Both Counts Have Issues, but One Has Fewer Than the Other

Today, the market pulled back and broke the support level that had been keeping the potential impulsive micro pattern off the 10/1 low intact. With that break of support, we are now left looking at another potential ending diagonal pattern to complete wave c of (v) within a larger diagonal. That larger diagonal could be either a leading diagonal per the yellow count or an ending diagonal per the red count.

Now, this smaller-degree diagonal off the 10/1 low certainly has its issues and is far from ideal. The short wave iii, the lack of overlap between waves i and iii, and the break below the parallel trend line are all things I would prefer not to see when a diagonal is developing. These issues raise questions about the reliability of this potential pattern.

When we encounter these types of issues with a pattern, I find it useful to take a closer look at the alternate counts on the chart and assess their probabilities relative to the primary count we are tracking. After all, just because a pattern has issues does not necessarily mean that the alternate is any more reliable.

In this case, the alternate count, shown in green on the ES chart, would suggest that we may still be working on a larger b wave in expanded form rather than completing the final wave higher within the diagonal structure.

The problem with this green alternate is that it also has its own issues, particularly when we consider how frequently these types of patterns occur. Expanded b waves are somewhat rare in and of themselves. Adding to that, for this expanded b wave to have completed at yesterday's high, it would have needed to take the internal structure of a WXY pattern. That would leave us with another relatively uncommon structure within an already less common pattern.

So, while neither scenario is what I would consider ideal, when weighing the issues with each, I still have to give the benefit of the doubt to the white primary count on the ES chart. This count calls for at least one more push higher to complete the smaller-degree ending diagonal off the 10/1 low and, in turn, finish out the larger diagonal pattern.

That larger diagonal could still be either a leading diagonal under the yellow count or an ending diagonal under the red count. Both scenarios call for another higher high in the near term, but they have different implications for the larger-degree move that follows.

Key Levels and Expectations

As long as the ES can hold over the 7755 level, I will continue to favor another higher high under the white primary count.

With what now appears to be an ending diagonal developing off the 10/1 low, I am revising the overhead target levels to better reflect this potential pattern.

The overhead target for the primary upside count now comes in closer to the 7946 level on the ES. This area has Fibonacci confluence between the 100% extension of the larger move that began off the 9/16 low and the 123.3% extension of the move that began off the 10/1 low. This confluence makes the 7946 region a key area to watch should we get that final push higher to complete the diagonal pattern.

Should we get that higher high, however, caution will certainly be warranted. Once the smaller-degree ending diagonal completes, we would typically expect to see a sharp reversal back toward the area from which the diagonal began. In this case, that would suggest a move back toward at least the 7669 region.

Furthermore, if the larger diagonal is completing under the red ending diagonal count rather than the yellow leading diagonal count, we would potentially have a diagonal within a diagonal reversal setup on our hands. That could lead to an even sharper and more accelerated move to the downside once the pattern completes.

So, for now, the 7755 support level remains key. A break below that level would have me reassessing the white primary count and giving greater consideration to the green expanded b-wave alternate. On the other hand, a push toward the 7946 region would bring the potential for a sharp downside reversal into focus.

While I still think the market has some unfinished business to the upside, I would not view another higher high as a reason to become more bullish. Rather, it would potentially complete the pattern and set the stage for the downside reversal we are tracking.

For now, we will let the market provide the evidence as to which scenario is playing out.