DOW Ekes Out its Own Alternate

Regular readers of this site simply know by now that we have been counting out a contracting ending diagonal for the Dow and the SPX for months and months. That Elliott Wave count comprised of three-wave sequences is shown on the 2-weekly chart of the Dow futures in log scale format below in blue. Because I have gone over it time and again, I won't spend much time on the count details. Readers should review it.

Dow Futures (YM) - 2 Wk - Diagonal Count

The reasons the above count 'works' to the extent it does are the following: First, in log scale, reflecting inflation over a long time, wave (3) is much less in price than wave (1). The Fibo scale on the upper left shows that (3) is less than 0.786 x (1). Second, wave (4) overlaps wave (1) and is shorter than wave (2) on this scale. Third, in 147 bars, the count follows The Eight-Fold-Path-Method with the EWO dipping below zero for wave (4). And fourth, there are no time or price degree violations in the count which seems to agree with the degree definitions as well.

But The Principle of Equivalence says we must at least be aware of potential similar counts and see what they suggest in terms of eventual market progress. And, to honor that principle, we note that just this week the Dow and its futures eked out a longer wave on an arithmetic scale than its wave (1). We commented on this several times back in January that the S&P500 had made a longer wave up, but the Dow hadn't. It seemed odd. With that in mind, here is the alternate in the Dow.

Now note that, again on arithmetic scale, wave (3) is now slightly longer than wave (1). So, that would suggest the alternate of an expanding diagonal, rather than a contracting one, but again, only on arithmetic scale. So, automatically, one factor against this alternate count is that it doesn't account well for the considerable experienced inflation over the five-year span. Second, to count this wave there would be a degree violation that we have written about repeatedly that circle-ii, or ((ii)), would be longer in time than Intermediate (2), the next higher degree wave in the same direction, and this would seem to be a degree violation. Third, this count would not reflect a fourth wave where the EWO drops below the zero line in April of this year.

So, The Principle of Equivalence suggests that we keep the original diagonal as the main count. We have done "due diligence" and looked at the alternate suggested by the arithmetically longer wave (3), but it still has a number of drawbacks and is not as compelling at this time. So, we stay with the main count, with a sharp eye on the alternate in the back-of-one's-mind. Why? Because there is no clear evidence that price has started retreating yet, as it will inevitably do one day. Also, while Elliott said to chart in both arithmetic and log scales, he did not say how to resolve conflicts between the two.

Further, if there is a recession and/or the FED does something unexpected, as they did on Friday, by easing the situation in the reverse repo market yet again, then it could further bend or morph the count by changing the value of the yardstick further, creating the false impression of higher prices, relative to GOLD, say.

Lastly, we have not seen the impact of inflows that might occur as of the first trading day of the month, even though many sentiment indicators are getting red-hot in terms of the percent bullishness. So again, patience, caution and flexibility continue to be vital tools in understanding this market.

Have an excellent rest of the weekend,

TraderJoe

Only Two of Us?

Here's a short Elliott Wave video, by a person who also disagreed with Prechter at the tail end of last year, too.

Are there only two of us? Regardless, The Principle of Equivalence says that a trend change hasn't occurred until new highs are no longer made. And Ira's work suggests there is no trend change until there is a lower low and lower high under the 18-day SMA. As of this writing, there was a new higher high at 23:00 in the overnight futures session. Further, there is progress on China tariffs & there are earnings for AMZN and AAPL after the close tonight.

One thing I will add is the equity-only put-call ratio for yesterday ($CPCE on stockcharts.com) was 0.44 which is back well into the Zone of Speculation and lower than the Sep-Oct lows, but not lower than the May lows.

So, patience, calm and flexibility remain the order of the day, and local technical indications will have to provide short-term guidance.

Have an excellent rest of the day.

TJ

Just Thinking Out Loud - 2

In the last post (seen at this LINK), the option of an expanding triangle option was explored. And it is a viable option. Still, there are some contraindications of a triangle that should be talked about. The first and foremost of these is that we don't know that upward movement is over. A certain amount of upward movement could still fit within the range of the expanding triangle, but if it goes too far up, then the expanded flat - or even a further upward wave - should be considered. The second consideration is the time of the Ⓒ wave down. It is quite short in time and looks very sharp compared even to the Ⓐ wave down. So, it might just be the initiation wave of the expanded flat, the (a) wave, with the Minor A wave location moved forward to the location shown in the SPY/ES (CFD) 4-hr chart shown below.

If so, then the current up wave can be counted as w,x,y as part or all of the upward (b) wave of the expanded flat. The time scale shows that the y wave is 2x the time of the current w wave, upward, and the EWO/AO shows it is currently on a 4-hr divergence which is not yet confirmed by red bars.

One implication of the expanded flat is that it could travel significantly lower than just the Ⓔ wave of the expanding triangle. The (c) wave of an expanded flat could travel 1.618 x (a) or even 2.618 x (a) without batting an eyelash. Meanwhile. the Ⓔ wave of the expanding triangle is limited to 1.5 x by rule.

But, even more than that, the expanded flat can start a more complicated series of waves - such as a double-three (double Flat), or a Flat-X-Zigzag to waste more time or create more downward movement if it wants.

So, bottom line, we don't know upward movement is over. Price is still over the 18-day SMA. And IFF downward movement should begin earnest, we should keep two things in mind at the same time. Those are the expanding triangle, and the expanded flat, with its potential extensions.

This is all part of The Principle of Equivalence I have developed which requires some disqualifying information to rule out certain wave segments before proposing that one wave count is more certain, or has better odds, than other.

Until we learn more perspective, patience, calm and flexibility are still the order of the day.

