Momentum Helps Identify Waves

Unlike yesterday, today we were able to count five-waves-up after the cash open - just not as an impulse wave. Yesterday, we were not even able to count five-waves-up. Today's 'five-up' appears to be a contracting diagonal. Let's look at why. Here is the ES 5-min chart from the low.

ES Futures - 5 Min - Tentative Channel

Here you see that when you place a tentative 'parallel' around the most vertical waves, the waves that are otherwise most likely to become wave 1  & 2, instead of seeing that massive, vertical,  spiky, gappy wave that you'd like to see for wave 3, then all that happens is you see a very compressed structure that never leaps out of the upside of the channel. To traders, this compression is venom. All it does is trap traders in the market, or cause whipsaws, or causes traders just to exit positions because "nothing is happening".

Yet, this lack of an upward spike should perk up the wave-counter's ears.  It might indicate the structure known as the contracting diagonal - IF it can be counted properly. Here is how this wave was counted.

ES Futures - 5 Min - Diagonal 3-3-3-3-3

Notice, the slanted "roof-line", and the three-wave structures each getting progressively smaller in both price and time, but yet with the requisite three marginal 'higher highs'. Then, to prove it's diagonal character - as soon as wave ((5)), up, was completed - price broke down. It pierced both the lower diagonal trend line and the lower channel line which indicates a further real loss in momentum.

To meet degree labeling requirements, the first three waves up must be counted as a,b,c to ((1)). That is because the c wave up is longer in price and time than the a wave, so the two waves 'must' be of the same degree or that c wave is of one higher degree.

Make no mistake, the at least temporary loss of momentum isn't necessarily benign. As a larger A wave up, it could eventually lead to as much as a 1.618 wave higher IFF (if-and-only-if) wave ((5)) is exceeded higher, showing the wave as a leading diagonal.

BUT, if price breaks through the low, first, before busting the high of wave ((5)), then the diagonal could be an ending diagonal. And that is one of the reasons for patience with wave counting. Diagonals are structures which can be their own alternates, particularly when they are of the 3-3-3-3-3 form. There is not yet a known case of a true 5-3-5-3-5 diagonal as ever having been an ending diagonal, so those are always leading as of this writing.

The reasons for writing this review of a diagonal - even on this short term time scale might not be obvious to you. There are people who try to count waves who -

1.  Don't draw a tentative base channel around their waves
2.  Don't try to examine the momentum in their wave by doing so
3.  Don't actually measure their waves with a Fibonacci ruler
4.  Don't verify actual three-wave or five-wave sequences
5.  Don't place a specific moving average on their wave to look for form & balance

Yet some of these same people want to tell you have their wave count is better than one that has such specificity to it. Or, they want to tell you how 'their guy'  has such a much better wave count. Yet, some people don't worry about criteria like, "In a diagonal, is wave three allowed to cut off a line from zero to wave two?".

This is one of the few sites that ponders such questions. Have an excellent rest of the evening.

TraderJoe