Year-End Clean-Up

I was looking over both the down count and the up count, particularly with an eye to try to explain just where this recent accelerating wave came from. Also, I wanted specifically to see if I could find any counts that channeled particularly well, and/or had good Fibonacci relationships. In this regard, we also note the ES futures (continuous contract) are already over the prior 2022 high - while the SP500 cash is lagging a bit. I expect that might be resolved in the New Year. OK, so here is the first channel count: the down count from 2022 on an ES 2-day chart.

ES Futures - 2 Day - Down Count in 2022

The only satisfying count I can find that meets these criteria is a Leading Contracting Diagonal A wave, followed by an Impulse C wave where B is a complex Expanded Flat. In the count C < A in the channel (about 78.6%). This allows the downward wave to be counted as either Intermediate (A) down of a large Expanded Flat or Intermediate (2) down of a Primary Contracting Ending Diagonal, up. 

Now for the up count since the October low.

ES Futures - 3 Day - Channel Count Up

What struck me about this most recent up wave is where did it come from? It seems to have third wave acceleration characteristics, and one must remember that C waves are in third wave positions. So, do we overall have an Expanding Leading Diagonal A wave, now proven by an already higher impulse C wave? Again, both of these counts are in a channel, and the alternation in the corrective wave would work well.

Further, within the expanding diagonal A wave, wave minute-v (circle-v) is 1.618 x minute-iii (circle-iii), and if a non-limiting triangle is considered for minuet (b), then within minute-v (circle-v) minuet (c) = (a), another excellent Fibonacci relationship. And, from a degree perspective wave Minor B is the largest down wave on the chart.

So, now if there is a simple zigzag A,B,C up, then it is even more possible to have either an Intermediate (B) wave, up, or an Intermediate (3) wave up, over the high, in a Primary 5th wave contracting ending diagonal.

We must be clear. There is nothing to conclude yet, that the up wave is over. Tuesday is the start of a new month and a new quarter which may see the characteristic flows from the usual sources (pension funds, 401k's, company bonus plans, dividend reinvestment schemes, etc.). So, we will continue to count locally while we note these potential relationships.

Have an excellent end to a somewhat confusing, but, albeit better year.

TraderJoe

Wedge w Overlap

I'm not sure if this pattern will play out on the SPY 15-min chart, and it might take some time. But it is possible we have a wedge count with overlap, w-x-y to a ⓑ-3 wave, up, from an ⓐ-3 wave down. We know price went over the high, so the large down move likely does not count impulsively, even though portions of it look impulsive.

Note that the potential double zigzag does have the suggested overlap and x is larger than the prior (b). Such a pattern might be a fourth wave in the "A" wave, up. And it might be needed to generate some bearishness with the extreme sentiment readings we are seeing now. For this pattern to play out, look for a five-waves-down pattern, and a retrace that does not go over the y wave high.

Have an excellent rest of the day,

TraderJoe

S&P500 Since 2009

There are some interesting features on this chart. Try to review the degree labels and see if they make sense to you. On the semi-log scale shown the degree labels can be defended, but it would be great to get your feedback on it.

Again, for this count to materialize, wave Intermediate (3) 'must' make a new all-time high, then an overlapping fourth wave, (4), would be looked for. This would be followed by a fifth wave up, (5).

The count would reflect the "too-far, too-fast" nature of the stock market's rise since 2009. A couple of the applicable Fibonacci ratios are shown. For example, wave ③ = 2.618 x ①, and wave ④ = 0.382 times wave ③ - when measured from the top of wave ③, itself, not the top of Intermediate (X). Keep in mind these are the Fibonacci ratios on the semi-log scale.

From a degree labeling perspective, waves IV and V are Cycle degree, waves ① - ⑤ are Primary degree and waves (1) - (5) are Intermediate degree.

Diagonal diagram added from Frost & Prechter, Figure 8.

Have a great rest of the holiday weekend.

TraderJoe

SPY 5-min Exercise

This exercise was done today largely in real-time after noon (following a morning haircut). Readers can confirm this by reading the comments in the prior post. Please look over the count in detail. It is heavily annotated. This exercise was done to show the types of counting decisions that should be made by you in your real-time wave counting.