Have an excellent rest of the weekend,

TraderJoe

Just Thinking Out Loud

In the prior post I sketched in some tentative trend lines, labeled them as such, and said they could likely be modified. Part of the reason I did that for the pattern people is to show some of the silliness of trying to call waves in either The Fourth Wave Conundrum, or the (very similar) B wave position. Mostly all of those who have read up on their Elliott Wave know that triangles mostly occur in 4th, B or X wave positions, see more below the chart. So here are the modified trend lines the market suggested today on the SPY 4-hr chart, below.

SPY Cash - 4 Hr - Possible Expanding Triangle

Still in the category of thinking out loud, this pattern is one of the rarest triangles, it is the expanding form of the triangle. I have suggested it because The Elliott Wave Principle suggests that the legs (by rule) should not be more than 150% extensions. So far, they are not in the cash SPY market.

But the pattern is still a suggestion. If price proceeds too far, it may be the Expanded Flat we are dealing with or perhaps a last impulse. 

This may seem a little "loosey-goosey" but recall that I did suggest a contracting triangle was not likely because of the 90% legs. Those just aren't common in contracting triangles. Still, the bottom line is that price is above the 18-day SMA, and it is until it isn't. So, it has been saying the bias is up, and it has been.

Further, with today's action there just isn't a downside trend established yet - even though prices can pull back at any moment.

Two of the key observations Neely has made about expanding triangles - if this is one - are that 1) they are very rarely in the fourth wave position. He has never seen one there. OK. This one would be in the B wave position, adhering to that observation, and 2) the up wave after a corrective expanding triangle can, and often does, fail.

So, let's see how it goes. It's Friday. Fridays often - not always - end on a high note that carries over into Monday and then follow with a Tuesday reversal. It's just a pattern. It may play out or not this time. But many here felt the whippy action is reminiscent of a triangle. Yet we couldn't find the proper way to count such. This may explain the feeling. It may not. Regardless, the whippy and gappy action is downright silly, and often does reflect what happens in a true triangle. So, don't be discouraged. Reversals may come, have come, and though it doesn't seem like it on certain days, they can be sharp. So, use the regular technical-analysis until the count comes along that makes sense. Keep this one in one back-pocket, and the expanded flat in another back pocket.

Stay calm, patient and flexible. And have a good start to the evening and the weekend.

TraderJoe

P.S. The other places triangles show up in an Elliott Wave count is in the Y wave position of W-X-Y and in the Z wave position in a W-X-Y-X-Z, if the triangles are not in the any of the X waves.

Scamper Back to 18-day SMA

Sort-of as promised, the algo's are having their way with this wave as U.S. equity prices, as measured by the daily ES E-mini futures failed to make a new high today and, in fact, headed back to the 18-day SMA, often the neutral point on the chart, to figure out what to do next. The daily chart is below. Note that intraday, the highs of each of the possible upward first waves were overlapped downward today. Also observe the daily slow stochastic is only in over-bought territory and is not embedded.

The new blue trend lines are tentative only and I think they will be adjusted later. There 'might' be a triangle in the making but with lower odds. Why? See the chart below which is the 4-hr chart.

Notice that twice in the last two days, price bumped up against the 90% level. And, while possible, it is not common for triangles to do. So, a triangle bucks the odds a bit even though the trading is whippy as all get-out.

Rather the better odds at the moment are for a Flat wave if prices keep heading lower. For now let's see what prices do at the 18-day SMA. If they close below it again, it would likely tilt the daily bias to down. Then we'll go from there.

Have an excellent start to the evening,

TraderJoe

The Next Parallel in Gold

The likely next parallel in GOLD is shown below on the daily chart. The prior (KCT-style) channel was shown on the 4-hour timeframe.

Given the position of the EWO, one should probably give room for another Flat, or a possible triangle so the EWO has time to come back down towards the zero line.

Have an excellent start to the day.

TraderJoe

An Oddity

I was examining some alternative counts, and I ran into this anomaly or oddity. The Neely 0 - ii guideline has been able to be used for nearly all prior waves. It certainly even works in the initial wave sequence in this series. So, I thought I'd check in what might be the continuing Minor A wave as an alternate to the Minor B wave down. Clearly, one can see that the guideline is broken. And it would break at several of the lower troughs on the close-only chart. So, something is odd.

We appear to be in a fourth wave or B based on the Awesome Oscillator (AO or EWO). I'm going to be noodling this situation a bit. Again. Something seems odd. Ideas are welcome.

Have an excellent rest of the weekend.

TraderJoe

Hitch - 2

Tentative steps were made today to close the gap we wrote about in the prior post on the ES daily chart, below. Today made a lower high and a lower low as shown.

Also of interest, there have now been four consecutive closes below the 18-day SMA, and the daily bias is said to have shifted to downward.

Markets have a funny way of getting to their Bollinger Band or moving average targets, particularly in an environment like this where a news story or a bad key earnings report or a worried hedge fund manager gets the heebie-geebies and decides to unload can quickly and significantly affect the price level, and the algos keep trying to pull things back to make it look like nothing actually happened.

So, in the above chart is there a way to be in a triangle? I think so, but a triangle is atypical with a gap at the low (not impossible, just atypical - or lower odds).

Are there ways that the market could get back down to the lower daily Bollinger Band, to close the gap, and or get down to to the 100-day moving average of closes? I think so, because large gaps in the futures typically fill a bit faster than those in cash, and it is very common for prices to find the lower daily band or their key moving averages.

We'll try to count it internally as best as possible, but we still need some key levels to break to have an understandable count. And, keep in mind, failures can occur. We're pretty sure we caught one this morning, and there may be more to come. They are a sign that the opposite movement wants to happen with some dispatch and length.

