FED Wins Half the Battle

In an earlier blog post we discussed a minimum configuration for the end of "five waves down". (You can see that post at this LINK). We continued to count for an impulse wave, as that is what Elliott theory tells us to expect, first. With last night's overnight gap up, and today's higher high the case for an impulse wave, lower, got severely less probable. Could one still happen? Yes, but the odds are much, much, lower. Please review the chart below, and I will explain.

ES Futures - 4 Hr - Diagonal

Taking as many factors as possible into consideration, it appears a diagonal count lower fits best for an Intermediate wave, lower. The factors are these: a) Minor 5 is shorter than Minor 3 in time and in price, b) Minor 3 is shorter than Minor 1 in time and in price, c) wave 4 is shorter in price than wave 2 and overlaps wave 1 without exceeding the end of wave 2, d) each of Minor wave 5 and 3 have divergence on the Elliott Wave Oscillator, and e) any reasonable parallel has now been broken to the upside. 

So, the only factor that did not work out in a pristine manner is that wave Minor 4 is slightly longer in time than Minor 2. Well, that is typically viewed as OK in Elliott wave work. But, one of the key considerations is that Minor wave 2 is the largest upward wave on the board. Unless it were part of a triangle - a solution we tried - it would be a degree violation. And, the fact is that the wave is now part of the triangle's cousin - the diagonal. We explained in a previous post how the patterns are cousins because the three-wave sequences can fit into either - given the right circumstances.

Thus, the potential degree violation for this wave 2 is worked out. I fully admit I did not catch the exact the diagonal at the time it formed. But I was looking for upward waves to A, as the minute ((c)) waves of Minor wave 4, and they occurred. Last night, the impulse count said there should have been a downward wave. There wasn't. That results in the diagonal count.

Don't think it's a diagonal? Put yourself in the shoes of a pure bull who is sure we are going over the top again. Nothing would better fit that bill than to have ended a Intermediate (C) wave down as a diagonal.

But, you know diagonals, They could be ending or leading. In a Leading Diagonal wave 5 can not fail. It didn't in this case. That makes the odds about 50:50 from here - purely on the basis of a wave count - as to whether we go over the high again or not. 

For now, though, we need to see how this retrace wave progresses. It could have surprises. If there become only three waves up, it could easily go under the lows again. Remember, this whole FED Intervention process with the threat of QE Unlimited is specifically to do their best to fool the wave counters. 

So, get some sleep and have a good night.

TraderJoe