It’s Still Not Easy Being Green

While I know many of you may scoff, boo and/or hiss at me when I tell you that I am keeping my primary count looking for 4860+, I have to say that it really makes the most sense out of all the charts at which I am looking.  

While I presented a number of potential paths last night, I have again narrowed them down to two.   The former purple count – the ending diagonal to complete wave v of 5 of [3] on the 60-minute chart - is now my primary count, and I have it outlined in green.  We really look like we need one more rally to complete this structure.   Moreover, our Bayesian probability expert – Luke Miller, who has done an outstanding job this past year, has calculated the probability to be at 64% to attain that higher high.  

Another supporting factor for a larger rally potential is that the MACD on the 60-minute SPX chart has now moved back down into its support from which many strong rallies have begun in the past.

The alternative count is in yellow and suggests that we have begun a decline towards the 4350SPX region.   And, it will be difficult to initially distinguish between the two since both will likely see rallies that take shape as a-b-c structures.  (Remember, an ending diagonal takes shape in 3 wave substructures rather than 5 as does a standard impulsive structure).  And, I have a basic path outlined on the 5-minute ES chart for both counts.  The difference will be that when the wave 2 completes at resistance, we will drop in an impulsive move that breaks the “floor” I am setting for us.  A bit more about that further down.

Since we are dealing with an ending diagonal, my minimum target is now 4860-4882, which is also represented by the trendline created overhead when connecting all the tops struck since early November.  Moreover, the 4882SPX region represents the 1.618 extension of waves [1] and [2] of wave [iii] off the March 2020 low, is a typical target for wave [3], and it has been my minimum target for wave [3] for a very long time.  But, keep in mind that ending diagonals do tend to spike through their upper trend line, only to reverse strongly right back down.  That is the typical hallmark of the conclusion of an ending diagonal.

Now, of course, since we broke our initial support in the 4710-21 region, I have to take the yellow count much more seriously.  How I intend on doing so is by raising cash as we develop a possible wave 2 rally.  I will likely raise up to 10% into the resistance box on the 5-minute ES chart, and then raise another 5% if we are able to make it to my ideal target at 4860SPX+.

In the meantime, I can now provide you parameters to differentiate between the two wave structures we are tracking.  But, keep in mind that, in both cases, we will likely be retreating to the 4400SPX region to complete wave [4] in the coming weeks/months, so a bit more cautious tenor towards further upside would now be appropriate.  This is why I continued to drone on and on at the 4800SPX region about how we have approximately 300-400 points of potential downside with only about 150 points of potential upside in my main updates.

As you can see from the 5-minute ES chart, I am still uncertain if we have completed this initial decline phase from the recent highs.  As long as we remain below today’s high – which represented the .382 retracement of the decline – then I can still view today’s bounce as a 4th wave in this decline.  This would suggest we can still see a lower low as long as we remain below today’s high.   Breaking back over today’s high suggests that this initial decline has completed, and then we move on to our determination between yellow and green.

I am setting a FLOOR to the market right now.  The floor is the level through we must break in impulsive fashion to suggest that the 3rd wave in yellow has begun in earnest, and that the yellow count is now taking us down to the 4350-4400SPX region.  Again, this is my alternative, but I need to objectively know where to adopt this alternative, and give up on the primary count.

Since I am still unsure whether we have completed 5-wave down, I have to assume that we have not and calculate the floor based upon an expected 5th wave lower.   Since a 5th wave does not really exceed .618 the size of waves 1-3, that gives me a FLOOR of 4625ES (which is approximately 4635SPX), based upon the high struck today.   Therefore, as long as we hold that level, I am going to maintain the green count as my primary. (Remember, since we broke below the ideal support for the standard Fibonacci Pinball impulsive structure -   which would have required two more higher highs to complete – I am now considering this pullback as a wave [iv] in an ending diagonal, which would only need one more higher high to complete).   However, if we break down below that level impulsively, then I have to assume that the yellow count is taking us down to our target sooner rather than later.  But, this is not my expectation at this time.

Should the market break back over today’s high, then I will assume whatever low we have in place will be our FLOOR, and a break down below that level in impulsive fashion will move me into the alternative in yellow.

In the meantime, I think the more likely scenario is to look for a rally in the coming days – whether it is from a lower low or not – as long as we remain over 4625ES.  That rally will be corrective in nature. Once we get our first a-b-c into our resistance region outlined on the 5-minute ES chart, we will have to be very careful about how the market progresses from there.  For if the market drops from that resistance in impulsive manner, I may be moving directly to the yellow count before we even break the FLOOR.  But, as long as all pullbacks continue to be corrective one we get to resistance, then we will retain our primary count looking up to 4860SPX+.

I know this has become much more complex than I had intended just two days ago.  But, we need to adjust to the market rather than force our will upon the market.  So, in very simple terms right now, as long as we remain over 4625ES (4635SPX), I am retaining a primary count looking for just one more higher high at 4860+.  Yet, I will be raising cash on rallies henceforth.

But, if we break that FLOOR impulsively, then I am looking down to 4350-4400SPX sooner rather than later.   And, once the market moves up over today’s high, then the new FLOOR will be the low struck in this decline.

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Avi Gilburt is founder of ElliottWaveTrader.net.