That said, you don't need me to tell you that when you put in an order than you think has momentum behind it, the algos go haywire - like you violated a commandment or something - and instantly yank on it back & forth until it almost drives you crazy. And the only way I know to even try to mitigate that is to watch positioning. Trying to initiate late in a move can have serious adverse consequences. We're likely all feeling that as the market seems to be making three-wave Elliott Wave structures. It might continue to do that until certain Smart Money players (and their algo-bots) are more convinced there really is a down trend under way.

That's why Ira invented the swing line indicator - to help determine if there is a real trend over or under the 18-day SMA.

Have an excellent start to the evening,

TraderJoe

Hitch

The ES daily chart has a bit of a problem - a hitch - in it which is pretty glaring. That is, on a non-rollover day the chart has the large gap up in it that is shown, below, around the 6,552 level. The gap was a 'news gap' and, again, not one just from the futures roll-over.

ES prices today initially headed higher, stopped underneath the prior high in the six-bar congestion area, made a lower low than the open (not a new daily low) and then rebounded to find comfort at the 18-day moving-average-of-closes. It is very whippy, as is wont in the middle of the Bollinger Bands, and the algos have the control.

Is it likely the gap will fill? Yes, unless the news cycle keeps being manipulated with the sheer nonsense of the tariffs, the shutdown, etc.

As best we can tell, the up wave currently counts as w-x-y, where the y wave is shorter than the w wave. So, it might be a (b) wave, up, in itself. But we can't confirm yet that the up wave is truly over. Still, one would expect some resistance from the 18-day SMA, and that seems to be happening, so far.

So, we have to take it day-by-day counting as best we can. It is possible that some news item or other (earnings, etc.) might spark a (c) wave or more downward, but, right now the count is still sloppy until lower lows are made. There are still ways new highs could be made, like if the w-x-y turns into w-x-y-x-z and forms a diagonal. But that is speculation, as well. All we know is that at the present the local upward count is not an impulse one.

Have an excellent start to the evening,

TraderJoe

Sideways in More Time After the Pop

SPY cash prices on the 15-minute chart, below, gapped higher (once again) after all the weekend hype including the scary videos. We have written, "if you want a third wave down, even if it's a 'c' wave, you have to be willing to enjoy a second wave up before that." After the gap up, prices traveled sideways - in the process taking more time in the lateral wave than the prior five-waves-down.

Tentative three-touch trend lines can be drawn today but they are just that - tentative. Yes, that could also be a triangle inside that wedge, but it remains to be seen. Usually, if a triangle should not hold up, then its three-wave internal structure allows an expanding diagonal down to form, instead.

It will be interesting to see if a recognizable pattern completes tomorrow. Today should be viewed as an inside day, and a possible consolidation day for a further down move until that is disproved.

Have an excellent start to the evening,

TraderJoe

Big, Medium, & Smaller Picture

Here is the long-term picture from 2009 as best as can pieced together from degree labeling. The span since 2009 is now 16 years, and during that time much inflation has occurred, Therefore, the chart is log format, and the channel is a log channel. The SPX (S&P500 Cash) Index is used to reduce any influence of time-decay from the futures. The chart shows the Cycle, Primary and Intermediate degree waves.

S&P500 Cash Index - Monthly - Log Channel Count

The next chart focuses more on the medium term. It is the two-weekly chart of the ES E-mini futures since the 2020 low.

ES Futures - Two Weekly - Log Diagonal Count

The above chart shows the Primary, Intermediate and Minor Sized waves in this advance. As best we can tell, while the whole sequence can follow The Eight-Fold-Path Method for a diagonal, the internal sequences are grinding three-wave corrective waves. The third wave, (3), is longest in linear scale, but not in log format. It is longest in time. The fourth wave, (4), is shorter than wave (2) in time and in log length. It misses overlap with wave (1) by less than 1%. The Elliott Wave Principle by Frost & Prechter says the fourth wave in a diagonal 'almost always' overlaps the first wave. It does not say 'always'. It does overlap in the Dow and the Russell. It does not in the S&P500; it misses by much less than 1%. Given the exceptional influence of seven stocks in this market, that is likely acceptable. And a fourth wave signal was received on the EWO.

And the Minor B wave? Well, first it may not travel - even by a tick - below the low of wave Intermediate (4). Next, technically it can be "any three" including a zigzag, a multiple zigzag, a Flat, an expanded Flat - and go over the high again - or be a triangle. And within the triangle category, it could be a symmetric contracting triangle, a barrier triangle, a running triangle or an expanding triangle. In the last three cases of triangles, higher highs could occur.

If instead there is fast and rapid movement below the low of wave Intermediate (4), we would have to conclude that Intermediate (5), red alternate, finished at the high we just experienced. But there is no evidence of that yet. Yet, most Elliott analysts know, the B wave could be any measurement (more typically 38 - 78%), but even less than that, or more than that.

And if Minor wave B turned out to be a triangle, it could stretch the wave sequence potentially well into next year. We'll have to see. A triangle is often likely in the next-to-last position before a wave termination.

For the smaller picture, we noted that the SPY made a higher high on Friday while the ES futures did not. Although we initially surmised that this could have meant we made a larger diagonal downward in the ES (as in prior comments), when we consider the SPY's higher high, it could also mean we had this diagonal failure in the vth wave of (v).

ES Futures - 4 Hr - Diagonal Failure

The lengths of waves ii and iv are acceptable for it, and the down move very characteristic after the end of a true diagonal. The start of the diagonal (iv) would have been exceeded in less time than the diagonal took to form. Further, there is one green pip above the zero line on the EWO associated with v, so it may indeed be a fifth wave. Further, the EMA-34 on this time scale fits for form and balance.

So, now we have to see how the Minor B wave evolves. Once again, nothing to the downside will surprise me. The downside is covered. The task ahead is to see if a B wave holds up; if something like a nasty 'take-your-money' triangle forms, or if we should get zigzags lower for the wave.