SPY Cash - 5 Min - Counting Exercise

Starting over on the left, there was this morning's gap up, then a decline that does not look like five-waves down, followed by waves up to 10:15 am that also do not look like five-waves-up. When I got back from the haircut, I was counting to see if we would get down to the 78.6% Fibonacci level. We did around 13:15, and I was able to count five-waves-down in that sequence including a contracting leading diagonal that started with a bearish engulfing candle. But, because of the only three-waves up to 10:15 I had my suspicions that those five waves would be the five waves that end the c-5 wave of a flat.

At about 13:15 there was an immediate bullish engulfing candle, and then a further diagonal which formed. At that point, I also sketched in the parallel trend lines. From the diagonal it was impossible to know if that would be a ① wave, an Ⓐ wave, or a Ⓒ wave if my down count was in error. So, I suspended judgement until the high of the diagonal was exceeded. When it was, the odds tilted very much in favor that the overall count would become a simple (a), (b), (c) up - even if the internals were tortured and twisted.

During the afternoon the 100% level of the formative wave sequences was passed, and this count seems relatively verified. There are a couple of other things not labeled you should try to find. Can you find the three bearish red crows in the down wave? Can you find the three bullish green soldiers in the up wave? These were also key aspects of following a count.

So what is the purpose of this post? The main purpose is not what you might think. The main purpose is this: you will note at one point during the count I was required to suspend judgement until I knew whether the second diagonal a) would be leading or ending, and b) if leading would it be a ①, or would it be an Ⓐ. So, these are the two questions I have for you.

Do you know the basic Elliott Wave patterns well enough so that you could complete this exercise? If you don't, you are encouraged to review them over & over & over until they are second nature. But second, and perhaps more importantly - can you suspend judgement simply and easily in portions of the count where the pattern is unclear because of a potential diagonal or a triangle or some other factor, rather than needing to know the count at every single stage of a rise or fall? 

I did not know certain things in this count, but I still made a few pennies off of doing what was most likely with appropriate stops around the uncertain items, even on a day when the volume is 'holiday light' and some people advise not trading. Can you do the same? Can you suspend judgement where you need to, and just accept that as part of the wave-counting experience? If you can't, you might have trouble with being a wave counter. For it is the nature of Elliott wave that there are some uncertainties. Elliott Wave can not reduce all trading uncertainty, or wave counting uncertainty. A heavy dose of patience, calm and flexibility is needed in counting waves. That's all there is to it.

Here is just one other observation to note. Look at how the bull (green) volume increased at the end of the trading day. So, here is the item to ask, "just why weren't those green people buying at the (b) wave low, after the bullish engulfing candle, rather than waiting until the end of the day and price had dragged them all upward?"

That is the key Elliott Wave question. Everyone (that is - the masses) gets bullish at the highs, and bearish at the lows. Try to use EW to try to help yourself from being in that position.

Have an excellent start to the evening.

TraderJoe

Survival by 2 pts ?

It's not for sure yet, but the A wave may have survived the current count by 2 pts in the ES futures. Here is the chart.

ES Futures - 8 Hr - A Wave Possible

The overnight high was 4824.25, and the max is 4826.25 based on this chart. It looks like there would be a gap down at the open, but that needs to be monitored. If the count busts, we'll switch to the alternate red count shown in the prior post. As always with a trending move, confirmation of a change in count should be sought. In this case, at minimum five-waves down and a retrace that does not go over the high would be only a first step.

Have an excellent start to the day.

TraderJoe

The Double-Zigzag, Overlap, Degree & Market Status

I have written about this topic before, but the current market environment provides the ideal opportunity to revisit and elaborate. When people don't use fixed rules for determining wave counts it is literally possible to develop "any" wave count and to have unrealistic questions about the current market environment. There are definitely fixed rules that I use to suggest a count is a double zigzag (versus a single zigzag or an impulse). Let's look at a diagram of an idealized double zigzag. We'll look at the market example second.

Double-Zigzag Idealized

These are the Fibonacci Five important fixed rules in use.

1. The first zigzag is a 5-3-5 sequence. Here is it hard to tell if the market will impulse or not. So, the Principle of Equivalence applies in the first zigzag as a,b,c is i,ii,iii until it is not.
2. The first zigzag is labeled a-b-c, and if there is to be a second zigzag, the first zigzag makes up the W wave.
3. Clearly the W wave is 'larger degree' than the a-b-c because "as a whole" it is larger in price and time than any of the single contained waves (i.e. larger than the a, the b, or the c alone). The lower-case letters are smaller degree. The upper-case letters are larger degree.
4. In a double zigzag, the X wave 'must' have overlap with the 'a' wave of the first zigzag. It is this overlap that prevents the further counting of the first wave as an impulse structure - because if it were a fourth wave - then, by rule, it may not overlap with wave 'i' up of the prior structure. This overlap is what negates the Principle of Equivalence and says the a,b,c is just that.
5. The X wave then 'must' or is very, very likely to be larger in either price or time than the 'b' wave as it is 'also' of larger degree. Therefore, a double zigzag 'must' be labeled as W-X-Y and not as a-b-c-x-a-b-c and that is because the lower-case 'x' implies that 'x' is of the 'same degree' as a-b-c and that is almost certainly not true.

