How You Can Tell - 7

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes closed mixed
SPX Candle: Higher High, Higher Low, Lower Close - Spinning Top Candle
FED Posture: Quantitative Tightening (QT)

Follow-through buying from Friday's payroll employment report pushed the futures higher Sunday night and into Monday morning. As a result, the S&P500 opened higher and made a new local daily high over that of 27 Feb. Also as a result, the NQ futures made a new daily all-time high. Markets, as measured by the S&P500 Index closed Friday at 2,787, and with the gap up, they traded up to 2,797. About a half-hour after the open the follow through dissipated and a bout of selling began which dropped the index to 2,779 in what looked like five waves down. Then, the "b" wave of a likely flat wave occurred - equal lows in the S&P500, and lower lows in the Dow - followed by a bounce that carried the index up to 2,792 to complete the likely "c" wave of the flat. So, from all appearances, it looked like we had five-waves down and three-waves up, before prices tailed off to close at the 2,783 level.

The NQ and the RUT closed higher, the Dow and the S&P lower. So, let's look at the daily chart first.

S&P 500 Cash - Daily - Spinning Top Candle

In the S&P500, the slight higher high day got the index to make a closer approach on the 78.6% Fibonacci retracement level. This is about the ideal level from which to form a triangle if one is to occur. And, yet, there is nothing magic about a spinning top day. It may just be a consolidation day.

Further, when we count the internals of the up wave from the March low, something very odd has happened.

S&P500 Cash - Half-Hourly Chart - Lack of 38.2% Retrace

You will note that after the wave marked A, the B wave shown failed to make a 38.2% retrace on A. It missed by several points. And yet, the upward wave to the point marked (i) is longer than the first wave.

Now, in a true impulse, when the first wave is retraced less than 38.2%, then we suspect that the first wave would be the extended wave. But, wave (i) being longer than A tells us this may not be a true impulse at all. Price may be forming a diagonal wave, either for a (c) wave of the ((b)) wave of the triangle, OR to go over the top as the next leg in an upwardly slanting wave for the third wave, Intermediate (3) in an overall contracting ending diagonal as we showed in Saturday's post.

So far, price is in the channel shown, and it is suspicious in that a third wave has not broken the upper channel boundary. And if a zigzag forms in the downward direction it may be a second wave of such a construction. In this chart, the "five waves down, and three waves up" from the second paragraph are shown as a & b just for simplicity (please ignore all degree labels at this stage - right now the labels are place-holders only). So, IF a sharp c wave should form downward tomorrow, there would also be little alternation one could point to in this wave - another sign of a potential corrective wave.

Again, a triangle for Minor 4, or a diagonal for Primary [5] remain the best options. The count has gotten very, very messy. It is typical of fourth waves and / or diagonals. But, I hope you can see the rationale in the above wave since the March low. A true impulse up would have retraced more than 38% or the next wave up would have been shorter. It would be highly unlikely to have both conditions together in anything other than a corrective wave that was forming.

Have a good start to your evening!
TraderJoe