How You Can Tell - 12

Thanks to all who read Saturday's post. If you read it, you know I have counted an a-b-c down, with the possibility of a flat wave following it. Many of you also know, I was probably the very first, if not only, Elliott Wave analyst to show a picture of a contracting ending diagonal in U.S. equity indexes. You can view that post here at this LINK if you have not seen it already.

This morning, I was considering the implications of the a-b-c down from yesterday's post in the overall context of the waves being made - whether triangle or diagonal - and had to ask this question. If we have just made an a-b-c lower, regardless if it is to be followed by another a-b-c lower, then why is the wave so short in point length?

To make a long story short, I concluded that such a wave could be a second wave, and the chart below is how it could fit into the overall pattern of a diagonal wave for the S&P500 Daily Cash.

S&P500 Cash Daily - Potential Contracting Diagonal

At this stage the wave labels are just placeholders - for clarity only - and the overall pattern is again still just a potential pattern: a diagonal is a pattern which must prove itself. But, I had, in near real time, successfully counted for you the wedge shaped a wave up and told you why I thought, since there were no large pull-backs - it was an impulse wave in a wedge with an extended first wave. Also, as an a wave, it did not go anywhere it important. It did not break any new all-time highs.

Then, I was able to count out the .a, .b, .c waves of the flat to the b wave down. Now, the giveaway might be that the higher high for wave i might just well be expressing it's motive wave character - the ability to move price in the direction of the main trend. And, this corrective wave lower - whatever form it takes - could just be wave ii. Most analysts are trying to count this as a fourth wave. What if it is not?! It almost certainly is not the fourth wave of an impulse in the DJIA because of overlap.

What I like about this count, is that it now gives us a very specific invalidation point. Wave ii may not go below the low of wave b. Perfect. That is the way Elliott wave counting is supposed to work. We are supposed to get clear invalidation points for the counts to help limit risk.

Then, if after a wave ii completes, a wave iii carries to a higher high than i, we might suspect the diagonal is really on!

In the process, as the indicator panel attempts to show, divergent high peaks would be expected on the Elliott Wave Oscillator (EWO, or AO on Investing.com), and there should also be a higher low (on the EWO or AO) for wave 4. And wave 4 must overlap wave 1 downward, yet remain shorter than wave 2.

I do not know how long this can take to play out exactly. Perhaps we will get more clarity as the pattern progresses. What I do know, is at this point, I can see the still potential pattern clearly, and it will be of great assistance with clear invalidation points to help in counting the overall wave position of the market. I have not seen this pattern or the one I posted earlier anywhere else on the web or from any Elliott wave service for that matter.

So, I consider this as value-added for you. And - free at that!
Have a very good weekend.
TraderJoe