Will it Activate?

Below is the 2-Day chart of the NQ 100 futures, and our consistent Elliott Wave Count since the low. To recap briefly, there is a Leading Expanding Diagonal as an A/1 wave up off the of the low, followed by a B/2 wave down and followed by a C/3 wave to the 1.618 extension. The up-wave channels decently, and IF the count is A,B,C up then there is good alternation in a corrective wave with a leading diagonal being followed by an impulse wave. Of course, if the count is 1,2,3 (by the Principle of Equivalence) then wave 3 is the required impulse structure. This is one of the best illustrations of The Principle of Equivalence you will see because all requirements for both structures are exactly in place. Note that the EWO on this time-frame is still within possible fourth wave territory.

Now, IF the NQ is headed downward, it looks like it would be doing so as an expanding diagonal - at least at the beginning. So far, the structure has (iii) > (i), (iv) > (ii) and (iv) overlaps wave (i) without traveling beyond the end of wave (ii). Now, in order to activate a true diagonal, then wave (v) 'must', by the rules, become longer than wave (iii). So let's look more closely at the daily chart.

The daily chart shows the activation level for a true diagonal is below 14,412.00 This would also likely fill gap 1. Then, it is also common for a fifth wave in a diagonal to extend to 1.618 x (iii). If this happens it would likely take wave (v) to around the 13,604 level or lower. Then there would be the potential to also fill gap 2. 

Likely, if this happens, more & more market participants will begin to assess that the market's direction is lower. The ES would be trading below its 200-day SMA, and the Russell 2000 would likely break the weekly low. Of course, there could be substantial retraces anywhere along the way. 

There are two key items to keep in mind. First, the diagonal could convert to an impulse under the right circumstances. We showed in the comments for a prior post how the Dow converted a well-formed contracting leading diagonal into an impulse wave simply by adding & adding multiple waves to the structure. Second, until there is overlap with wave A/1, up - by The Principle of Equivalence - the diagonal can also be considered as its native three zigzags (w), (x), (y), (x), (z) and still be a fourth wave, 4, in this case. Because of the position of the other indexes, it seems this wave 4 would have lower odds, maybe 30-70 against forming wave 4 at this point. But we count every index separately. 

So why is the market doing this? It's all sentiment. The public and the hedge funds are desperate that the magnificent-7 stocks are the darlings and will carry the markets to new highs. So, the move off the high is a grinding one rather than an immediate impulse because so many opinions have to be changed if the market is to move lower. Make no mistake, a wave 4 in the NQ could still turn out to be a correct view, but right now it is just that increasing odds are against it.

Have an excellent start to the weekend,

TraderJoe