Is The Pullback Underway?

Today we saw the market open higher across all of the indexes thus giving us a potentially full and complete pattern down to the smallest of degree timeframes for this potential move up off of the July lows.  As we have been noting the move up off of the 8/2 low was quite overlapping and sloppy which was suggestive that we were dealing with an ending diagonal to finish off that portion of the move. As is typical with these patterns we should see a fairly sharp reversal once the pattern completes back down towards the origination point of the diagonal. In this case, that origination point comes in at the 4077 level. This is also the lower end of the support level that I am watching to give us further confirmation that a top has indeed been struck in either the green wave (iii) or the yellow wave a which we have been laying out over the past several weeks. Both the yellow and green have the potential to start out very similarly in that they could take the form of corrective wave action. The yellow count however should be a bit sharper and quicker in its decline as I am counting this wave structure as a larger ending diagonal. So under the yellow count, we have the potential to have a smaller degree ending diagonal off of the 8/2 lows within a larger degree ending diagonal that originated off of the July 14th lows thus making the initial pullback sharp with a possible further accelerated drop finishing out that yellow count. The green path, however, would still likey to see a sharp initial drop into the 4077 level but after that, the pullback may be a bit more muted in nature down towards the 3950-3900 region. 

Yellow Count
As noted last week the yellow count would suggest that we are following an ABC up off of the June lows with the wave (c) of that ABC coming into completion near current levels in the form of an ending diagonal. As it is typical for the reversal out of an Ending Diagonal to be quite sharp back to the origination point if we are indeed following this yellow count I would expect to see a sharp move lower that ultimately targets the 3736 level below. I would want to see this move below the 3994 level followed by a break under the 3900 level to give us confirmation that we have indeed topped in this yellow count. Again this should be a fairly swift reversal to the downside under this yellow count so If we do break under the 3994 level but see a more muted move down then I think it would become more probable that we are following the green wave (iv) retrace. 

Green Count
Under the green count, we still should see a pullback towards the 3950-3900 region and that pullback should take the form of a three-wave move. We should however see another higher high back over the current high to complete a potential leading diagonal up off of the lows. The initial move down off of the highs will likely be very similar to that of the yellow count but again the drop will not be nearly as sharp or deep before turning higher once again. Additionally, once this does bottom in the wave (iv) the final leg up for the wave (v) of 1 is likely going to give us more sloppy action as it should take the form of another three-wave move to fill out the last leg of the leading diagonal.

So while this move has continued to extend and grind higher there is still not too much change to the wave count in that this simply counts as an extension of the current wave pattern. The pullback down towards at least the 3950-3900 remains the base case at this point in time with still the potential to see a deeper pullback per that yellow count. With that, I still remain cautious here to the long side and will wait to see how deep the next pullback goes and what the structure looks like into those lows to assess the next opportunity to the long side.

ES 8812 15m
ES 8812 15m
SPX 8812 60m
SPX 8812 60m
Michael Golembesky is a senior analyst at ElliottWaveTrader covering US Indices, the US Dollar, and the VIX. He contributes frequently to Avi's Market Alerts service at EWT while also hosting his own VIX Trading service.