The Pattern Is Suggestive That There Is Still Some Unfinished Business to the Downside

We saw the market gap lower overnight, only to whipsaw around most of the day. We are currently trading up significantly off of the lows. However, the move up off of the lows is so far only three waves in nature and is still sitting well inside of the retracement zone that could still swing this lower in the coming days. In fact, the pattern to the downside still looks incomplete in nature, which has me leaning toward lower levels still to come in the days ahead before we see any sort of breakout to new highs. With that being said, the overall structure remains quite sloppy, so the exact path we take to get there is a bit more of a question. I will, however, lay out the parameters that I am watching, and we will simply have to wait to see if the market will see a move lower sooner rather than later or if more twists and turns are still in store.

As shown on the ES chart, we are currently in the b wave retracement zone, which comes in at the 7535-7571 zone. As long as we continue to hold within this retracement zone, my base case will remain that we are topping in a wave b, still needing further downside action to complete the initial abc move down off of the highs. As I noted yesterday, the move down does look like it is taking the form of an Ending Diagonal, so the exact path lower will be difficult to project. However, because the pattern still looks incomplete to the downside, I have to lean toward seeing lower levels before any sort of breakout to new highs is seen.

If, however, the market breaks over the resistance zone as noted above, then it would open the door to seeing a push higher before any sort of significant top is found. Furthermore, due to the deep move lower today, if we do break out higher, it is certainly possible that we would be moving higher as part of a very shallow retrace for a wave 2, as shown in yellow, thus moving higher in a wave iii of 3 up. I do have to view this as a lower probability, however, given how shallow the retrace was and the structure of the wave structure off of the 6/25 low.

So for now, as long as we remain under resistance, I am giving the benefit of the doubt for this to resolve lower to fill out the larger corrective pattern to the downside.