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