The ending diagonal that I’ve been concerned about all this week is crumbling. In ES and SPX, it looks like we’re going to morph into a contracting triangle. I see that happening across most of the major US indices.
The ending diagonal has been questionable right from the third wave, due to the fact that it counted as a ‘5’ until we got the C wave up. But even then, it doesn’t have the right look, and the fourth wave has taken so long to form that it’s ability to reach the downside target in ES before the trendline diverge is not probable.
In SPX, it’s all but impossible.
So, we’re back to the triangle idea in almost all the US indices, although at a higher price point, and I’m so early in this call that it requires the market to confirm it.
I’ve listed my reasons in the explanation under the chart of ES. The key factor is that the US Dollar and USD currency pairs still have to trace out a final large wave. The US indices have to burn some time in order to top at the same time as the currencies. So, while the ending diagonal looks like it’s going to break, a contracting triangle appears to be the ideal solution.
Contracting triangles move sideways and burn up a lot of time with their up and down five waves. They end up with a final wave to a new high. The final wave up is typically the same length as the widest part of the triangle, but not always. So, while we can’t count on it, it’s a good guideline.
Once we have the contracting triangle confirmed (with a larger drop in a C wave), there’ll be some high probability trades that set up. But we need confirmation first.
We had a little Santa pre-rally leading up to Friday, but during most of the day Friday, currency pairs and the US indices started to trend down. I expect that to continue through this week.
As I wrote last week, it’s the dollar that will have the last word on the top, but they’ll all join the parade to a final top (each perhaps in its own way. A little more patience is warranted.
The Varying Options in the US Indices
I took at look at all the major US indices this weekend and am showing my preferred count here for all of them. Most of the wave patterns leading up to the triangle are really hard to decipher, so it’s making my job that much more difficult, as we’re still very early in the projected triangle pattern. Volume is extremely low and that can cause waves to be a bit misshapen.
We need a few more days for the market to confirm what it’s doing, but in the meantime, I’m providing as much info as I can on each of them. They may all end up with contracting triangles, but at the moment, it’s just a little too early to tell.
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The Market This Week
Here's the latest daily chart of ES (emini futures)
Above is the daily chart of ES (click to enlarge, as with any of my charts).
There have been no material changes to my prognosis. We are at the high. I expect this final wave to breach the previous high for the final time.
Volume: I'm seeing volume rise when the market comes down and subside as it rises. This, of course, is a very bearish warning.
Summary: The count is full for the US market in general, except for small subwaves that form the balance of a motive set of waves in SPX and some other major US indices. I'm leaning towards a contracting triangle as the final pattern, rather than an ending triangle.
Above is the 60 minute chart of ES (click to enlarge). Please watch the video to get the full story on what's happening short term.
Last weekend, we knew we were dealing with a triangle of some type. Last weekend, it looked like a contracting triangle was not an option. However, with the wave structure now more advanced, there are compounding reasons to believe we're going to trace out a contracting triangle (not the original one, but one at a slightly higher price level) after all.
I've kept the labels for ES as an ending diagonal, but I believe this week, we're going to see it break for the following reasons:
- Currencies (including the US Dollar itself) have one more large wave to trace out after bottoming in the current fourth wave. This suggests that the US indices are going to take more time (not a significant rise in price) to trace out a final pattern that would allow everything to top more or less at the same time (which is what I've been calling for, for well over a year).
- Currency pairs still have to bottom in their fourth waves, which is still a significant drop from where they are, which suggests a larger drop in ES than to the 2650 area (of an ending diagonal).
- The drop in the fourth wave is so far very slow, and as time progresses, there is much less chance that it will hit the ending diagonal fourth wave target before the upper and lower trendlines diverge (which would "break" the ending diagonal).
- The SP500 has little chance now of completing an ending diagonal for the reason given in point 3.
At this point, I have to leave it to the market to tell us what the operative pattern is.
Short term: The wave larger count is now virtually complete. We're tracing out a triangle of some sort. I'm leaning now towards a contracting triangle as being the operative pattern; however, we need confirmation from the market.
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