Market Analysis on Nov 2nd, 2016


A few weeks ago I made a post regarding how frustrating it can be to trade within diagonals. At the time it was quite appropriate because we were in the midst of a diagonal in the SPX. Well 3 weeks later we are still trading in that diagonal so I think it is appropriate to post version #2 of Everyone Hates Diagonals...

As mentioned in the previous post trading within ending diagonals can be frustrating as the patterns are made up of corrective waves in which we often see very little follow through. The key point to remember about diagonals however is that the easy money is not made attempting to trade within that diagonal but rather when that diagonal ends. As when an ending diagonal ends it almost always will make a very sharp move back towards the origin point of that ending diagonal. 

In the previous post I gave an example using the VXX of this very phenomenon. Today's example is using the USD/JPY chart. If we take a look at the Ending Diagonal that we were tracking in the USD/JPY that began on the 10/19 low we can see that we had a series of overlapping waves forming that we were able to connect with our trendlines. In this particular case the diagonal was a bit expanded, not unlike what we are seeing right now in the SPX at the moment. The diagonal was also forming in the correct location within the larger degree pattern to signal that it was indeed an Ending Diagonal and not likely to be a Leading Diagonal nor was it likely to be something more bullish (like a series of nested 1-2s). As you can note at the 10/28 high we came up a bit short of the upper trendline before seeing a sharp impulsive reversal to the downside breaking back through the lower trendline. This impulsive move down and break of the trendline was our initial signal that the ED had ended. We then saw a corrective retrace that tagged the 76.4 retrace prior to moving sharply lower right back to the origination point of the Ending Diagonal.

This was a textbook example of what occurs when an Ending Diagonal finally comes to completion. So as mentioned in the previous thread while some may hate ending diagonals these are actually one of my favorite patterns to trade and I will always do my best to remain disciplined when I see one forming in preparation for what comes after the ending diagonal ends.... In this particular case that is exactly what we did in the Forex Service on Monday as we had identified this trade setup at the 105.05 level with stops just over the 105.52 high with targets at the origination point of the ED which we hit this morning for a gain of 181 pips risking on 51 pips on the trade.

Michael Golembesky is a senior analyst at ElliottWaveTrader covering Forex, the S&P 500 and the VIX. He contributes frequently to Avi's Market Alerts service at EWT while also hosting his own VIX Trade Alerts service and co-hosting the EWT Forex service.