Mind Games & Projections

This is the second post this weekend, and if you have not read the first one, it is sort-of a prerequisite to this one. In that post, we said there are two good possibilities here 1) that a diagonal forms, or 2) that the price structure breaks above 3,943-50 which makes the diagonal much less likely, and the 2-day wedge breaks upward. Here is the daily chart again with the second possibility more clearly outlined.

So, in this case we said that because wave Minor A is likely a Leading Diagonal, then by the Principle of Alternation wave Minor C should be an impulse. We said it is possible for such a Minor C wave to subdivide. We are now at the point where we can deal with that potential impulse because the Minor B wave is "in the market".

The first and most immediate issue for the impulse higher is that the upper Daily Bollinger Band is directly ahead of the market, around 3,896 as of Sunday, but it will likely push outward after the open. Below we deal with the case where the Minor C wave subdivides.

So, if this wave is the minute wave ((i)) up, then there should be a minute wave ((ii)) pull-back, and it would likely be on the order of 50 - 62% of this current minute ((i)) wave. The invalidation level for this wave is shown. A minute ((ii)) wave can not go below the low of Minor B. Then, if there is a strong minute wave ((iii)) one has to wonder where such a wave could go? 

We showed on the second chart in yesterday's post, that the 0.618 projection of the Minor A wave is at 3,964. That would be the wave that breaks the potential diagonal. Could it go further? Yes. Eventually. Here is a weekly chart for you to review.

ES Futures - Weekly - Fib Projections

This chart contains two different Fibonacci projections. The longer lines (toward the left) are the External Retracements (ER) from the Feb - Mar 2020 decline. It is clear price is just peeking through the 1.382 ER at this time. Look at the top of the price bar two weeks ago. It was right at the 1.382 level. Was it wrong to call for a correction there? It was not. The market pulled back more than 200 S&P points in the largest decline since November. Did the price structure develop into a larger (X) wave at that time? It did not. In fact, it appears to have made another "running flat" correction: a potential sign of strength. You can see that the 1.50 and 1.618 ER's are still above this market. Could price go there? It could.

The second type of measurement is the usual forward projection from the (W) and (X) waves. Notice that the 0.618 forward projection and the 1.618 ER form a "Fib Cluster" of about 50 points in width - about three days trading in this market - between about 4,100 to 4,150. That might be a point of significant resistance to upward movement.

Again, I call this post "Mind Games" because first the market must prove it can bust the diagonal. If it can't, then more bullish scenarios are off the table. Second, have a look at this Russell 2000 weekly chart.

Notice that the Russell has just now exactly reached it's 1.62 ER with exceptional precision. So, there is a plausible reason to think that if the ES is going higher, it might be by funds rotating out of the Russell and into the larger caps. It is at least a rational case.

Again, the immediate issue for the ES is that the daily Bollinger Bands are directly over the market. The market often finds resistance there. If the market makes another high Sunday into Tuesday of this week, there will likely be a way to count a C wave of the diagonal at that location. Then the issue is to see how deep any minute wave ((ii)) is. We already know there is a potential 200+ points of risk in that wave. And, from an objective viewpoint, one must be patient to see if that 3,943-50 level breaks before assuming the higher targets. Otherwise one runs the risk of getting caught up in the exceptional bullishness of the moment. 

We shy away from being bullish or bearish in terms of determining wave counts for trading. For that we are more analytic. Being bullish or bearish is more for investment strategies and longer term time frames. And that's one reason why we don't suggest trades or investments plans - because different people have different objectives, time frames, and desired levels of risk.

Have an excellent rest of the weekend.

TraderJoe