most dramatic one. But, even then, we don't know that downward wave progress is over, yet, to assess if there are only three waves down or not.

So, we make no assumptions. We observe. We count. We are well aware of the phenomenon I have coined as The Fourth Wave Conundrum, and we respect it.

For those wondering how the up wave in the DOW might have ended, I pushed this chart in the live chat room days ago on January 30th. And you may view it below. I titled it The Completion Count.

DJIA - Hourly - Completion Count

You will note that is does contain both a final triangle, and an ending contracting diagonal at the hourly level. That diagonal has well been superseded lower in less time than it took to form validating it as a diagonal. We have shown you portions of this count on this blog. Notice, again, that the very purpose of  the triangle for wave ((4)) was to equalize the net distance traveled with wave ((2)), and to insure that wave ((5)) did not wind up being longer than wave ((3)) since wave ((3)) was shorter than wave ((1)).

Can this happen again at the daily and/or weekly chart level? Sure, it could. But I'm not holding my breadth. Due to The Fourth Wave Conundrum, it's at times like this I turn my wave-counting attention to other markets rather than be inaccurate in what might turn into very whippy highly volatile waves.

Have a very good start to your evening.
TraderJoe
 

Third Question Answered

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

The third question we had to answer from yesterday was:

3. When the retrace begins, does it stop short of the high or make a new high?

In short, the answer is there was no retrace. Instead there was follow-through selling. Let me explain what I mean. Elliott Analysts often look for wave v to equal wave i, or for wave v to be 0.618 x net ( wave i through iii). Yesterday, we clearly outlined the possibility for a fifth wave down, depending on the Payroll Employment Report. As the fifth wave accelerated through these two levels this afternoon, we changed our charting time frame from 15-minutes to one hour. And we changed the very short term wave count to a third wave lower. We'll show you that chart at the end.

We also said, that once we saw the full length of the downward wave, we would evaluate whether a smaller degree fourth wave was in progress. Today, we got that answer. It is not - with a very high probability - a smaller degree fourth wave. It is at the very least a much larger degree fourth wave. For perspective, here is the weekly chart.

S&P500 Cash Index - Weekly

As you can see, there is hardly a larger down bar on the chart. Next, the turn came at the 2.618 Fibonacci extension which was pointed out on this blog both last Friday and over last weekend, along with all of the numerous sentiment factors we pointed out, including a $VIX which was diverging, and a put/call ratio in the "speculation zone", the very poor volume on up days in the ES E-Mini S&P500 Index futures, the actual premium of the futures over the cash (which is not typical), and the poor reactions to earnings on several of the FANG stocks over the last couple of nights.

So, here is the hourly chart of the DOW - which is just a lot 'cleaner' than the S&P500.  The Dow gapped down and closed down -666 points (rounding).

DJIA - Hourly - Base Channel Broken Lower

Just as we showed you in the weekend commentary, that Elliott suggests drawing the "base channel" first on the weekly chart, then so, too, do we draw in the base channel on the hourly chart. So, we have done that above. The Elliott Wave Oscillator (EWO) currently indicates a third wave of some type in progress, and there is no divergence that can be seen at this time. We have also showed the relevant Fibonacci extension levels, and the down move is currently below the 1.27 extension, with a 1.618 extension (or more expected). When we know where the third wave ends, we will redraw the channel, and look for a fourth wave. Today's third wave closed two of the gaps - shown in black circle - on the left side of the chart.

Although you will not hear this commentary from anyone on television, once again we have a FLAT wave ((2)). This most likely means the market is in a very weak position. If a flat correction on the upside means the market is in a "very strong" position, then this flat correction to the down side must mean the reverse. What is good for the goose is good for the gander. The advance-decline line today was 323 - 2,728 (or 1 : 8.4) which is definitely in the impulsive category.

Back to the weekly chart. If wave 2 was a FLAT, then wave 4 could be a simple zigzag or a triangle. If you thought we were in The Fourth Wave Conundrum on the fifteen minute chart, the problem is only going to be larger on this time scale. For the immediate future though, please have a look at the daily ES E-Mini futures with an 18-day Bollinger Band on it. I will leave that exercise to readers.

Anyway. One doesn't lose their head on the upside, and one doesn't lose their head on the downside, either. Patience and flexibility are still needed. There are other options, including, again, on the weekly chart, that the waves labeled Minor 1, 2, 3 are just Minor A, B, C of Intermediate (1) of a contracting ending diagonal. I again have absolutely no preference on how this Primary 5th wave ends - impulse or diagonal. I hope you don't either - as that is the spirit of true objectivity.

Have a very good start to your weekend.
TraderJoe


  

Two Questions Answered

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were mixed
SPX Candle: Lower High, Lower Low, Lower Close - Trend Candle
FED Posture: Quantitative Tightening (QT)

Well, two of our three questions from yesterday were answered. As a reminder, those questions were:

1. Does the potential diagonal above finish lower in good order?
2. Does the Dow make a new daily low tomorrow?
3. When the retrace begins, does it stop short of the high or make a new high?

First, the diagonal did not finish in good order on the Dow and the S&P. The overnight futures and intraday range was volatile, and made a different pattern. But, the Dow did make a new low today, as expected, and near the last half-hour, the S&P500 did too. (So, too did the NQ futures).

The market, as measured by the S&P500 Index closed yesterday at 2,826. The futures were much higher overnight, then turned lower, and cash opened down -4 points at 2,822 and  continued lower to 2,815 before a rally began which reflected where the overnight futures had traveled. Prices traveled up to 2,835 (a +20 point) swing, and then headed lower to 2,816, then higher to 2,826, and then lower to make the new low at 2,812 before rebounding +10 points into the close at 2,822.

Here is the same chart from yesterday, relabeled to show it's construction as a running triangle. The new low at the end of the day can do one of two things: it can validate and complete the running triangle (i.e. done, finito!) or there is an alternate shown on the chart, as well.

S&P500 Cash - 15 Minute - Running Triangle

So there are actually four options - depending on the outcome of the employment report. The first option is that wave v? extends significantly lower - say to the width of the triangle from the breakdown point - and completes a larger five-wave impulse downward. The second option is that with only a minor new low, that yet another minor new low forms and creates an ending contracting diagonal in some manner. A third option is that a longer triangle in time forms as a barrier triangle. That is that wave (d) moves to the right. And the fourth option as I mentioned was that the pattern is currently done and complete.

In any event, it looks like we are going to have five-waves down.  But, do you see why I coined the term, The Fourth Wave Conundrum? Such wave action keeps Elliott analysts guessing through no fault of their own. It results from the numerous fourth wave structures that can form which are largely unpredictable. Even the blue  EMA-34 meanders through the pattern with significant waves on either side for form and balance.

Next I'm going to show you the current count of the Russell 2000 Futures in order to help answer the last question. How deep will any retrace be?

Russell 2000 - Cash Index - Daily

This count show the running wave iv version of the triangle in the center. It also shows that within a potential wave v up, that wave (iv) narrowly averted invalidation by not overlapping the prior wave (i), but then handily reversed by the end of the day. So, this chart - of 2000 stocks - suggests that a fifth wave up is entirely possible even as bad a momentum is.

Will a fifth wave up in this index make a new high? Possible. There is still a gap at the top of the S&P500 chart which could fill. Or, will there be five waves up that truncates? It is impossible to say, but it should be clear from today's whippy action that volatility is higher, and risk of calling a wave incorrectly is up too.

Again, these are some of the more difficult counts because the wave lengths within this potential fourth wave have been so long.

Have a very good start to your evening.
TraderJoe