The Weekend Update
Let me share two important inputs that we should take into consideration before we start working on Elliott Wave analysis.
(1) the Crowd Feels VERY bearish:
According to the latest AAII Sentiment Survey:
*last week’s bullish sentiment reading ranks among the 60 lowest in the survey’s history, and
*there have been fewer than 35 bearish sentiment readings at or above 55% since the survey started in 1987.
(2) we have extremely strong Bullish historic seasonality for the second part of October (see the chart).
Many Elliot Wave analysts keep promising a devastating wave 3 down.
But we keep getting wild pullback, something that NEVER happens in wave 3 down. Those considerations make me consider TWO similar and very tricky scenarios that are bearish only short term and may soon produce a very strong five wave up impulsive rally or at least a large three wave up pullback.
(Scenario 1) The Simple Bearish Scenario:
This is how ES Daily chart can be counted in accordance to that straightforward and the most common corrective structure:
According to that Scenario 1, there is a chance that quite soon we can complete the whole corrective (A)-(B)-(C) down structure off the Jan’22 top.
Once you come up with such a hypothesis you need need to conduct one test to check its validity. Specifically, you need to add extensions of the first leg down labelled (A) to compare size of wave (A) and wave (C):
Note that we got a wild consolidation at the very first target at 76.4% ext of wave (A) down (3,592.17).
But as I explained in the Lesson “Underextension”, when the second leg down stops at 76.4% extension of the first leg down, quite often a new rally fails. Because the second leg down in wave C almost always gets larger than the first leg down in wave A.
On that daily chart you can see that the next strong important level working as both, a support and a magnet, is 100% ext of wave (A) down = 3,360.
Let’s now zoom-in to 60 min chart to see details of the micro structure of the decline off the mid Aug top:
That scenario 1 can be considered a very bullish one because upon completion of a corrective (A)-(B)-(C) move down we should expect either a new impulsive rally targeting new higher highs (over the highs made in Jan’22), or, at the very least, a large corrective (A) up, (B) down, (C) up structure (my preference).
(2) Scenario 2: Very Bearish path
Now Let’s review the second scenario, a low probability scenario that is widely expected by the majority of wave analysts:
Under the Very Bearish count we can count the decline off the Jan’22 top as an unfolding five wave down structure:
Under that structure, the first part of the wave 3 down, in subwave A, is a weaker leg down. It is normally followed by a flat shallow A-B-C up pullback in subwave B up of wave 3 down.
Upon completion of that flat consolidation bears finally start the strongest leg down in subwave C of wave 3 down targeting much lower lows.
If we apply standard extensions, they return a target for subwave C of wave 3 down at 2,140 and a target for wave 5 down at 1,655. That sounds too apocalyptic to me and I do not consider that super bearish path a feasible scenario. Because we got a rally with a very clean five wave up structure from 2009 to the top in 2022 we should reasonable expect a corrective 3-3-3 or 3-3-5 structure instead of an impulsive five wave down structure.
Now let’s discuss my preferred scenario where ES-mini has been following the most complex corrective “3-3-3” structure.
(Scenario 3) The Most Complex Corrective “3-3-3” Structure.
You can note that the simple 3-3-5 and the complex 3-3-3 structures look similar:
They look similar because 3-3-5 structure is part of the more complex 3-3-3 structure. When we get a completed large (A)-(B)-(C) down structure (highlighted with the green box) bulls get an attractive LONG setup for a new five wave up rally targeting first the previous high, the starting point of that (A)-(B)-(C) down structure.
At the Green Point the market does NOT know what scenario it will follow. That is a major crossroad. The legacy of the market will depend on bulls. Bulls will have a chance to start a new five wave up impulsive rally targeting the Jan’22 top.
If, instead of a five wave up structure, we will get a corrective (a)-(b)-(c) up structure that would be a strong sign that bulls are about to fail.
Let me show you a great example from our very recent past:
Let’s look at the first (a)-(b)-(c) down move off the Jan’22 top in ES-mini:
That clean corrective (a)-(b)-(c) down structure bottomed in late February 2022 looked like an invitation to buy.
At that point one could reasonable said we just got some corrective micro wave (iv) down to be followed by another (a)-(b)-(c) move up of wave (v) up:
Look, any a-b-c down move against a strong rally should be considered a corrective pullback that is normally followed by another rally.
So bulls had a setup for a micro five wave up rally targeting the previous high.
This is what that wave count required bulls to do:
But bulls failed:
Off the high labelled -iii- up bears produced a micro a-b-c down move that looked like a corrective wave -iv- down. At that point the bullish count required bulls to turn ES back up and start a new leg up in a micro wave -v- up. But bulls failed to do that.
What did we git as result of that bulls’ failure?
We got a three wave up move making a lower high! That was the sign that we dealt with a corrective, not impulsive structure. Then we had to expect either another three waves down or another five waves down.
… after that three wave up pullback (in the grey box) ES dropped in a five wave down structure (in the right yellow box)!
By now you might have lost my way of thoughts and might ask me why I started talking about that crossroad that happened in mid March 2022.
Because one more drop expected by that count would bring us to another major crossroad point:
One more drop to the Green Box (shown on the chart below) would allow bulls to start a new five wave up structure:
But nothing is guaranteed. Again, everything will depend on bulls. Bulls will be able to start a rally out of the Green Target Box. If they fail to produce a five wave up structure as they did at the end of March 2022 and we are left with only a corrective three wave up structure, that would be a setup for another five wave down decline.
You may say, it sounds too complicated, there are too many alternative scenarios.
I would not agree. We have two most probable scenarios. The main takeaway from this weekend update is that the both scenarios allow bears to push ES down to 3,360, and both counts would allow then bulls to start either a five wave up rally or at least a three wave up corrective bounce!