Usual Expectations - So Far

Market Outlook: A Challenge of the High is Underway
Market Indexes: All Major U.S. Equity Indexes were higher; NQ futures new ATH
SPX Candle: Higher High, Higher Low, Higher Close - White Soldier
FED Posture: Quantitative Tightening (QT)


In yesterday's post we wrote, "The retrace downward at the end of the day, today, was to the 62% level so a further up leg is possible to near the level of the B wave of (5), if the gap direction tomorrow is up." It was. And price exceeded that B wave location, quickly eliminating at the open that wave (5), lower would sub-divide. (Wave 2 of a C wave may not travel beyond the start of the B wave).

The market as measured by the S&P500 closed yesterday at 2,565. The futures were higher overnight and price gapped up at the open to 2,573, then climbed to 2,590 intraday. As soon as we saw the B wave exceeded, we drew the confluence of these two Fibonacci levels on the chart.

S&P500 Cash Index - Half-Hourly Chart - Fibonacci Confluence

We took the extension from yesterday's intraday high and low (in blue), and the retracement of the entire move upward (in green). These were the only two Fibonacci levels that agreed: a 78.6% retrace, and a c = 1.618 extension. Those two measurements also were in the area of the (4)th wave of one lower degree.

For the day, this upward location held price rather well, and it started to back off a bit into the close. But, we did not get confirmation (yet) of a lower wave beginning. Let me explain with reference to the 5-minute Neely-style chart below.

S&P500 Cash Index 5-Minute Chart Neely Style

Yesterday, I was able to count "five waves up", shown as the :5 (which is a structure label, not an Elliott wave progress label). It literally just means "five waves up" that meets the definition of an impulsion. Then, I was able to count "three-waves- down" as A,B,C to the location marked :3. Again, this is a structure label that only means "three-waves-down" that meets the definition of a corrective structure. And today, with the gap up, it was possible to count another five-waves up, again, as :5

But, the gap was in a very odd location - it could not be counted as a "three-of-three" gap. It could only be counted as a "1". So, when you include alternation, it seemed like the best count was as a sharp for wave 2, and a flat for wave 4. This would mean that was 3 was shorter than wave 1, and so wave 5 would have to be shorter than wave 3.

In the chart above, you can see the 5 = 3 location. Somehow price never crossed it today, and the rule of wave three not being the shortest has, so far, been met. Very interesting.

BUT in counting in the downward direction, while we got some overlaps, we did not, by the close, meet a key Neely guideline for beginning a downward count. That guideline is that to start a down count, the down wave should beat the wave 4 label, today, lower, in less time than wave 5 took to form. Now, there is nothing magic about the close; this guideline could be met on a gap downward tomorrow. But, so far, it hasn't. So, the gap direction again becomes key tomorrow.

As long as this guideline is not met, then all we have in the upward direction so far is :5, :3; :5 in which the second :5 is 1.618 x the first :5. That means there "could" be another five up tomorrow. Or, there doesn't have to be and an upward corrective wave could be over for this index. This is simply the way Elliott Wave labels are assigned, as I understand it, in the Neely method. So I wanted to show a relatively clear example.

But, once again it places us in the position of having to monitor the gap direction tomorrow for further clues. This is not always the case, but we are still in The Fourth Wave Conundrum hopping around and opening and closing gaps. Today's gap up open helped close two of the gaps shown in black circle on the half-hour chart, above. But, now there is a gap both above and below the market.

Suffice it to say, the usual expectation of a 78.6% "deep retracement" after a diagonal wave has been met. And the question is "what's next"? Will an impulse form upward, or will price movement in the downward direction resume? It is very, very difficult to find a set of market metrics that can predict the overnight gaps when the market is not clearly in trending mode. Anyone who has better clues on that score, please let us know!

As you can see, sometimes not being able to clearly predict the very next wave is not a matter of whether a person can count or not. Sometimes, the market must leave the situation unclear enough so that there is enough uncertainty to make a market. If there weren't uncertainty, the market would cease to function because it would become one-sided. 

In the meanwhile, thanks for all your comments yesterday. I may not have gotten to all responses yet, but I will. It was a bit overwhelming to not to get anything for days, and then to see so many. I truly do mean, "thanks", but, also, I hope you will help spread the word about the blog. I'm not advertising, and so word-of-mouth is the best.

Thanks again for helping, and have a good start to your evening.
TraderJoe