Some Additional Notes

Way back on November 14th (post at this LINK, entitled "For Those Seeking Five-Up"), we said that it might be difficult to distinguish an Intermediate (W)-(X)-(Y)-(X)-(Z) count from a potential contracting diagonal composed of the exact same waves but labeled as Intermediate (1)-(2)-(3)-(4)-(5). The good news is that we can now add some additional notes to that discussion as per the ES 2-day chart, below.

ES Futures - 2 Day - Limitation on Diagonal

The very first note we will add is that we do not know that up movement is over yet. Daily price is still over the 18-day SMA, and so it has positive bias. Each day, the upper Bollinger Band keeps moving out a tad. Second, we will note that the current (X) wave retrace is not anywhere close to the 'typical' 62 - 81% retrace listed in the Elliott Wave Principle for second waves in diagonals. It 'could' be a wave that turns into a diagonal - anything is possible - but it bucks the odds for a diagonal for that reason.

Still, there is a very important measurement that can help separate the two counts cleanly, and that measurement is shown above. In order to make a contracting diagonal, if wave (X) is (2) in such a diagonal, then the current up wave would be (3), and the next down wave would be (4). And, wave (4), as we know must be, by 'rule', shorter than wave (2) and should overlap wave (1) - or (W).

Well, as the Fibonacci ruler shows that means the current wave (Y) or wave (3) - in the diagonal - would be limited to about 3,943 - 50, depending on how much overlap you want to see on wave (W) or (1) in the diagonal. In the sketch above, the Fibonacci ruler gives about five points of overlap. Let's say that for all intents and purposes 3,950 is a 'hard cut-off'. Anyone proposing a contracting diagonal after 3,950 would be violating a basic 'rule' of wave counting, and wave (4) would likely not overlap wave (1).

Does that mean the market can't go past 3,950? It does not. It just means that, if it does, the diagonal is ruled out, then probably the (Y) wave of the contracting wedge is extending. The (Y) wave of a double-zigzag is not required to be in a wedge. It could push the upper wedge boundary outward to form a better parallel with the lower wedge boundary on the two-day chart shown yesterday. How could such a thing happen from a wave counting view-point? Let's go closer in on the 1-day chart, below.

ES Futures - Daily - Status

This chart shows the current wedge line (dashed cyan color) and a strict Elliott parallel channel for a zigzag (solid magenta color). We can see that the Minor A wave is a Leading Contracting Diagonal. It was a stinker of a count taking more than three months, but it has been exceeded higher, proving itself as Leading rather than ending. Then, there was minute ((a)), ((b)), ((c)) downward to the Minor B wave in which the minute ((b)) wave was that next contracting wedge that looked very much like a diagonal, but can only count as it's triple zigzag counterpart, upward, minuet (w),(x),(y),(x),(z). We know this because that wedge was not exceeded lower in less time than the wedge - or potential diagonal - took to build. 

Then, the minute ((c)) wave down is either the contracting diagonal with poor form, as an ending diagonal, that I sketched out a couple of times in prior posts, or it was a 'three' and not a five. In the later case then Minor B can be counted as minute ((w)), ((x)), ((y)). Either is acceptable, but counting in real-time I think it was the former - as it is too complex to have minuet (w)-(x)-(y)-(x)-(z) inside of the larger minute ((w))-((x))-((y)). You can see it as you like, I know what if felt like and counted like in real time.

So, that leaves us with the Minor C wave, up. If the wedge and/or parallel lines hold - for the 'possibility' of a diagonal count, then the Minor C wave could be nearly over: maybe another wave up Sunday into Tuesday. But, if wave C subdivides into five minute waves as is very typical, then the wedge could break upwards. If the current high is part of minute ((i)), then a minute ((ii)) wave down that holds last week's low would likely form, next, before a minute wave ((iii)) forms to break the high again.

So, because the wave (X) retracement was not the typical 62 - 81% retrace wave, and because a Minor C wave could easily subdivide, then we must ascribe some real probability to the wedge breaking upward - perhaps on the passage of a new stimulus measure or some other news. If that occurs then we look to other Fibonacci ratios shown in this chart where wave (Y) becomes 62% of wave (W) or tries to reach for equality with the same.

We have to note that while the Dow has not even made a new all time intraday high, yet, it has bounced strongly higher off of the February, 2020 high on a weekly chart. Blog readers are encouraged to investigate that aspect of the count. For our part, we have no particular bias at this time other than that provided by the relationship of price to the 18-day SMA. Clearly, for the contracting diagonal count, the Dow 'must' make a new high for a wave (3) as also required by the 'rules'.

We remain flexible, patient and calm and are counting waves in real time. Yes, sentiment is over-heated at this time, and volume is declining. But, the sentiment situation is not as bad as it was a couple of weeks ago. Still, it is enough of a problem to keep one on their toes.

Have an excellent rest of the weekend.

TraderJoe