$ES #ES-mini #long setup
When we see a wave -i- up followed by a quick a-b-c move down, the base case is straightforward: the market is completing a corrective wave -ii- down, setting the stage for bulls to launch a strong wave -iii- up rally.
But quite often, that initial a-b-c move down happens so quickly that it doesn’t shake out enough bullish positions. What follows is a sharp recovery that pushes to a slightly higher high. On the surface, it looks like the promising start of a wave -iii- up — but then the rally suddenly stalls.
ES-mini 5 min chart
This “frozen rally” is typically just a premature attempt to start wave -iii- up. We label this failed move as a corrective wave -b- up.
Afterward, we usually expect a sharp drop in subwave -c- down, which completes the wave -ii- down correction.
This second leg down essentially finishes the job that wave -a- of -ii- started.
The purpose of this second push down in a subwave -c- down is twofold:
- To plant doubt among retail traders about the continuation of the rally.
- To lure in fresh short positions from the bears, adding fuel for the next impulsive wave higher.
Even more importantly, if that additional push lower still results in a higher low, it is widely interpreted by millions of bulls as yet another sign of bear weakness.
That second failure by the bears then becomes the trigger for a powerful new leg higher, driving the market to fresh highs.