Fourth Wave Triangle Warning
The warning is this: One more relatively small wave to the upside once the horizontal waves of the triangle play out. Then it’s down, down, down … until 2022.
I give it about a month until the top tick is in.
For the past few weeks, I’ve been referencing the pattern unfolding in the Nasdaq on a daily chart and making the case that it looks like we have an ending diagonal unfolding. This weekend I’m tempering that prediction slightly, as I can see either a contracting triangle or an ending diagonal (but my preference is still the ending diagonal).
Above is the 60 minute chart of NQ (Nasdaq futures) in which I’ve drawn both the trendlines for a contracting triangle (blue) and ending diagonal (dotted red).
The reason I’m favouring the ending diagonal is due to the new high (marked wave B or 1) in the chart above. Normally, a contracting triangle will not seek a new high until the final wave out of the triangle at the very end (the fifth wave). On the other hand, each bullish wave of an ending diagonal seeks a new high.
Triangles are labelled with letters; ending diagonals with numbers. Each contain five waves of three waves each. However, there are subtle differences. Ending diagonals have a slope to them (in this case, to the upside), while contracting triangle are horizontal patterns.
As mentioned, each of the waves of an ending diagonal traces out a new high. The final fifth wave will be the shortest wave of the sequence and trace out three sub waves. In a triangle, the final fifth wave can be the longest wave and will trace out five sub waves.
If the current wave we’re in now traces out a new high, we have an ending diagonal at work. Otherwise, it will be a contracting triangle.
Summary: For NQ, we’re in the final pattern of this 500 year bull market. My preference is for an ending diagonal, but it also could be a contracting triangle. We’ll know the answer at the top of the next wave. It’s early yet but a triangle pattern of some sort is what we have here.
A Rare Triple Zigzag
Above is the 60 minute chart of ES (SP500 emini futures) showing the C wave of the currently unfolding contracting triangle (the pattern was the same in the SP500. This is an extremely rare combination wave pattern that traces out three separate 5-3-5 wave patterns in a row.
There have only ever been three patterns in a combination wave, so at the end of the third zigzag, you know the trend will change. It did and that gave us some nice gains on the wave up on Tuesday and Wednesday of this week.
We also took advantage of the drop on Thursday night and Friday. On Friday, we put in a bottom, so expect us to head up over the weekend and into next week as we trace of the D wave of the contracting triangle (daily chart below).
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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).
This week confirmed the contracting fourth wave triangle, which is the final pattern before the top. So, I'd give this bull market about a month. Then we magically turn into a bear market and we'll eventually head down at a breath-taking pace.
However, that action likely won't happen until fall, because the first couple of waves start off slowly. The crash doesn't happen until the third wave, and it usually takes a couple of months for the first couple of impulsive waves down to play out.
Until then, we'll go up and down a couple of more times (as per the chart above) before we take off to the upside in a fifth wave, which will simply finish off the pattern. We'll get to a new high and probably more, but don't expect (as I've been saying for a very long time) a large fifth wave that travels any great distance.
Over the next week, expect more upside as we trace out the D leg of the triangle.
Summary: More sideways to come as ES/SPX traces out a contracting triangle, which in a fourth wave position signals that a trend is about to end after one more wave (in this case, to the upside). That fifth wave up to a new high will be the end of the 500 year bull market.
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