The bottom line is it remains risky for trades to the upside (very!). And yet we know there will be retrace waves, and waves that will form an eventual pattern. It's just that most Elliott trading references advise one to steer clear of B waves because of the number of forms they can take. What you do, of course, is up to you. I'm just summarizing what the literature that I've read suggests - not offering trading or investment advice.

And the reason for showing this smaller term picture is to show that ending diagonals can fail. So can the C wave of the (5) wave of Primary ⑤. That is important to note, and we will also address it later.

This is the second post this weekend, and if you have not read the first one yet, you might like too.

Have an excellent rest of the weekend,

TraderJoe

One Day Takes Out a Month

Pens will be flying. YouTube and other videos will say you were warned. CNBC will say it's not even a 5% correction, and "who cares if there's a 10% correction" (heard recently). Meanwhile, we just counted waves and suggested it was an extended first wave count. The first chart of the S&P500 Cash Index, below, shows that count. From our measurements in the futures today, one day, today, took out all of the trading from the prior month!

S&P500 Cash Index - Daily Close - Back to EMA-34

And the Fibonacci retrace ruler shows it's not even a 23.6% retrace on the up wave-set from April, yet.

We certainly did warn appropriately: that the downside risks were high, that sentiment was highly bullish, that put-call-ratios were speculative, that rare Elliott Wave patterns were showing up right & left. All of that. And so here we are.

In our experience the extremely small retrace nature of the internal waves & the lack of pullbacks after the April lows suggested to us that the wave personality is that of an "A" wave. And we think the Minor B wave is underway.

Now in the second chart is an open-high-low-close format version of the ES daily futures. I post this chart for one specific reason.

ES Futures - Daily - KCT Failure

I like Jeffery Kennedy personally. He seems like a sincere analyst. But I need to point out the first part of this wave sequence in April. If you were relying on the KCT (Kennedy Channeling Technique) to deliver the third wave breakout above the channel, it clearly did not happen in this case. Of course, we have stated that is more likely when the third wave is the extended wave. Because it didn't happen this time is why we think the first wave was the extended wave in this sequence. Those extended first waves just grind and turn to the right rather than turning to the left as the extended third waves do. His information should point out the circumstances where it is most likely to work, and where it is least likely to work. In that regard we agree with Neely that "the analyst needs to know which wave is the extended wave in the sequence".

Personally, I think this wave shows the folly of letting machines set the pricing of securities. They grind and grind and grind on every tick for six months, based on the original tariff news story. And then they have a day like today with little let-up in selling all day long, based on another tariff news story. Yes, there will be rebounds, but people work or put stop orders in, and they might not be able to assess things until after the close or they might have elsewhere lost a bunch otherwise. Meanwhile, machines assessed the story nanoseconds after it came out, and the rest is history.

So, others can strut their bravado, accumulate incredible wealth, publish cavalier television stories that somewhat mislead their audiences, or worry publicly in on-line videos. No, for our part, we'll just take the opportunity to learn. I truly hope your losses were small if you had them. Losses are no fun. And if you made a few pennies, great. For our part, we are just trying to sort out what really does and does not work with the Elliott Wave Principle - calmly and clearly.

Have an excellent start to the evening,

TraderJoe 

Arbies - They Have The Treats

With apologies to the restaurateur of a similar name, the number of tricks being played in these markets are a real treat. Several treats. Treat after treat after treat ...

Overnight, it looked like the ES futures were making a grinding set of waves in zigzags upward. They did, but I did not get the count exactly right. It took one of our loyal blog readers, Roy C., to consider that cash SPY could possibly only be making a fourth wave signature in the hourly EWO. Good call, Roy! So, that leaves this count in the intraday ES 30-minute futures.

There's an overlapping leading diagonal for a first wave, a fairly brief second wave lower, a big third wave, and then all of, or just part of, a non-overlapping fourth wave lower. At this time price has already made a new high above 6,807. It might turn out to be a 'b' wave of a flat or just extend to be the fifth wave. Either way, the count sure looks and feels like a five-wave-count.

Then, there's the tricks in GOLD. After invalidating an ending diagonal overnight at the 4,035 level, GOLD used that diagonal too to add third fourth and fifth wave up to the 6 AM morning high. Since the morning, there was this overlapping pattern traced out on the 10-minute chart.

So far, it can look and count like a running triangle. The drop at 15:00 was a fairly dramatic $25 in less than five minutes from which there has been another recovery attempt. We'll see if it holds. If it does, then the widest width of the triangle added to the breakout is another target. If it doesn't hold, then we could be making a diagonal downward, but that just doesn't count at all well internally. And, while a running triangle can point towards the ends of a wave, it is still supposedly bullish because of the higher b wave, as shown.

Apologies, but things like truncations, triangles and diagonals are supposed to be more rare in Elliott land in terms of frequency. Yet, here at market highs, the arbs, quants, hedge funds and other Smart Money are throwing them out right & left.

We're doing our best. We wish you the best. Have an excellent start to the evening,

TraderJoe

Second Verse Same as the First

Yesterday, we pointed out that the daily slow stochastic on the ES futures had its third day of re-embedding. Ira Epstein (broker with the Linn Group, LLC.) who noted this characteristic also noted that the 'second' time embedding happens in-a-row it is often - not always - a sign of a weakened market; one that is wobbling. The ES daily price chart is below. Price has still closed above the 18-day SMA, and so the daily bias is still positive.

ES Futures - Daily - Outside Key-Reversal Bar

However, today's bar can be a "key reversal" bar taking out the high and low of the previous two bars after the highest high in the trend count (i.e. today). And, depending on where it closes, it might also come to be considered a double-close key reversal, closing below two of the prior closes.

