Overlap and Gap Fills

Over the last several days, I have been "neutral" and just counting waves. Today, a good example of why, opened with a tiny gap up that was quickly filled when the API petroleum report came out and Crude Oil sank again. After the opening gap filled, the downward waves were sufficient to fill the gaps shown with the black circles in the chart below. Crude Oil got as low at $42.05 before ticking up towards the end of the day.

SP500 2-Hr Chart Potential Diagonal

We had warned to start being on the look out for the gap fills. Today's downward wave slightly extended the length of wave ((iv)) of the diagonal, and clearly overlapped the prior wave (a) wave up, just like we indicated the futures had the previous day.

So, today, we slightly modified the trend line up from the lows, and it now intersects wave ((ii)) and wave ((iv)) very well. Wave ((iv)) played with this trend line all day, falsely breaking it lower, then recapturing it by the close.

If the diagonal is to complete properly, then we should see three clear waves up as (a), (b), (c)  to make wave ((v)) of C - possibly where (b) is a triangle. Since wave ((iv)) has a slight throw-under of the trend line, this often gives the fifth wave a sufficient sling-shot action to slightly get it over the upper trend line. But, again, we want to emphasize, that since this is overall a very flaky (b) wave, it is not even necessary to make a higher high. The fifth wave of an ending diagonal is allowed to fail. Just keep in mind it is 'more usual' for there to be a throw-over of the upper trend line on somewhat increased volume.

By way of invalidation, we have still indicated the prior B wave as that location. However, wave ((iv)), down, may not go below 2425 and maintain the contracting diagonal shape, and that is because wave ((iv)) would become longer than wave ((ii)) - which is not allowed, by rule, in a contracting diagonal. So, technically that is new invalidation for a diagonal pattern.

If a diagonal should not complete with good form, we would then have to suggest the pattern ended at the location shown as ((iii)) with a slightly modified count. We remain open and flexible at this point in time.

And we hope you have a good start to your evening.
TraderJoe