The End of the Road
I can see it from here, but it’s still a little ways off in the distance. Reaching it will be like dropping off a cliff in some respects. The world will never be the same.
Relax. We’re not there yet. In fact, we have a few weeks left to go. Cast your gaze to January. Because …
For a couple of years now, it’s been obvious to me that the US Dollar was “running the show.” It just made sense to me that being in corrective fourth wave since the beginning of 2017 would eventually lead to the top of the US market when the US Dollar bottomed. We’re not quite there yet, but it looks like we will be sometime in January (perhaps earlier than later).
This week, I expect all the asset classes to turn into their final wave to the top. All the assets I cover daily (ES, NQ, major US cash indices, USD currency pairs, gold, silver, and oil) should turn together.
This will lead to the trend-ending parade by virtually everything to the final top (bottom for the US Dollar). The US Dollar turning back up in deflationary. If you’ve read any of my posts on this topic, you know that we’ll eventually end up in spiralling deflation. This is what has happened in every financial collapse in history.
In the meantime, as I said last weekend, it looks like Santa is coming to town for the usual seasonal rally. I expect a final rally to last through the holidays, and at least into the very early part of 2018, if not a little longer.
If that’s the case, I would expect to see the crash sometime in March (it always happens in wave three, so we’ll get a fair amount of warning).
Above is a diagram of the structure of an ending diagonal. There are a number of rules for the formation and they cannot be broken:
- A diagonal triangle always subdivides into five waves.
- An ending diagonal always appears as wave 5 of an impulse or wave C of a zigzag or flat.
- All waves must subdivide into zigzags (5-3-5 wave combinations)
- Wave 2 never goes beyond the start of wave 1.
- Wave 3 always goes beyond the end of wave 1.
- Wave 4 never moves beyond the start of wave 3.
- Wave 4 always ends within the price territory of wave 1.
- Going forward in time, a line connecting the ends of waves 2 and 4 converges towards (in the contracting variety) or diverges from (in the expanding variety) a line connecting the ends of waves 1 and 3.
- Wave 3 is always shorter than wave 1, wave 4 is always shorter than wave 2, and wave 5 is always shorter than wave 3.
My concern this week about wave three of the ending diagonal was because it was breaking the zigzag rule. Zigzags are three wave moves and until we got the new high on Friday, wave three was in five waves.
“The market always does the most predictable thing in the most unpredictable manner.”
We still have a wave four zigzag to go, along with a final zigzag to a new high. I expect the end of the wave 5 zigzag to conclude as the US Dollar bottoms, gold bottoms, and oil tops.
Let’s see what happens.
Where I Disagree with Bob Prechter on Ending Diagonals
In the Elliott Wave Principle (the book), Robert Prechter classifies ending diagonals as a motive wave. I classify them as corrective waves, because they appear both at the end of corrective C waves, as well as wave 5 of an impulsive structure. The pattern in certainly corrective, in that all the waves overlap.
In my way of thinking, the very nature of an ending diagonal is corrective. The overlapping waves signal that the market is simply too wear to complete an impulsive pattern and reverts to an overlapping pattern, which plays out until it tops. They typically have a dramatic reversal that retraces to the previous fourth wave.
In that case, ES would turn and head back to 2610 for a small first wave down. Since I expect ES will top at about 2700, that’s a 100 point move for the first wave.
Ralph Nelson Elliott, who discovered the wave principle and literally wrote the book on it, also classified ending diagonals as triangles, and included them under the heading of corrective waves. He also noted that they form at the ends of third waves (rarely), as well as fifths, which seems to be the case, as we’ve seen over the past few months.
There are other issues with the information in the Elliott Wave Principle, information that is incorrect, a follow-up post that I’m currently working on.
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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.
We're now down to hourly charts for all the action. It's been a day trading environment for the past few months.
Volume: With the most recent wave up at the top of this market, you can see that volume has contracted rather drastically as expected. 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 put us in a final ending diagonal in ES.
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. Early in the week, with the rally to a new high, the contracting triangle option ceased to be an option; the ending diagonal became the pattern of choice.
In the Trader's Gold service, all this week I've voiced concerns about the third wave of the ending diagonal, because it was clearly in five waves. All subwaves of an ending triangle need to be in three waves. Well, on Friday, ES/SPX solved that issue by going to a new high. Now we have the required ABC wave up to complete the third wave of the ending diagonal.
The next move is down to the 2645 area, followed by a final wave up to the 2700 area. Fifth waves of ending diagonals cannot be longer than the third wave, so with a potential bottom for the fourth wave at approx. 2645, the maximum high for the rally will be about 2700.
Short term: The wave count is now virtually complete. It appears that we're tracing out a final ending diagonal in ES, which is a final pattern before a trend change.
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