Today was a 'turn-around Tuesday' which is interesting of itself. There is a way to consider a top in place, but more downside is needed. Today's bar just is not that long yet although it does overlap with the bars of 22 & 23 Sep. So, patience will rule. Loss of the embedded slow stochastic might be one factor to wait to observe, and a close below that line-in-the-sand might be another. 

With price having hit the upper daily Bollinger Band again, it might be a place where the Smart Money is at least lightening up on some positions. 

If we have finished the Minor A wave up, remember I am primarily looking for a Minor B wave down.

Have an excellent start to the evening,

TraderJoe

Day Three

Today is the 3rd day of the daily slow stochastic re-embedding in the ES E-mini daily futures, as in the chart below. Price is still above the 18-day SMA so the bias is still up.

The sole active up (green) fractal was hit. There are three local active down (red) fractals and numerous gaps below the market. Up progress can still be made by triangle or diagonal. Downward progress could only be made at this point by a failure top (today) but this is less likely.

Have an excellent start to the evening,

TraderJoe

An Original Fibonacci Study

Here's an original Fibonacci study done today on the Dow. I have not seen this idea elsewhere - just to expand the Dow 1929 top from its origin in the first prices available and 1932 bottom in "log Fibs" and see what that gets us. So, I worked this one up this morning and it has some interesting 'hits'. They absolutely are not 'precise', mind you, but they are very much in the neighborhood.

Keep in mind, regardless of the degree symbols used (I just chose these as if I was preliminarily studying any other chart) that the peak RSI is usually on the third-of-three, and the divergence is on five-of-three.

Further, we are up to and slightly past the 2.618 "log" expansion not to mention that price is squeezing out of the upper log trend line, depending on how you draw it (Gulp!).

Have an excellent rest of the weekend,

TraderJoe

Non-fatal Daily Dogi - Yet

With the government shutdown, the non-farm payrolls were not announced today. In the lack of serious news, equity prices - as measured by the ES E-mini futures - headed higher and attacked the upper daily Bollinger Band, exceeded it, and touched the 6,800 level, exactly, before backing off in the oft-cited round-number psychological something-or-other. The day created at Dogi candle, but didn't have a lot of power to it, yet, as on the chart, below.

The problem is that nothing significant has been downwardly overlapped, no significant prior daily lows have been exceeded, and no downward daily fractals are broken. While the daily slow stochastic is still over-bought only, price is still above the 18-day SMA. And so, yet again, the bias remains up.

There is an interesting pattern that might develop Monday morning. It is an expanding diagonal - if it forms properly with a longer fifth wave than third wave. The problem with that, of course, is that these patterns can be ending patterns as well as beginning patterns. So, even if the pattern forms properly, there could be a stiff partial or full retrace following it. So, higher highs might still be possible, and such might happen if important announcements occur, like the re-opening of government, etc. You can see this potential pattern in the comments for the prior post

Further, while it is speculative, it is also possible that NVDA is in the third wave of its fifth wave higher. This might drive other prices higher without the need for announcements.

So, we're taking it slowly and wave-by-wave. Also, we like to examine some of the data over the weekend, but it certainly appears like we are in the neighborhood of a top. Even though higher highs are possible, our assessment remains that the risks are skewed to the downside.

Have an excellent start to the evening,

TraderJoe

ODU

U.S. equity prices - as measured by the ES E-mini futures - declined overnight on the news of the government shutdown. On the daily chart, they closely approached the 18-day SMA, as in the chart below.

As we suggested yesterday, the "first-of-the-month" money had been front-run yesterday after the window-dressing. Then, today, after the cash open, the passive inflows began in earnest, and the ES futures made an outside-day-up (ODU) to a new higher high and near the upper daily Bollinger Band on a divergence with the slow stochastic, which is not embedded.

The higher closes are dragging the 18-day SMA up with them. And, yes, there are ways to be considering a top in this vicinity, but the daily bias is still up - until it isn't. In this instance, the low of an outside day up should not be taken out in the next two trading sessions, or it constitutes a trap for the bulls.

Because of length considerations, it is possible to consider a ivth wave located on the 25th Sep low, or a triangle in the futures that ended this morning as a ivth wave. It is also possible to consider an upward diagonal starting anew from the 25th Sep low, but this will have to be monitored in terms of overlaps and depth of any retraces.

In any case much better reversal signals are needed, along with a close below the 18-day SMA to consider that prices are serious about trading lower for a period.

Have an excellent start to the evening,

TraderJoe

Tri or Di

During the day today, we noted how the market just ping-ponged back-and-forth between the intraday Bollinger Bands, likely delivering whiplashes galore. The futile volatility, likely due to the end-of-month window-dressing we noted continued until about 2:00 pm at which time, the futures decided to front-run the likely first-of-the-month money with a vengeance, before backing off a bit. Today is the end of the month, the end of the quarter and maybe the end of continuous government (just kidding, we don't know about a government shutdown or not, yet). We said that an upward triangle or diagonal was still possible. It still is. Here is the ES futures 4-Hr chart showing two very 'loose' possibilities.

It seems like a triangle might take a lot more time as price is nowhere near the apex. The complex leg of a triangle 'could' form. A diagonal could take less time, but it could also have much wilder internal waves. For the contracting diagonal, upward, price would need to make a higher high, and this third wave would need to stay shorter than the first. For the triangle, price needs to stay above that prior Ⓒ wave - which is pretty darn deep already.

And yes, a top could be in place, but then the diagonal would be downward, not upward, and that is not even close to being on the board, yet.

So, for the time being, both patterns could represent something of a no one's land until something recognizable forms. We'll watch and try to suggest, but it could be quite tricky. In short, it's The Fourth Wave Conundrum, and it happens at every degree of trend.

