Bulls Need What the Bears Don't

To make a cogent case for a bullish move, Elliott Wave theory says that the move should begin with "five up" and preferably an impulsive move up in five waves. Here is the current daily closing chart of the ES futures.

ES Futures - Daily Close - Wedge

At the present it is a very tough sell in this index that there are a clear, impulsive five waves up. Currently the chart looks like it has three waves up in a wedge with a lot of overlapping structures and a diverging MACD. For weeks I have been saying that a diagonal could form but is not required. It still could, and it is still not required. In this chart wave (y) / (iii) is currently shorter in price and time than wave (w) / (i).

For the bullish consideration, either prices need to gap up out of the current wedge beyond the price length of the (w) / (i) wave, or the fourth and fifth waves of a diagonal need to form properly. While a massive gap up is possible on some news or other, I would first ask you to look at Friday's wave and compare it to the other two up waves marked by arrows. Note how those large price movements actually occurred nearer the end of their respective waves. (Right. The past is no guarantee of future results).

So, while the bearish count can tolerate a diagonal - as it might be an ending one if it forms properly - the bearish count upward simply does not require five waves. There is no reason I can see why a bearish count upward can not be a double zigzag from the low. It could even be a triple zigzag, as zigzags and not as a diagonal.

So, the bears don't need what the bulls do, but they can handle a diagonal if one is formed. The chart also shows that a fourth wave (iv) in a diagonal can not move below the low of wave (ii) or the diagonal would invalidate (actually it can not move beyond the price length of the second wave using OHLC charts).

That said 1) we do not know that upward price movement is over. In this count marginally higher prices are possible, but if the wedge turns more into a parallel channel then that would not be the right look for a diagonal wave; 2) the NQ futures may be just about to enter their fourth wave in a channel count so a valid fourth wave has some evidence going for it, and 3) the daily MACD is still diverging.

So, one still needs to be calm, patient and flexible as this wave sequence is worked through. Most people know that the ES is rubbing up against the 0.618 Fibonacci retracement of the entire down move on the weekly chart. The question is whether prices hold near here or not. The longer-term weekly chart will gain a bit more clarity once we see if there are any reactions to these levels and what the extent of them are.

It is also worth remembering that the very purpose of an upward corrective move is to convince the majority that the prior uptrend is resuming in full force when instead it intends to turn down. From a sentiment standpoint the equity put-call ratio is down to the "Zone of Speculation" again, below 0.55, at 0.52 today. It can always go a bit lower. Let's see how things go from here.

Have a excellent rest of the weekend,

TraderJoe