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