So, how does this apply in the current market environment? Let's have a look at the two-day ES futures and see each of these rules in play.

ES Futures - 2 Day - Double Zigzag Forming? 

Application of the Rules to the Current Market

1. Starting from the lower left there is an expanding diagonal five-wave Minor A wave, up. This is followed by a 30 bar Minor B wave down, and a longer impulse C wave higher which did not make a 1.618 extension. Up until this point The Principle of Equivalence applied, and as I had showed earlier the wave could be labeled as 1,2,3 - as they eventually were in the NDX.
2. The Minor A,B,C, make up the Intermediate (W) wave. The Intermediate symbol ( ) is of larger degree than the Minor (capital letter) symbol. 
3. (W) is a larger degree wave, and the (W) wave is larger as a whole than any of its components.
4. The (X) wave then ensues. Critically, it overlaps the prior A wave and negates the Principle of Equivalence, forcing only the A,B,C count and not the 1,2,3 count.  The (X) wave is 32 bars in length. It is larger in time than the lower degree B wave, and therefore (X) is larger degree than B, the prior wave in the same direction. The Fibonacci ruler also shows that (X) is larger in price traveled than B, as well.
5. If the structure plays out it will be labeled as the double zigzag (W)-(X)-(Y). Currently, price is likely in the next Minor A wave, up, of the series.

The Fibonacci Five rules were applied above. What does this imply for the current wave upward since the recent October low?

In yesterday's post, the wave structure suggests that the current price in SP500 (SPX) should not exceed 4,771 to maintain the five waves up with the extended first wave. But what if it does? What if this up wave becomes longer in price than that?

First, we note there are no overlaps in the current structure. So zigzag labeling likely does not yet apply. Then, using the 0 - 2 trend line guideline, this would be the next most-likely structure.

Again, the above chart alternate is currently for example purposes only. But first note there simply are no overlaps to suggest the market is not strong and is not impulsive. The 0  - 2 guideline would then suggest that the largest trough to the right is the larger degree wave (ii), assuming the 1 symbol in this case is for the lower degree micro degree, say. And the current wave up is wave (iii) which would make sense only if the price limit for the main count is exceeded. Exceeding that limit would also suggest extraordinary strength as in a (iii) wave.

(P.S. Why was this structure suggested as the alternate at this time? It is because wave 5 measures exceptionally small compared to 1 or 3. The wave principle is about measurement, form and balance which suggest the main count over this alternate. This alternate is possible but just less likely at this time).

This explains the situation as clearly and precisely as I can with regard to double-zigzags. Regular readers of this blog will also clearly note how it is the overlapping nature of the (X) waves in double and triple zigzags that also results in the contracting and expanding diagonals. These waves are not impulsive. They are motive, and can move price in a direction, but they are not impulsive. It's just that those overlapping (X) waves can be labeled as (2) & (4) within the diagonals, only!

I hope this helps address the topic. You will likely not find such a full explanation elsewhere. I know that these "no-pullback" waves tend to suggest zigzags. But not always. Sometimes they represent extended first wave sequences, and the analyst must be alert to it.

This is the second post this weekend, and if you have not read the first one, you are invited to read it now. 

Have an excellent rest of the weekend,

TraderJoe

Measurement - Note

The chart below is of the SP500 (cash), SPX, 2-Hr time frame. We note that in the current count under consideration, the SPX cannot make a new all-time high with only the sub-waves, below. Meanwhile the DJIA has already made the new all-time-high.

S&P500 Cash Index - 2 Hr - Likely Count

This count would max out at 4,770.99 but the prior all-time-high was 4,818.62 so it remains a bit of the way off. The primary reason for bringing this up is the following.

