My poor shoe that I’m expecting to drop (based on last week’s post here) is getting a little worn. But I’m still holding onto it! Yes, I’m one of those guys that likes to wander around the house in comfortable old clothes that sometimes have holes in them!
This week, we got what looked like the first wave of the C wave of a flat to the downside in ES. It was a fake-out move, because it proved to be a double zigzag that looked like 5 waves, but was not.
There were also clues in NQ and the SP500, that we weren’t quite there yet. Plus, a regular flat needs to retrace at least 90% of the A wave.
So, I’m still looking for a regular flat in ES/SP500 and an expanded flat in NQ/NDX. Note that NQ is at a new high, which registers as a possible expanded flat set-up.
Regular and Expanded Flats
The pattern tracing out in ES and the SP500 seems to me to be a regular flat. Here’s an description of the traits of a flat (from the Elliott Wave Principle):
“A flat correction usually retraces less of the proceeding impulse waves than does a zigzag. It tends to occur when the larger trend is strong, so it virtually always precedes or follows an extension. The more powerful the underlying trend, the briefer the flat tends to be. Within an impulse, the fourth way frequently sports of flat while the second wave rarely does.”
Regular Flat (below)
Above is a chart showing a very simple drawing of a regular flat. Think about the large fourth wave in ES that we’ve been tracing out since January 29. The BULL Market wave on the left in this diagram relates to the probable pattern we have unfolding.
The first set of waves down from the 2875 area was in three waves (a zigzag). This is the A wave of the flat.
The wave up from about 2530 is also in three waves. This is the B wave of the flat, and it’s not quite complete. My target now on the upside should be above 2838 in ES and a similar number in the SP500. A turn down into Wave C that traces out five waves will complete the pattern (3-3-5).
Expanded Flat (below)
The only difference between a regular flat and an expanded flat is that in expanded flat, the B wave goes to a new high (the pertinent diagram is the one on the left, for a bull market)
Summary: We seem to have a regular flat in progress in ES and an expanded flat setting up in NQ. Look for a rally into perhaps Monday or Tuesday and then a sudden turn down into the C wave. The C wave in both flat patterns will drop to a new fourth wave low.
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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).
Things were moving very slowly all week long as we built what appeared to be a second wave of the C wave of a flat. However, on Friday, the count changed: The apparent five waver down (the first wave of the C wave of the flat) turned out to be in three waves — a fake-out.
There's another lesson here in that a flat has to retrace 90% of the A wave down (in this instance). It has only retraced to slightly under 80%.
So now, we're headed higher to meet the 90% retrace requirement. For ES and the SP500, that means the turn should happen above 2838 (but ES should not go to a new high). The flat is still the best option for both ES and NQ.
Expect a turn down this coming week into the C wave to a new low. I'll go with a rough target of 2420 on the downside, although the C wave down can end anywhere after at least tracing out a wave similar in length to that of the first ABC wave down. It needs to reach a new wave 4 low.
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