Diagonal Maintains Parameters - 2

Market Outlook: Expecting Higher Volatility
Market Indexes: Major U.S. Equity Indexes were lower; DJ Util fractionally higher
SPX Candle: Lower High, Lower Low, Lower Close - Follow-through Candle
FED Posture: Quantitative Tightening (QT)

As per yesterday's blog post, today was expected to be a down day and it was in the S&P500 and most other major averages. The market, as measured by the S&P500 Index, had closed yesterday at 2,663. Overnight the futures were slightly higher on some of the European Central Bank announcements, so the market opened with a small three-point gain at 2,666 and traded up to 2,668 without filling it's gap. The DOW made a new all-time high, while the S&P500 did not. At 11:00 AM the down turn took hold and stocks essentially traded lower in an impulse channel until the end of the day.

First, let's have a look at the potential hourly ending diagonal on the cash S&P500 Index.

S&P500 Cash Index - Hourly - Potential Ending Diagonal

So the first expectation was fulfilled. Price traded below the hourly EMA-34 to likely make a much more proportional diagonal (than the non-proportional triangle we cited earlier). A diagonal at this level would have excellent form and balance. So, again, just like a triangle is defined by it's (a), (c) and (b), (d) trend lines, so too is a diagonal defined by it's wave (i), (iii) and (ii), (iv) trend lines. Therefore, we detach the wave 4 anchor if this or something close to it is to be the diagonal. And, we just draw the lower trend line from wave (ii) to wave (iv). Period. It's that simple.

Next, we measure wave (ii), and subtract that measurement to the top of wave (iii), and a price of 2,631.54 is obtained for an invalidation level on the diagonal. Beyond that, the alternate flat count would take over.

So far, we note above that we have obtained a wave four signature on the EWO with a shallow break of the zero line, so far, within +10% to -40%, meeting expectations.

Next, for your confidence this Holiday season, I will show you the five minute chart of the S&P500 Cash Index we counted out in the live chat room - turn by turn, wave by wave.

S&P500 Index Cash - 5 Minute Chart - Zigzag Count

One reason to be reasonably confident about today's down turn starts over on the left hand side of the chart. Yesterday, we were able to count out a completed smaller vth wave ending diagonal of wave (iii) in perfect form. Prices then turned lower around noon, and made another grinding lower structure, which we were again able to count out as a contracting leading diagonal A wave. Next, on the FED announcement prices spiked higher in the w wave of a double zigzag and filled the small running gap they left by leaving the diagonal in such a hurry.

After prices failed to make a new high, and started heading lower again, we counted out yet another diagonal, this one an expanding leading diagonal as (i), (ii), (iii), (iv), (v). Since it would be poor alternation to have two first waves as diagonals, we surmised that yesterday's first ontracting diagonal down was an A wave, the deep retrace was a B wave, and the second expanding leading diagonal was a first wave of an impulse lower.

At around 11:30 AM today, prices broke through the prior low and we began counting the impulse you see in the channel looking for alternation at each turn. Wave ii is a clear sharp and wave iv is a clear flat. Less straight forward was wave ii as a Flat-X-Zigzag, and wave iv as a double-zigzag. Within wave ii, the first b wave makes a 90% retrace which is the only reason it alternates with wave iv - whose first b wave does not make a 90% retrace.

Further, you'll note that wave iv comes back exactly to the second wave (ii) of the extended fifth wave of the third wave. That is just as it should be!

Regardless, wave iii is outside of the lower channel boundary to express it's momentum, lower, and wave v has come down to within 0.2 of the prior low - enough for a fifth wave, but maybe not all of it. And, it is currently on a divergence with the oscillator shown.

Yes! It's possible (but not required) that if this wave down is to remain a zigzag A-B-C, then the fifth wave of C may indeed truncate slightly. But, it is very possible a lower low will be made tomorrow without harming the pattern.

A truncation would be an excellent sign of a fifth wave (v) up, of a diagonal, if it is to occur. So keep an eye out for overnight developments. We will also note that after the Dow made it's new all-time-high, as wave (iii), it has maintained it's diagonal parameters as well, and has since downwardly overlapped it's wave (i), as well.

Can this diagonal invalidate and just form the larger FLAT wave 4? Yes, it is possible. In that case, the A wave would indeed be a first wave 1. But, at this point in time there is no evidence for it yet. And one piece of counter evidence for that flat, was yesterday's ending diagonal on the left side of the chart. Notice that although it's low was exceeded yesterday, it was not exceed in less time than the diagonal took to build. Could that mean there is another high ahead? Inquiring minds want to know.

So have a very nice start to your evening.
TraderJoe