If the S&P500 is to make an ending contracting diagonal, then it would likely have to have a retrace and then another leg up, counted as (W)-(X)-(Y) to the third wave of the diagonal. As noted previously this double zigzag would still be acceptable in a diagonal, but it does run slightly afoul of a guideline. But if there is no retrace & further extension or higher all-time-high, a diagonal third wave could not be considered for this index. And that would leave only a "B" wave count of some type for the indexes. Meanwhile, the Dow has made the new all-time-high already and can be considered already for either the diagonal count or the "B" wave style count.

It is way too early to say which will occur. But seasonality and a year-end rally, along with new money from the "first of the month - of January - effect" after a dip could provide the needed new all-time-high in the SP500. 

Yet while these are "likely" based on history, they do not have to happen. On some measures, sentiment is quite extreme in the short run. If - for some reason - they don't, then either the diagonal will not occur, or the count above would have to be modified.

Right now, things are on track. Let's see how they go.

TraderJoe

Measurement

Here is the calculation on the up wave for whether ⑤ remains less than ③. Always use OHLC bars or candles. Always do the calculation in futures, as they use have greater traveling ranges than cash.

Have a good start to the evening,

TraderJoe

Up Wave Structure

The ES 2-hr futures (RTH only) shows the structure of the up wave well with about 122 candles on the chart, as below, and using The Eight-Fold-Path Methodology for an Impulse wave.

The first wave up may be the extended wave, x①, and has the highest Elliott Wave Oscillator value. The 0 - ② trend line identifies the end of wave ③ ala Neely. And the return of the EWO to the zero line - or near it - identifies wave ④. And the current wave - likely wave ⑤ - is diverging on the EWO.

In this count, wave ⑤ should not exceed the length of wave ③. To the downside not much happens until the lower trend line 0 - ④ is exceeded lower, back tests, and/or fails.

Have an excellent start to the evening,

TraderJoe

 

IF the Dow goes over the high in 2023 or early 2024

If the Dow goes over its high in the remainder of 2023 or early 2024, then we need to be completely open minded to the contracting diagonal possibility I have noted several times in the past. As a reminder, it now looks like this on the Monthly Chart of the Dow.

Because sentiment is getting quite bullish, price could retrace down closer to the (B) wave within a few days. But then, a holiday rally might take the Dow over the all-time-high again. For the short term, wave (C) of ③ should not trade under the (B) wave to remain valid. This is clearly marked on the chart.

Then, IF and only IF a new all-time-high is made one can suggest it might be the larger diagonal that is forming. It may take a while, but the MACD is currently above the zero line on this time frame. So, keep it in mind for now until we know more.

After (and only after) a new all-time-high could there be a fourth wave down, ④ which should overlap in a diagonal wave and might re-test or throw-slightly-under the lower uptrend line. Let's see how this plays out and IF it plays out.

Have an excellent rest of the weekend,

TraderJoe

Mean Green Machines

I'm a bit envious of the Smart Money that has the machines. What a tool. See below for a little more explanation. The ES futures made overnight lows on the US Payroll Employment Report. That's the large down bar on the left of the chart, below. Little of that was seen by the cash open. Further, the Consumer Confidence Inflation Expectations came out more benign at 10 AM, and the ES put on another leg higher. Here is the ES 10-min chart.

Beginning about 10:10 am there was a three-wave-sequence downward, until about noon, and roughly then, you could tell "someone turned on the machines", much like you can tell when the casino 'turns off the slot machine' and you get no winners until your stake runs out. Look at that long and choppy pattern to a new high. It looks like and can be counted like it is 'five-waves-up'. Yet it in no way has the same impulsive character of the preceding up waves. Still, it grinds and grinds to a new higher high with not even a 38% percent pull-back along the way. "Hello Machines" - to keep prices higher into the Friday daily, and weekly close. It's similar technology. They monitor your account. They control the algorithms. You are being traded against. They are the house. You (and I) are not.

From a wave-counting perspective, that wave came out two-points-shy of validating an expanding diagonal wave. Then the cash market closed. An expanding diagonal could still occur, but not below the low of what is marked wave ④ - and the local wave-counting-stop.

From a non-wave perspective, it feels like something is going to happen soon. The reaction of the equity markets to everything is bullish. The Payroll Employment Report doesn't matter, but, oh, it's the Consumer Expectations report that really matters. Yeah, right (uh, no).

So, stay tuned. A number of things are falling into place. It will be interesting when they do.

Have an excellent start to the evening and the weekend,

TraderJoe

Gappy & Trappy

A gappy and trappy triangle can still be valid in the SPY 30-min cash index. We have been following such for several days. The US Payroll Employment report is tomorrow.