Have an excellent rest of the evening,

TraderJoe

The Very First Rule

While we are waiting some internal resolution of the current hourly up sequences in the ES futures, I thought I would touch on a basic topic, but in a way that you probably have not seen or heard before. That is the First Rule of Elliott Wave. I have a lot of respect for Glenn Neely. He has had some excellent clarifications of EW theory. But there are some places I disagree with him, plain-and-simple. He claims his rule-base for Elliott Wave is more extensive than EWI's. That is partially true. It may also be true that he has "added" patterns that don't follow the rules. In other words, he may also have decreased the rule base of Elliott Wave, and he won't tell you that or look at it that way. Let's start with an in-depth review of the very first rule in Elliott Wave. You know that rule is as follows:

Wave 2 may not retrace more than 100% of Wave 1.

That rule is diagrammed on the left below.

The First Rule of Elliott Wave

Implicit in that first rule is the fact that wave 2 will, indeed, have a retrace on wave 1. This is clearly supported by the impulse wave "guidelines" that the second wave retrace will typically be 50 - 62% on the first wave.

In Mastering Elliott Wave, Neely does away with this convention and argues for a "running second wave" where the c wave of 2 does not overlap on wave 1. An example of this appears in the diagram on the right. There are two logical traps with this approach. The first one is diagrammed below.

The first logical trap is this: If the lower degree b wave is less than the total length of the larger degree wave 1, as prescribed by degree definitions, then what is to separate the purported running second wave on the left, from a further impulse where the first wave is the extended wave (as shown on the right)? Thus, Neely has created more confusion in this rule set and actually decreased the rule-base of Elliott Wave.

The second logical trap is this: What is the meaning of the depth of a "retrace"? Is it the travel of the "c" wave, or just the travel of the "a" wave? Neely's "running second wave" would seem to suggest that it is only the "a" wave in this case as that is the only thing that overlaps wave 1. But, if that is the case, why isn't that also the case in the very first diagram, where the retrace is measured to the end of the "c" wave and can't go below the start of the first wave? The last-wave-in-the-retrace view is supported further by the rule that states the (e) wave of a running triangle "must" overlap its prior 3 wave or its prior B wave.

Do you see the issues this creates? To have a rule set, definitions must be consistent. In fact, I will even go one further and suggest that in a true "running second wave" the "c" wave would likely have to be longer in price than the "a" wave, overlapping wave 1, or else the pattern could also be confused with a contracting diagonal.

I have long argued that only way to see whether Elliott Wave is working or not is to "follow the rules". If you don't follow the rules, you don't know if the count is working. Still, there are many people out there who won't take the time to internalize the rules well enough to know why they make sense. And, it has even gotten worse.

According to some on-line information, Prechter has now changed the rule for the third wave in a contracting diagonal and now says in some circumstances it can now be the longest wave, precisely contradicting the definition of a contracting pattern. A contracting pattern means 5 < 3 < 1 or e < d < c < b < a. Pure and simple.

In both cases (Neely and Prechter) it's my opinion that the original rules are just fine for the task, and both are currently being fooled by just plan-and-simple but unprecedented monetary expansion, though I will agree that on a log chart the rules should be consistent, and on a short-term arithmetic chart, the rules should 'also' be consistent.

That said, there are still problems with the "rules" for Elliott Wave. For example, what is the definition of a "first wave" up? How does one "know" it is the first wave up, and not the assumed retrace of a part of a bear market? How is this made consistent across all stocks, indexes, commodities, crypto's etc.? 

This is only the first rule. And that is partly why this is so much fun. 

Have an excellent rest of the weekend,

TraderJoe

Bounce off 18-day SMA

U.S. Equity prices, as measured by the ES E-mini futures contracts, went down to the 18-day average of closes, and bounced, as shown in the ES daily chart below. As so often happens, this was accompanied by the loss of the embedded status of the daily slow stochastic, as shown below. The down (red) fractal on the FOMC report date of 17 September was not yet exceeded lower.

ES Futures - Daily - Bounce from the 18-Day SMA

Intraday, thus far, with 105 candles on the ES 30-minute chart, we can only count three-waves down following the degree definitions. The essential problems for wave counters are that 1) wave Ⓒ, below, is actually longer in price than wave Ⓐ; 2) wave Ⓑ - while shorter in price & time than wave a/i, is not at all in five waves; 3) the absolute length of wave ④ is longer than either Ⓒ or Ⓐ; 4) wave c/iii is longer than wave a/i in price & time; and 5) the waves appear at this time to form an exact parallel.

ES Futures - 30 minute - Three Wave So Far

So, the problems seem to be solved by designating the "running b/ii wave", and by suggesting that wave ④ is a flat wave to bring its net travel in line with the prior correction. However, that clearly leaves the count with only three-waves down into the c/iii divergent low.

The EWO now appears to be heading up, and a true non-overlapping fourth and fifth wave are needed for a downward impulse wave, probably within 120 - 180 half-hour candles. If this does not occur, then any downward wave would have to form by diagonal instead - if one is to form properly or at all.

Price closed the session above the 18-day SMA. So, the daily bias is still up. The only day that price can get the embedded status of the daily slow stochastic back is tomorrow. Closing below the 18-day SMA might change the bias to lower and create a longer down wave than prior down waves, but that has just not happened yet.

The "running b/ii wave" was a significant sign of weakness. We have not seen one of those in a while. For that reason - and others - no amount of downside would be surprising to me. It would be a matter of counting it properly. But, right now, the downward wave count is governed by The Principle of Equivalence and has two commensurate meanings. That means an upward diagonal or a triangle could still form here and make higher highs and these must be considered equally with downward counts until the market rules out one set of circumstances.

