Bigger Change And More Complex (b) Wave

Market Outlook: Now Getting Higher Volatility
Market Indexes: Major U.S. Equity Indexes closed lower; DJUtil higher
SPX Candle: Higher High, Lower Low, Lower Close - Bearish Engulfing Candle
FED Posture: Quantitative Tightening (QT)

In yesterday's post, I completely outlined how a (b) wave lower could become much more complex. It would start with an X wave that made a slight higher high over yesterday, and then trade lower with a further zigzag lower. That is exactly what happened today. The (b) wave down traded to exactly 0.618 times the (a) wave higher, and found some initial support there.

Stocks, as measured by the S&P500 cash index, had closed yesterday at 2,670. In the first half-hour stocks gapped up and traded to 2,684. At that point, stocks turned lower, and traded all the way down to 2,617 before finally trading up to close at 2,634.

So, this (b) wave scenario would be (b) wave of the minute ((d)) wave shown in the daily chart below. This is the Potential Larger Triangle Count.

S&P500 Cash Index - Daily - Potential Larger Triangle Count

So far, we have called almost every turn of this wave of the triangle, and not been surprised by any. Still, I noted in earlier blog posts that there is a smaller version of the potential triangle which must be considered because it is logical. That version of the smaller daily triangle looks like this one.

S&P500 Cash Index - Daily - Potential Larger Triangle Count

The smaller version of the triangle just says that the minute ((d)) wave ended with a slightly steeper upper trend line, and this is now the minute ((e)) wave of the triangle lower. 

Again, other than the fact that the symmetry of the first pattern would look better, and it would take more time, there is not much than can separate the two patterns cleanly. This is just another reason why there is a Fourth Wave Conundrum, and why trading is always risky. 

But beyond even that, the old trader's adage is that "trading is treacherous in triangles". It is precisely because triangles can breathe a bit. That is, they can add an internal sequence that is more complex. So far, we have not yet positively seen that complexity. However, in the smaller triangle, the minute ((d)) wave can be counted as a w-x-y sequence, the more complex sequence.

In any event, there are two possibilities for a triangle to play out - in all indexes but the Dow. With the weekly Elliott Wave Oscillator now at only +2, we must allow that a fourth wave triangle - like the ones above - could play out, with a Minor wave 5 to follow.

On days like today, people tend to get very, very bearish. One reason people get bearish is they might only following the market leading FANG stocks. It is important to realize that the way a market top is built is that some stocks generally, most-often, diverge from the market averages. So, if one is overly concerned about some individual names or groups, this is generally to be expected. Only if stocks immediately gap down and exceed the minute ((a)) wave lower should we assume that we are, in fact, not in a fourth wave triangle count. But, as of this writing, there is just is not clear evidence for that at this time.

Should the latter condition occur, we will immediately adjust accordingly. Barring that we will stay the course, and remain flexible, patient and calm as the grinding pattern continues. Absolutely nothing has said we are done with the volatility yet.

Have a good start to your evening,
TraderJoe