Follow the Procedures - 2

Elliott Wave counting does not reduce market risk to nothing. If it did, there would be no market. But having clear, defined procedures helps reduce the additional risk posed when a trader's emotions further cloud the market picture. One such clear procedure is the use of the Bill Williams' Alligator and fractals on the daily chart. Another clear procedure is the use of Elliott parallel trend channels to help define whether momentum is with or against the market. Below is the current situation with Willams' daily Alligator and fractals. (This is an update from the "Follow the Procedures" post at this LINK which did provide a valid five-waves-down sequence).

The last week's daily market action created a daily down (red) fractal at the May 2 low. It also created a valid up (green) fractal at the May 4 interim high.

We note that on Friday, the market held off making a new low below the 2 May down fractal, but it clearly did come within 90% of the low. This measurement allows a Flat wave to form legally and possibly revisit the May 4 high. However, at this time, the up fractal at that location is below the upper limit of the gator at that level. Therefore, if that fractal is exceeded upward, it might only be a trap fractal.

Similarly, if on Monday the market is inclined to continue making lows, then it is still possible to form a larger flat or expanded flat wave.  Why the focus on a flat wave? First, the volatility index while still at a very whippy level of 30 did back off from higher levels on Friday. Here is the chart of the daily VIX.

If the VIX continues lower, then it could easily retrace to support at the 18-day and 100-day SMA. This would likely represent a concomitant increase in US equity prices.

A second reason is that since the 29 March high there have been 20 downward days to the low, but only three up days since to the 5 May high. This seems very disproportional in terms of time at this moment. So, a flat wave could extend this correction further in terms of time.

A third reason is a bit more straight-forward. If we look at the ES 1-hour chart, below, we see some of the local parallel channels.

As of Friday's close, we could only count three waves up, and a similar three waves down. So, first one needs to ask the question, "why can't we count five-waves-down as of the end of the day?" Next, we need to watch the upper trend line of the most recent down parallel to see whether it holds allowing lower prices or whether it breaks higher on Monday. We might know this answer before Monday's opening bell.

Yes, there clearly are ways the B wave of a flat can extend downward - which would involve breaking the prior daily down (red) fractal. But right now, such further downward movement is not in evidence. And such is the way that risk is maintained in the market even in the face of a reasonably well-described wave count.  It is the very structure of corrections (flats, expanded flats, zigzags, combinations and triangles) that often expands this risk within limits.

Clearly, the above structure looks like a traditional head & shoulders top - which would provide a clear downside wave-counting target. But, at this time the five waves down needed to activate and follow that count are difficult to find.

Further, there is a new five-wave-sequence upward (:5) without a new low yet. So, while we clearly see the possibility of more daily downside waves eventually, we need to "think globally" but count locally.

Have an excellent rest of the weekend.

TraderJoe