One of Two Choices

Market Outlook: Downtrend Likely Under Way
Market Indexes: Most Major U.S. Equity Indexes Closed Lower, RUT higher
SPX Candle: Lower High, Lower Low, Lower Close
FED Posture: Quantitative Tightening (QT)

When the expanding triangle we showed you yesterday failed to produce significantly higher highs today (we warned it could fail), we recognized immediately what had happened. If we look at the hourly count of the SP500 below, we can see a completed count.

S&P500 Index - Hourly - Potential Top

The count has a contracting ending diagonal wave ((5)) of c of (z) which has already been exceeded lower validating such a potential upward diagonal. Such a count ends exactly on the FED meeting day. And it ends with the slightest truncation in a (z) wave. Interesting! Now while we must at least allow for the possibility of one more higher high, we must conclude the wave count could be over - at least for a while. That higher high would be made possible by the "last ditch" wave ((4)) flat count shown in brown on the right of the chart, and the fact that the NQ may not have topped yet.

Because of the length of the downward wave from c, we may indeed have started a down trend.You will note that wave (1) upward of ((5)) has been overlapped downward, but wave ((1)) has not yet been. That overlap, and the shape of the wave, in general give a significant warning.

Further, we want to remind you that since we counted (w),(x),(y),(x),(z) to the high, that may have the same implications as the expanding diagonal (i), (ii), (iii), (iv), (v). This is a very dicey situation indeed. If that is an ending diagonal, then it is possible (but not required) to agree with the proposed count by Elliott Wave International, as below.

DJIA Three-Day Chart EWI-Style Count in Which Entire Bull Market is Completed

The strength of this count is that is does end in an ending diagonal - the same one we showed you above, on the hourly S&P500, which can be counted identically in the DOW. The weakness of this count is that there is no touch of the lower trend line (yet). Further, the Elliott Wave Oscillator has not traveled to the zero line within about 160 candles - which is where we should start to expect a fourth wave.

That means the alternate count would still be the Minor 3 wedge-style count - which may be counted like this.

DJIA - Three-Day Chart - Minor 3 Count

And, if, instead, that is just a triangle for minute ((iv)), as suggested by reader mblcta, then it would not be a diagonal, and it would not necessarily have to end the whole wave sequence. It would just signal the end of Minor 3.

We will be among the first to remind readers, 1) that until there is unqualified downward overlap, there is no positive conclusion that upward movement is over - only that the probabilities continue to grow; 2) that the point loss from the top is quite benign, and the only way we can count from the top in a true downward count now is with an expanding diagonal shown below, and 3) even if Minor 4 begins, it should begin with a sharp zigzag which might travel to the lower channel boundary.

Here is the potential expanding diagonal, below on the chart of the SP500 10-minute time frame. In order for this diagonal to work out, there must be overlap of wave (4) on wave (1), and wave (4) must become longer than wave (2) - which it has not yet. (Addendum: after the close, the futures did make the upward overlap. We are likely to see that tomorrow).

The overall problem for an impulse downward count is there is a very clear "running triangle" in the middle section of wave (3). And, since we recognized that triangle, the waves we have been calling have worked out very well in real time. Thus, we are using a diagonal count, lower.

S&P500 10-Minute Chart - Potential Expanding Diagonal Lower

The problem for the market is that if wave (5) does become longer than wave (3), as required in a true expanding diagonal, than it can do some real structural damage to anyone's upward wave count, because this downward wave will become quite long compared to the prior upward waves.

So, let's take this one step at a time. One thing to be sure of - we never concluded - like some web sites that we were in some nearly never-ending series of micro third waves that had to unwind yet. We have always been exceedingly cautious on this market, and we are still. It keeps breaking down, now, rather than completing upward counts, so far.

If we get a valid downward wave, I will let you know. And then the market must also make a valid retrace that does not take out the prior all-time highs. Regardless, my mode of operation right now is not one of dogmatic rigidity. As I have said before, this is the time for patience and flexibility as the market attempts to fake us all out.

Have a good start to your evening.
TraderJoe