For our part, we count & we measure. And that is compared to the rule-based logic.

Have an excellent start to the evening,

TraderJoe

Count and Alternate

Prechter says, "stocks are over-valued". Nobody listens. Powell says, "stocks are fairly highly valued" and the market sells off. Here is the current count on the ES 30-min chart. If the high has been set it is because the triangle preceded the last wave up in the move.

If not, here is the likely alternate - being still in a diagonal until the low is exceeded.

Have an excellent start to the evening,

TraderJoe

The Principle of Equivalence - in a potential diagonal

ES futures prices scored higher all-time highs again today. It is possible that a diagonal will end tomorrow and there will be a turn-on-Tuesday. There is also a possibility that this will not happen, and the upward wave will impulse instead. Again, part of the confusion is caused by the compression of the waves made on the FOMC report date - last Wednesday. The chart of the SPY (cash) 15-minute time frame is shown below.

SPY (Cash) - 15 min - Potential Diagonal

We note that the current wave 3 is measured as 0.618 x wave 1. The problem is we don't 'know' the third wave is over. It could be, but it begs waiting to see what tomorrow will bring. The Principle of Equivalence says that within the current wave 3, the Ⓐ and Ⓑ could just be a smaller wave (i) & (ii) with today's high as (iii). We must wait until tomorrow to see what kind of downward movement there is, if any, and what overlaps do or do not occur. 

The overlap level is shown for the wave 4 of a diagonal as currently drawn. Also shown tucked in the middle section of the chart is the 662.75 level where a wave 4 should it develop would become too long in price and invalidate for a contracting diagonal.

We note the MACD on this time scale has some divergence and that is interesting. But divergences can be broken. We have seen that often. But, still, it is interesting. A diagonal should have diverging waves indicating the loss of momentum in the motive wave.

Clearly, the alternate for this wave set would be a non-overlapping impulse. Measurements will become important. The wave degrees shown are just to illustrate the points involved. They will be corrected when we get some confirmation that Minor A is done.

We do note on the daily ES chart that price hit the daily upper Bollinger Band today, that price is still over the 18-day SMA, making the bias still up. And the daily slow stochastic is still embedded, among the very strongest of technical signals. So, there is nothing outright bearish on the chart, with the possible exception of how stretched prices are. But Ira never advises selling when prices have not closed below the "line in the sand".

The Principle of Equivalence says, "keep the powder dry". It says, "evaluate the waves and the lengths of prices seen". 

Have an excellent start to the evening,

TraderJoe

Call Me Sentimental

Many years ago, I wrote about developing a proprietary sentiment index which I have been updating religiously week upon week since well before the 2008-2009 financial crisis. This sentiment indicator is considerably different than some of the casual ones some talk about. This sentiment index reflects the views across a very wide swath of market participants of which the AAII is only a small sub-group. To keep a long story short, the Percent Bullishness (or %B) shown on the chart below is the cleanest and most consistent gauge of sentiment I know. Key data points are plotted on the two-weekly hi-lo chart of the S&P500 Index below.

As you can see, the percent bullishness is currently among the highest recorded. This is in part due to the AAII Sentiment Index (see chart at this LINK) having swung from only 28.0% bulls last week to 41.7% this week. That is a massive one-week swing and represents the market dragging them in near the top. Note that the highest bullish sentiment on the chart was during the middle of the third wave. And that's why sentiment is only "one leg of the stool". Notice, if, as EWI suggests, sentiment is all there is, then this data point provides scientific evidence that is not the case, at least not always.

You can add to this data, the other market-related data I consider relevant as it is transaction-based. It depends on what traders do. And that is daily equity-only put-to-call ratio shown in the chart below.

Equity-Only Put-to-Call Ratio - Daily - Speculative

From the chart, you can see that price has entered the Zone of Speculation as the often-wrong small options players move in to catch the 'new' (sic) trend. Notice that single data points on this index, by-themselves, are not infallible either, as May of this year was an excellent time to purchase, not sell. But what I like about the data is they clearly show what market participants are doing, not saying. And, right now, they are speculating. Still, the moving averages (5, 20 day) could go lower. Those averages have been lower in history.

Sentiment observers will also note that the CNN Fear & Greed Index recently swung from Extreme Greed, to Neutral, and back to just Greed. So, in the manner they measure it, too, 'Extreme Greed' was not the market high, either. Prices are higher than when the Extreme Greed was registered. Again, this is counter to what would be expected in EWI's market model.

I suspect that some of this discrepancy is due to the fact that a good number of decisions are being made by a) machines/algorithms, and/or b) passive investors, and that some of the recent jumping in is due to the FED being interpreted that they will continue to lower rates. One adage market players use is "don't fight the FED", right?

Whether that is the case, a very common technical measure - the NYSE Advance-Decline line made new all-time highs this past week. Again, it would be very, very unusual for a major bear market to start with that condition. Usually, there is a significant divergence before a true bear market begins.

But some other anecdotal evidence is also 'piling up' on the side of a heated market. Jim Cramer, host of Mad Money, said Friday night (paraphrasing), "Just buy the Mag 7. These stocks are in control of their own destinies". And CNBC, whose commentators, are almost never allowed to use the 'bear' word was heard on Friday, via host Brian Sullivan, to say, (again paraphrasing), "Pfff. a 10% correction? We don't even care if that happens. That's reasonable. Those happen." No worries, right? 6600 - 10% = 6000, right? No issues.

So, in sum, it seems the data may indicate we are near the end of "a" wave, and maybe the Minor A wave I'm expecting. But it may not be the end of "the" wave yet. I remain flexible and ready to watch for either - based on measurements and wave counts. But time will tell.

This is the second post this weekend, and the first one has more wave-related measures in it.

