Real Third Waves Turn to the Left

If you have not read the prior post through to the end, you may not fully understand where this one is coming from. It's about the fact that in bull markets real third waves "turn to the left", not to the right. They usually show a pattern of increasing acceleration and momentum, not decreasing amounts of same. With that - and yesterday's example in Soybeans - we show this potential count in $TNX, the US 10-year Treasury yield, as we stated in yesterday's comment section.

$TNX - Weekly - Real Third Waves 'Turn to the Left'

First, I need to say at the outset that I do not know a contracting diagonal will form. Only, the chart shows one actual and one potential wave three "turning to the left". And, IF Treasury yields are to rise due to inflation or stagflation, this would be the likely path forward from the low. It is possible Intermediate wave (3) breaks the high, then prices could back off again in Intermediate (4) - in a wave shorter than Intermediate (2) - followed by a higher high for Intermediate (5), shorter than Intermediate (3).

As of the moment, the weekly Elliott Wave Oscillator (EWO) shows the high on a potential Intermediate (1) wave. It is likely - because of the potential diagonal shape - than the EWO would diverge on the Intermediate (3) wave, and then too into the fifth wave. Time will tell.

The alternate to the above count has to be that - if inflation suddenly and miraculously vanishes - then it is possible that wave Intermediate (1) is not exceeded higher, and only a large triangle is forming, with a lower low to be expected. Either way it is a relatively straight-forward exercise to propose outcomes for either path. At the moment, we'll go with where the fundamentals of price shocks, supply constraints, and low worker-availability are pointing.

Lastly - on this topic - we will note that in bear markets real third waves turn down and to the right. You might look to earlier instances on the $TNX chart to see cases where that has happened.

With regard to the stock market, we suggested looking for a whippy day due to the confusing employment report. And that's what happened. All day prices whipped back-and-forth in a range including 62% from Thursday's low, and settled on the 18-day SMA which was also pointed out at the time. Here is the daily chart.

With price having settled on/near the 18-day SMA, then prices need to trade below to be bearish, in which case follow-through to break the 100-SMA would also be needed. It is primarily the role of third waves to provide the power to do so. If these key price levels are not broken lower, then it is likely not a third wave being discussed.

On this chart we have also shown the key trend line down from the high. For the bulls to resume control then they would need to pop above this trend line, then back-test the line and see it hold. So next week should be key understanding the larger picture in equities.

Have an excellent start to the weekend.

TraderJoe