Special Weekend Update: Looking to the SPX for direction

THIS IS A LONG POST SO IF YOURE NOT A BIG READER THIS IS YOUR WARNING:

Today I wanted to try something different and look at the cash market and go through all the scenarios objectively. For those traders who have ever wondered which chart is the chart to determine the direction of the SP500, the SPX cash market or the ES futures?

It's the SPX cash market.

I have said many times previously that each chart should be considered its own story. The ES (in the above main chart) is a different instrument than the SPX.

Question: Then why even track the ES if our goal is to determine the direction of the SPX?

Answer: For me as a trader I trade ES futures, so why would I track the cash market?

It's a good question. But in truth I do not seek profits in the SPX. I primarily deal in futures options. This post is not about why I choose to do that...that's a conversation for another time. However, when I am selling a strike price and choosing what expiration cycle, the ES is going to provide me the information I need to make those decisions. However, I do think it's a relevant endeavor to check in on the cash market chart to see if it gives me clues or insight into the ES chart. The last thing on this subject I'll share is the ES chart is far more complex. I would even go as far as to say it's twice as complicated as the cash market chart. The overnights provide complex patterns in a low volume environment that as an analyst sometimes can make things very challenging to analyze. But let's dive into the cash market and see what clues, if any, we can ascertain. This post supposes NO BIASES. Bullish or Bearish...I'm looking at all the potential scenarios.

We start from the October Lows:


BLUE PATHWAY

Highlighted in Blue I can count a leading diagonal off the October lows. Now a leading diagonal is a motive wave, which means the prevailing trend is now up, and we should be able to count a 5-wave structure into its ultimate conclusion. If the blue count is correct, then this supposes the October lows could be the bottom for the bear market. Why is that? Because we look for corrective patterns to end and reverse-trend upon observing the developments of motive waves. Motive waves are confined to impulsive 5-wave patterns and diagonals. Nonetheless, I can count a leading diagonal in 5 overlapping waves, followed by corrective price action in a 3-wave structure equating to a wave 2. Currently I would state that price now appears to be in its first subdivision wave 3 (i of 3)...with one caveat, we should be targeting the .618% to .786% fib extension. The .618% extension resides at 4140.81. However, price has yet to breach the 4100 level. This level in the cash market has been rejected twice before. So, if price can get above the 4100 level and stay there...the blue pathway is intact and must not be ignored.

Blue Pathway Conclusion: I would say the next week should provide enough price action to breach the 4100 level and see some sort of reaction to the .618% area of 4140.81. If price does get as high as the 4140.81 level, I think it’s time to adopt a more bullish perspective. However, under the blue pathway if at any time price breaches 3764 then this pattern invalidated. Now 3764 is a long way away from where we are now...so you see price can decline by a lot and still not invalidate the bottom is in thesis. Therefore, the blue pathway has a lot going for it as of now. My issues with the blue pathway are this all starts with a diagonal. Diagonals are notoriously unreliable patterns because they can be interpreted as something else as I will explain next.




BLACK PATHWAY

Highlighted in Black

The black pathway, in my opinion, is a safer pathway for traders to adopt because it doesn’t suppose we are impulsive. You see under the previously explained blue pathway, and impulsive considering the leading diagonal start would point to the possibility of ending as high as minimum target of 4846 and as high as 5349.75. That’s new highs. So, to adopt that analysis and not consider the black pathway which could reach only 4220.39 to 4372.01. The risk here is waiting for price to reconcile higher (blue count), only to find price at NEW LOWS and not new highs. As a trader, price must prove its intentions to me every step throughout the structure. I have received many direct messages criticizing me about the fact that I typically will feature 2, and on occasion 3 potential outcomes on a chart. I have no idea why readers think I should tell them the future of where price will go and give them one outcome. People who read my posts, or who choose to follow me, get my personal trading strategy annotated on a chart who is seeking to profit from his analysis...not provide readers with a money back guarantee. Formulating a trading strategy around the black pathway (which could finish around 4200-4400) is infinitely less dangerous than the previous blue pathway. However, you’ll notice the two pathways follow an initial similar path.

Black Pathway Conclusion: Clearly, I favor the black over the blue pathway mainly for risk management purposes as price approaches the 4200-4400. I have no problem with the black pathway. I have only a slight concern that the “b” wave bottom struck on 12/22 was too quick to be all of the b-wave considering the length of the previous “a” wave. There is no Elliott Wave rule that substantiates my concerns with respect to duration. Let’s just say my intuition is this area will be revisited before going higher. Now my concerns will be alleviated if price breaches 4100 and stays above it. We have come into this area (the area we are now) twice before. If three times is a charm...prove it.




GREEN PATHWAY

Highlighted in GREEN ARROWS

Now, as an analyst, the green pathway solves all my concerns. It fits within the rules of EWT, and It solves not only the issue I have with duration, it solves the overlap issues I have with the leading diagonal (how we started) and the overlapping issues afterwards. It also catches most of the traders off guard as witnessed in the put/call ratio. I will acknowledge sentiment was extremely bearish in October and a retrace of some magnitude was warranted and we’re getting that now. But recently I have taken to listening to the live CNBC stream on my phone while in the office as back ground noise. I noticed the other day; I get the sense from the CNBC guests that sentiment is bullish now, or at least getting more bullish. I see that bullish (or at least constructive) view show up in the fact that traders, by and large, are not too protected from downside. The P/C ratio in the ES on Friday got down to 1.3 that means slightly more traders are buying puts than calls. The normal P/C ratio in the ES is around 1.75-2.0 during uptrends.

Green Pathway Conclusion: I favor this pathway because it solves the time duration between the a-wave and the b-wave. It also reconciles why we have so much overlap in price.

In summary, I am unsure which of the above pathways price will take. When a trader is analyzing corrective price actions there are many forces at play. These forces push, pull and tug on prices in both directions. But in all the above cases, I am expecting a retrace. Whether that retrace is small (as in Blue and Black) or deep (as in Green)...WE SHOULD BE RETRACING SOON. This retrace, and what price does afterwards will provide a huge opportunity for profits.

Let’s not get married to one pathway over another...LET’S LET PRICE PROVE Its INTENTIONS...AND THEN BE PREPARED TO PROFIT.

Best to all,

Chris