Tricky Treats

As I stated in prior postings, no amount of downward movement will be a surprise. We got only a typical smaller portion, Halloween-sized, morsel of that on Friday, and then a rebound. The most ghastly of facts surrounding this decline is that my proprietary bullish sentiment model shows the percent bullishness as still being on the longest average sustained romp over the 60% level that has ever been recorded by this measure, as shown in the weekly chart below, as of this weekend. 

Bullish Sentiment - Weekly - Longest Ever Sustained Push Over 60%

Now for a real fright: compare that level to that shown on the CNN Money Fear & Greed Index, shown below.

This, market-basket approach, is showing outright fear and labels it as such. The indicator-basket is made up of a mishmash of moving averages on a number of factors, and it's trying to tell you people are thinking differently than the survey data, above. Quite honestly, I've looked over their indicators and to me they are confusing with the overall index ill-constructed. So this may amount to an unintentional but never-the-less nasty Trick being played on you - much like when the high-school kids on Halloween night think they're only going to flood your window-well with the garden hose, but instead the whole basement gets drenched.

We know that daily price now has a lower high (or a series of them) and now a lower low. So, does the market offer any costumes that might be more informative, and not just hip & cool? Well, for that we turn to the work of Master Trader, Bill Williams. Bill wrote the book Trading Chaos and offered some indicators that are still in wide use today. A few of them are used in the chart below. They are 1) the Alligator, 2) the Elliott Wave Oscillator, or AO, and 3) fractals.

The first thing one can note is that the truncation high, if it remains so, did occur on a confirmed divergence with the Elliott Wave Oscillator as shown in the bottom panel. That divergence is given the term confirmed precisely because there was a daily higher price high on a lower EWO value, and then the EWO dropped below zero again.

The next thing to note is in the upper right - the presence of a trap fractal. That is defined as a price that exceeded a prior fractal, in this case, green or up, and then promptly reversed to exceed a fractal in the opposite direction, in this case a red or down fractal.

So, think about the characteristics of either 2nd waves or of B waves. Their job is to try to convince you that the trend prior to the last wave is really reversing. In other words, you didn't see a 1 wave or an A wave, down, in this case, before the 2 wave or B wave up. No, that down wave was a sham, a ghost, as it literally didn't happen. That is what the trap fractal tries to do. It tries to get you to buy into the reversal back into the prior up trend at precisely the incorrect time.

So, in the Bill Williams system, there is now a fractal break well below the alligator. Several down (red) fractals have been broken lower. And the daily gator appears to be turning lower. And, while this is a sell signal in the Bill Williams system, keep in mind, as I have written about before, to follow this system on a daily basis requires a very high level of capitalization relative to risk. So, what that means is one either has to be extremely wealthy already not to care about the inevitable retracements relative to one's potential market gains, or one has to remain out of the market until one of those retraces occurs, or one has to keep their position sizes extremely small (in either futures or options, say) until the gator fully "opens up" to the downside. In short, extremely conscientious risk-management must be practiced or the consequences might be suffered.

Lastly, should the market continue lower the chart is showing the first two price counts along the way, noting that the 2.618 Fibonacci level is also a measured move should the neckline of this bobblehead be significantly broken lower.

Have a terrifying, hair-raising, and blood-curdling rest of the weekend - just kidding, of course.

TraderJoe

Main Truncation Count

The main truncation count (*) on the ES 8-hr chart, currently counts like the chart shown below, and is somewhat based on earnings performance, so far.

But this count has to prove itself by making new lows. A clear invalidation is shown. At the present the count is channeling well. If there is to be a third wave, it should shatter the lower channel line and try to make a 1.618 wave, lower. That is because the up wave, b/ii, is slightly greater than a 62% retrace.

Have an excellent start to the evening,

TraderJoe

Pump Err or Dump Err

One way or another mistakes will be made. We don't know what the FOMC will do, although the consensus is they will hold rates steady tomorrow. Today, as shown in the comments for the prior post, price can be interpreted to have made 'five-waves-up'. Price got back near the 18-day SMA, the 'line in the sand', and then backed off a tad.

Will they pump em' on the FOMC, or dump em' on the FOMC & buy-em back the day after? This remains an open question. Because of the likely exceptional volatility, uncertainty and opportunity for mistakes, Ira typically would say something like, "take the day off - at least until you know the report, the chatter in the press conference, and/or then how the big organizations and other countries respond the day after".

In Ira's method, the main trend is trying to be determined for either entry or reversal. Right now, the daily bias is down. Will it stay that way or will price close way above the 18-day, flipping the bias to up? The daily slow stochastic is still over-sold, so this is still a bit of a warning sign from momentum as well.

And, as I showed before, there is still a count, for example, that allows another nicked ATH to be made. It is the one below on the 2-day chart shown. It's a little far away, yet, but, if the 18-period does not restrain prices. This count definitely works.

It is what I referred to earlier as a larger wave 3, although, still in a diagonal. However, the key question to ask is how much does one want to be whipped around inside the daily bands where the 'house' typically has the edge? Being near the 18-day average basically means the odds currently are roughly 50-50. Not very good for large decisions.

Have an excellent start to the evening,

TraderJoe

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