Wither The Wedge

Long time readers of this blog know that if a wedge-shaped price pattern is to form as a true diagonal, then the up waves AND the down waves must form as true zigzags. That said, in prior posts we noted that if the wedge was to form at all, it would ideally form from a lower low than prior days. Yesterday, as the daily chart of the ES futures shows, we got such a qualifying wave down. See the red arrow in the left panel, Panel 1.

So now the trend lines of the wedge form a better wedge shape. But, in the considerations for a true diagonal wedge we still note the following conditions that detract from the probability of a diagonal.

1. The retraces are not 62% or greater.
2. The December bottom is very, very messy. It is not crisp (Panel 1, red circle)
3. The early December drop can be also cleanly counted as a Flat wave (Panel 2).

'Usually' (most often) in a diagonal we look for wave 2 to be significantly longer in time than wave 4. And, in this case, it is really unclear how long in time such a second wave would be. Where does such a zigzag actually end?

Further, the current down move - while it can be wrangled into a zigzag (Panel 2) - is also not crisp. And we just don't know that downward movement is over.

So, when faced with such situations we must simply note that while the probability of a true diagonal wedge is a bit lower because of these factors, nothing absolutely rules it out at this point in time. What would convincingly prohibit a contracting diagonal is if the fourth leg became longer in price than the second leg as that would break the rules.

Until then, we must be flexible, cautious and patient and use technical indications as best as possible.

Have an excellent start to the day.

TraderJoe