Crying Over Spilt Milk

This post explains, in part, why I designed The Principle of Equivalence for financial markets. There is another reason, too, but I will leave that for later. This example is from the current US500 equity index. Two panels of four-hour charts are below. We know the market has traveled lower a bit - it has spilt some milk.

US500 CFD - 4 Hr - Two Logical Interpretations

As you can see from the left panel, it is possible to count the current wave structure as a series of three wave structures which might eventually go on to complete a contracting diagonal. Please ignore the degree of the labels for the moment. They are just for relative size illustration at this time. In the left panel you can see that purple 3 is shorter in price and time than purple 1. So, to complete this count, the wave structure needs a 4 that is shorter than 2, and a 5 that is shorter than 3, hopefully in three-wave sequences. The potential wave 4 already overlaps the potential wave 1, so that part of the job is already done. The MACD is diverging, so that could fit, too.

But now look on the right panel. It is also possible to consider the truncation at the red asterisk (*) shown, followed by an impulse for the first wave, blue 1. Then, in a parallel, there is a second wave, 2, followed by a smaller degree blue wave i. Because this wave is shorter in price & time than the larger degree wave 1, then we are allowed to also consider a nested count for a down move. And there might be an expanded flat brewing for the smaller-degree second wave ii. It is currently shorter in time than the larger wave 2.

So, there you have it. I'll bet you think it is pretty spiffy that two different counts can potentially work with all their wave degrees in-tact. Every wave that needs to be longer is longer. Every wave that needs to be shorter is shorter - and this is in both price and time. A purple count and a blue count. So, you'd be doing anything but crying over that spilt milk, right? You know what to do in either one of two cases, right?

No, a key reason why I designed the Principle of Equivalence is because of the chart below. Same panel on the left. Different panel on the right.

The count in the right panel is still a truncation count. But because the brown x wave shown is also shorter in price and time than brown 1, then it is potentially legitimate that the market is making an even larger second wave, 2. This wave could be in the overall flat variety. It could turn out to be a regular flat wave, a "running flat" wave that does not cross over the w wave, or even an expanded flat wave to make a deeper second wave, 2.

And this is a key reason why The Principle of Equivalence was designed. "With the current state of prices available to us at this time, there are literally three possibilities which, if prices were random, could each occur". Not two, three! That means there are roughly equal odds of the outcomes - purple, blue and brown - and those odds are roughly 33% each.

I have showed you intraday where examples with 3% or 4% odds routinely happen. So, are roughly-equal 33% odds anything to stake a claim on? I suggest not. It would be gambling at the very least, and maybe just plain irresponsible, especially with an FOMC meeting, more earnings, and probably POTUS war or peace tweets in the near future.

No, this is why I implore readers here to measure, measure, measure both price and time to see what fits in with various degrees of waves (which waves are actually larger and which waves are actually smaller) and remain patient and flexible until the situation clears.

To be truthful, I watched one veteran wave-counter's YouTube video this weekend and I watched him agonize how sloppy the market was, and what it was doing to the fund he runs. I mean he was almost crying on-line about how useless the wave principle was and how no counts currently fit his currently uber bullish scenario.

Rather than agonize, I long-ago developed a full-fledged equivalence principle that tells me what I must do in such situations, and why. It is not because of darned Elliott Wave. It is because there is a principle of wave counting that says, "lengths of price & lengths of time actually MATTER". And, like throwing a rock in a lake, you just don't know how big or small the waves will be until you either see them, or until you see the size of the pebble or boulder than goes into the water. 

Yes, from an investing or trading perspective, you want like the dickens to know how big those waves will be in the future. But, in actuality, all you have is odds. So, act accordingly until things become more clear.

Have an excellent rest of the evening,

TraderJoe

Golden Slumbers

With apologies to the Beatles lyric, I was asked back in July if I thought Gold had bottomed. At the time I said "not likely because of the three-wave sequences at the low". Practically the instant I said it, Gold, as measured by Gold futures (GC), went on a tear higher as the chart below shows - traveling about $700 higher. But a new all-time high was not made - nowhere near the $5,600 high - and this set up a huge bull trap, because, as the chart below shows, Gold for December has made a new contract low over those July lows.

Now to be fair, the November contract, and the roll-over contract have not made the new lows yet. But they might. That is to be determined. So, the question now is, "what is to be made of Gold, now?" Well, my original count was that we were making a contracting diagonal lower into July, as the weekly chart below shows. The five-wave contracting diagonal could easily be the Intermediate (A) wave of a zigzag, lower. This seems to be validated by the lower low just seen.

