Market Indexes: Major U.S. Equity Indexes were mixed; DJIA and S&P Higher; RUT / NAS lower
SPX Candle: Higher High, Higher Low, Higher Close - Trend Candle
FED Posture: Quantitative Tightening (QT)
As we suggested in the prior blog posts, one way or the other, the market was likely headed higher - whether it was the breakout of a triangle (with poor proportions) or the formation of a larger triangle or diagonal. The market as measured by the S&P500 Index closed yesterday at 2,660. It gapped up two points at the open to 2,662, then filled the gap within the first fifteen minutes. Then, it headed higher to 2,670, the high of the day and made a new all time high, before trading sideways and lower to close at 2,665.
Because of the higher closing hourly highs, it seemed best to slant the upper trend line upward, as in the following chart.
|SP500 Hourly - Triangle Morphed to Diagonal|
With today's price movement, a potential wave (iii) of the a diagonal is nicely forming. There is nothing here (i.e. no significant downward overlaps) that says wave (iii) upward is over yet. The red bars at the end could just be wave .iv of c of (iii), and a gap up tomorrow could fill the bill to finish the wave before the all-important FED meeting. We note wave (i) is on a divergence with 3, and wave (iii) is on a further divergence with both waves 3, and (i).
For now there are three cautions. First, of course, wave (iii) must remain shorter than wave (i). It's OK now, but keep your eye on it. Second, if wave (iv) starts tomorrow, it may not travel below the low of wave (ii). If it does, then the diagonal is converting to a much larger and more complicated flat wave. The third caution is this. We have seen many contracting ending diagonals before. And we have seen them where the third wave is longest in time too. This one may be no different, but, often contracting diagonals contract in time, too. So, the caution is that a diagonal may not work out for that reason. If it doesn't, there is nothing we can do about it. We ARE in the Fourth Wave Conundrum. And, you may have just seen a fine example of how a potential triangle shape can morph into a potential diagonal shape.
For form and balance (unlike the poor proportions of a triangle we noted yesterday), it would be best if potential wave (iv) traveled below the EMA-34, and if the lower upward sloping trend line remained somewhat in tact - a few pips under-throw would be fine. For those who are just learning Elliott Wave, this is a fine example of why a contracting ending diagonal fifth wave is not even a potential until both of it's waves (i) and (iii) are over the high of the prior 3 wave, so that they still express their Motive character - their propensity to travel in the direction of the one larger trend.
Please note the wave labels we have assigned on the chart are 'placeholders' only for clarity. We will confirm wave degrees in a subsequent post. For now, it is most essential to understand the characteristics of this potential diagonal, and to see if the pattern is born out. So let's keep it simple.
If a diagonal should play out correctly, it would indicate the market has come "too far, too fast" and is due for a very significant correction. But, we will talk more about that once we see how this goes. Until we get a valid ending pattern, particularly if it has the right look, higher highs are still possible.
I hope this helps, and have a good start to your evening.