Have an excellent rest of the weekend,

TraderJoe

Clear Indications in an Elliott Wave

Yesterday and today, we were able to count a triangle. It did not appear to be a running triangle, just a regular contracting triangle. The ES hourly chart below shows the triangle on the right-hand-side.

ES Futures - Hourly - Indications

Based on the FOMC wave compression we simply cannot say whether the peak before the Ⓑ wave is a 'three' with the triangle as 'four' and the new high as much of 'five', OR, whether - because of the size of the triangle the wave before the Ⓑ wave is a larger 'a' wave of a diagonal with the thrust out of the triangle as the 'c' wave of a larger diagonal.

Regardless, the wave structure gives off a heck of a lot of clues. First, wave v (or c) is not 'done' until price travels under the Ⓔ wave of that triangle. Next, a wave lower is not confirmed until under the Ⓐ wave of the triangle.

Because a diagonal 'could' form, a downward wave 'could' retrace 62 - 82% of wave iv and still be acceptable in a diagonal wave. But such a wave cannot go below iv, and price would likely have a trend change if it does.

Notice the EWO is throwing off a lot of fourth wave signatures at the hourly chart level. Still, on the daily chart level, the BIAS is up, price has contacted the upper Bollinger Band again, and the daily slow stochastic is still embedded.

One thing that might be watched is this: say over the weekend there is a smaller degree triangle, and a higher high; that still might end only smaller degree wave ① of v, so be sure to see whether that triangle Ⓔ wave breaks or not on a downward retrace.

Have an excellent start to the evening and to the weekend.

TraderJoe

The Bias

Two days ago, in the post at this LINK we proposed a way via an Elliott wave count that prices could decline on the FOMC report out and then recover to a great extent. Today they did that. The ES daily futures chart for December lead month contract is below. The FOMC did, by the way, cut the FED Funds rate by 1/4%.

ES Futures - Daily - Hanging Man

The importance of the chart remains that price could not get down to or close below the 18-day MA so the daily bias remains up. The daily slow stochastic is still embedded, so, on substantial breaks, like today, it is expected the Smart Money would deploy some new money, and they appear to have done that by the size of the tail they left. Yes, this is a hanging-man candle, but like all single-candle patterns, then confirmation candles are required.

It is not until the red line of the slow stochastic closes under 79 that price might be expected to start down to that "line in the sand" in earnest.

While it's nice to have an FOMC meeting out of the way, the next item is the reaction to the rates cuts as the sun travels around the globe and the reaction to it in other countries is seen.

So, it is possible that higher highs are made. It is also getting increasingly risky to rely on just the assumption that such will continue. Not only is the wave structure almost fully mature, but the distance between price and the longer 200-day moving average is also getting quite extended.

Have an excellent start to the evening,

TraderJoe

The Brakes

Another Elliott Wave issue I've noted is what is likely incorrect counting off of a top. The tendency is to rush to try to find 'five-waves-down'. The market is currently going to have none of that (until perhaps later in the cycle), and so the market, or the Smart Money, does one of two tricks. They both involve putting on the brakes to avoid a steep decline. To view a recent example from the standpoint of degree labeling see the chart below. This compares the ES futures to the SPY cash index.

ES Futures vs SPY Cash Index - Intraday - Diagonals

So, your eye should first go to the bottom chart. Note it has already made a 62% retrace of the whole wave. That is far too much for any fourth wave. Note also that wave ② is the largest retracement in the decline. So, this likely means that the blue a,b,c are likely sub-waves of wave ①. Then, there appear to be too many overlaps to consider anything other than a diagonal. This is one form of "putting on the brakes".

From what I can tell, there are two reasons for this. The first, and lesser important, is that the whippy behavior makes it nearly impossible for retail to get a decent trade out of it - without considerable skill. The second and more important is that the Smart Money is not going to change from overall buy-mode to sell-mode without considerable evidence the trend has changed - something like trading below the 18-day SMA. So, the Smart Money fights it all the way down from the high, and that is what makes the whippy behavior in the first place.

Now go back up to the first chart. I rightly gave kudos today to someone today in the blog for utilizing the Kennedy Channeling Technique. Bravo! Glad to see it. I use it too. But, what Mr. Kennedy fails to explain to you is what I have termed The Principle of Equivalence. Jeffery explains that leaving the bottom of the channel sketched in is confirmation of third wave price action. Yes, dear Jeffery, it can be and often is. But The Principle of Equivalence I have developed says, "whoa! the last time I checked C waves are in a third wave position, also. There is not a confirmed impulse until the proportional fourth and fifth waves are completed."

So, when the futures leave the channel, as they did in this case it can just be to the 'c' wave which ends the first wave of a diagonal.

What does this do for degree labeling? It makes the whole wave down either the first wave down as a diagonal or it makes a complete wave that ends a previous wave with a :5 - like a 3-3-5 Flat - or similar ending pattern. It can also put the overnight futures in-synch with the cash market.

What is the second trick? They herk & jerk the market down in an expanding diagonal until it sends a big enough signal to the Smart Money to bail if they wish. But they give them time. They put on the brakes.

These are hard learned lessons. They are not for the faint of heart or those easily disappointed in Elliott Wave. They are for serious students who see the glimmer of potential. Do you?

Tomorrow is schedule to be FOMC report date. Have an excellent rest of the evening,

TraderJoe

A Stab

Now likely back within the Minor A wave, this is a probabilistic stab at the local hourly wave count. The wave appears to be extended in time, which means it might be an extended fifth wave sequence. Even within it, retreats to the lower channel line are possible/probable, particularly with the FOMC magicians about to work their conjuring on Wednesday.

Good, stimulating discussion on the blog today. Look at the divergences on this puppy. No issues out there, right?

Have an excellent start to the evening,

TraderJoe