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