The report might have a lot to say about the triangle. If the reaction is really bad, Friday could be an entire down day provided the triangle does not travel below the low of wave (c). If the reaction is initially bad but turns around higher the (e) wave might just be another spike lower.

Today the (d) wave got over the prior x wave of (c) but - from these quotes - the prior gap near the high was not yet closed.

What is making these triangles so treacherous is that the proportions are a little stilted. The retraces are both a bit greater than 78%, so it makes it a bit more difficult to know where the legs will stop. But these are likely machine made triangles - where the machines are exercising the control, and that is probably needed to keep them profitable and traders less so.

Regardless, the pattern is full of holes - like Swiss cheese - and often the gaps from triangles fill. It may take a few days but 'often' (not always) they fill.

Oh, and a word of caution, it looks like some data services are doing their 'futures contract roll over" tonight as this is written. That will throw a wrench into the mix.

Have an excellent start to the evening,

TraderJoe

ES Daily - Outside Day Down

In somewhat tricky action the daily ES futures contract made an outside day down. And in doing so the daily slow stochastic lost its embedded status - all as of the cash close.

As we indicated in the comments for the prior post earlier, the DJIA (YM) futures made a new higher high today. We were expecting such and we also called a >78.6% upward wave in the ES today and began counting a downward wave. We said such a wave could be part of a potential smaller triangle. That smaller potential triangle invalidated. There could still be other downward structures - including a larger triangle - that would eventually result in a further new high, but the loss of the embedded reading is problematic, and the market will have to prove it.

In the ES, there is potentially a lower high and a lower low, and if price closes below the 18-day SMA it might trigger some more significant selling - perhaps to the lower daily Bollinger Band. 

So, we remain flexible, calm and patient. We did our best to count upward today; the market wasn't having it. Maybe it will eventually, but for now this remains to be demonstrated. 

So far, the Dow (YM), the SPY and the NQ are over their July highs. The ES, the SPX and the RTY are not. It's a fractured situation, but it is what it is. And one wonders of it could be resolved eventually. For the moment, we just count what we see.

Have an excellent start to the evening,

TraderJoe

So Slow ...

The cash chart of the SPY 15-min ETF is below. Today's price movements were slow, controlled and largely contracting.

Some tentative trend lines were roughed in. The major question to be asked from the coiling action is, "are we consolidating just the drop of 4 Dec - as in a fourth wave which is not upwardly overlapping yet- or are we consolidating the larger prior rise with a triangle?"

Some news in the next few mornings is likely needed to provide some cover for the breaking of the stalemate. Clearly, the situation demands patience, calm and flexibility. The odds are roughly equal, but the downside might come more into focus if the ES loses its embedded status on the daily chart. As of the cash close that hadn't happened yet.

Have an excellent start to the evening.

TraderJoe

Extended Fifth Wave?

Is the Dow Jones Industrial Average making an extended fifth wave as per the Dow (YM) futures 4-hr chart, below?

DJIA (YM) Futures - 4 Hr - Extended Fifth?

Here is what Glen Neely writes in his book, Mastering Elliott Wave, about this prospect.

Page 5-12 (Formation of ..) Fifth Wave Extension

It is during a fifth wave extension that wave-3 will normally be related to wave-1 by 161.8%. The 5th wave most commonly will relate to the entire move from the beginning of wave-1 to the end of wave-3 by 161.8% added to the end of wave-3 or wave-4.

Page 6-2 (Correction Following...) Fifth Wave Extension

The correction following a 5th extension pattern must retrace at least 61.8% of the 5th wave but must not retrace all of the 5th wave IF the trend is to remain in effect. If the 5th wave does get completely retraced, it indicates the extension terminated a larger trend. Here are the different ways that can happen: 

1. The 5th extension pattern was part of a larger impulse which was also part of a fifth wave extension; or,
2. The 5th extension pattern was the c-wave of a Flat or Zigzag pattern.

With regard to the first page reference (p 5-12), this measure indicates the construction may have a short way to go yet.

With regard to the second reference (p 6-2), it would be interesting to see if this pattern ends both the zigzag pattern at the Minor degree and the Flat pattern at the Intermediate degree. This, again, only applies if the entire wave is retraced. Otherwise look for a minimum of a 61.8% retracement (in Neely's view).

Have an excellent start to the weekend.

TJ