So, the new low in the December contract could be one of two things. First, it could be a stumpy (C) wave which may or may not be over. It can currently count as five-waves down, nearly complete. And remember, a 'C' wave could truncate. They certainly do happen. And the three-waves down, now, might start a larger Flat wave - but that is not required as the damage is being done.

So, with the five-waves-down now suggested when it ends it might start the larger upward move. We will have to watch closely to try to verify it, but an upward move would be confirmed over the (B) wave high. Other counts are possible, too, such as the start of a very, very large triangle. But there is insufficient evidence to begin a count like that at this time.

Have an excellent rest of the weekend,

TraderJoe

Someone Say "18-day"?

Prices in yesterday's daytime session pipped up over the 18-day SMA and tried to close strong-ish with a close above that average as the ES daily chart shows below. That seemingly would turn the bias up, but the swingline indicator had no up-trend. But, after the boring earnings conference calls from Meta and Tesla started - which were long on promises and short on details - prices began wavering. This morning they are falling off fairly sharply and are again below the 18-day SMA.

ES Futures - Daily - Intraday Lower

Prices could head back to the 100-SMA and/or the lower daily Bollinger Band, and a key question is whether or not a daily fractal will break lower or not. If so, then the next immediate target would be the up-gap fill from the daily close of 31 July. The daily slow stochastic is not yet in over-sold territory, and there is some chance it might start the process to embed lower, but we need to take that a step at a time. First, we need to watch the red (down) fractal to see if it is exceeded.

Again, no amount of down movement will surprise us. So far, the price action is consistent with my primary EW count and the potential truncation. Let's see if it holds. If you are a newer reader here, I will point you to my paraphrase of broker Ira Epstein's guidelines for trading here at this LINK that I have summarized from his publicly available videos back in 2015.

Have an excellent start to the day,

TraderJoe

Break-ie, Break-ee

Attached is the daily chart of the ES futures (rollover contract) with the steps for potential diagonal confirmation clearly shown. The chart uses the Zigzag indicator, so the wave terminals are accurate.

The first confirmation step may be checked (or tic'd, as they say in the UK) as complete. The remaining are yet to be seen.

What happens if confirmation is not obtained? Then, one must look for a different structure, such as a large Flat at the high, or possibly a triangle, or something similar - even a larger diagonal.

Let's see how it goes. Have an excellent rest of the weekend,

TraderJoe

Current Suggestion

Tops of any degree can be darn difficult. In our local case, we don't know for sure that a truncation has occurred. But, if it did occur, it could have happened in one of two places. Those are both shown in the SPX500 (CFD) 4-hr chart below, market with the red asterisk and question mark.

SPX500 (CFD) - 4 Hr - Channel

So, the best suggestion at this time is to draw the parallel, as shown and see if today's high is exceeded higher. If it is, then the A/B/C count lower may best pertain, especially if there should be upward overlap. Otherwise, it will be harder to claim a larger degree "five-down" until or unless there is a new low from here. Then, if there is, there could still be confusion with the nominal high made on 6 Oct. And that is why there is also a purple 1 & 2 shown in the count with purple 1 near the low.

If the market is to truly be weak, then it must show that character. If it is to be stronger, it could still wheeze upward into a larger diagonal. So far, the buying has persisted into yesterday. If the market can truly be perceived in a down trend at this time, that buying would seem a bit odd - unless the buyers are ignoring all the warnings (or those doing the buying have nothing to lose - like government officials, etc.)

So, caution, patience and flexibility are still highly recommended until the market speaks more clearly.

Have an excellent rest of the day and start to the weekend.

TraderJoe

Caution Flags Flying

Because today 'can' be currently counted as 'five-waves-down', there is some probability that, contrary to the 8,000 hype, the upward count is over. Note, this count, the truncation count, still requires better confirmation, but it should receive serious consideration because of the sloppy upward progress of the last several sessions.

The count is shown here in the ES rollover contract, but cash would be similar. There is no reason that a throw-over of the upper wedge is required, and those who think this must happen might be abandoned by price. The RSI hasn't quite broken a larger trend line from late July, yet. But it could.

We will have to wait and watch for both that and further confirmation signals in upcoming days.

Have an excellent rest of the day and start to the evening,

TraderJoe

Nary A Touch Lower

Overnight the ES futures (and the SPX500 CFD, below) made a higher daily high near the R1 daily pivot level. But, as the SPX500 30- minute intraday wave-counting-screen, IWCS, shows, price could not close outside the lower band this morning.

SPX500 (CFD) - 30 minute - IWCS

Further, price could not close on or below the daily Pivot level (P) and is headed back for the 18-period intraday moving average after the intraday slow stochastic lost its embedded status.

Short-term we continue to follow the local technicals as prices continue to try to resolve to a fuller EW count.

Have an excellent rest of the day.

TraderJoe