ES Morning Update May 22nd 2023

Last week I was expecting an up move for the breakout of the diamond pattern but I really didn’t think it would make it all the way up to the top white trendline in the wedge pattern, but it pretty much did (missed by a hair, but close enough).

Friday we pulled back, which I think put in the high for that breakout rally squeeze. I’ve added another trendline, which is in a yellow gold color. I think it will be hit this week and be support on that first hit, then bounce up from it to try and hold it as support all week probably.

For today it’s around 4145 or so and rises higher each day afterwards. What could be in play here is that from the 5/4 low of 4062 we started a 5 wave move up. The chop zone from roughly 5/7 to 5/16 would be some kind of wave 2 and the breakout squeeze last Wednesday to Thursday was the wave 3 up.

That suggests we will pullback for a wave 4 this week, probably early in the week, and do a wave 5 up afterwards. It should take out the high of 4225 for the wave 3 but it could also end as a truncated short wave 5, or a double top one.  Either way there’s not much left, if any, above 4225 ES.

My thinking here is that we’ll stay above that new yellow gold rising trendline that makes a new wedge pattern with the rising white trendline of the megaphone pattern. While I was previously thinking we’d go down to the lower falling white trendline of that megaphone that’s not looking likely right now.

That falling green trendline that you see connects the August 16th 2022 high of 4327 to the February 2nd, 2023 high of 4208, and will be strong support now on any move down. You can see very clearly how the entire diamond pattern danced above and below it for a month or so, and that means it’s formed a good floor of support there and won’t likely get broken on this coming pullback.

What usually happens when a big bottom is put in (the October low), and then followed by turning the moving average back up (daily chart I talking about here), is that the pullback become smaller and smaller. You can see that very clearly this  is in fact “true” here in this case just like so many others big bottoms dating back decades in the past. This period of “smaller pullbacks” only last so long and then a surprise big one shows up again.

And I’m sure it would follow some Elliottwave wave patterns too, where you have a 5 wave advancing pattern and a 3 wave declining one.  Here’s a wave count I did on April 24th of the SPX…

Now while it is still not known if we are truly bottomed or not with the October low last year I am leaning more toward the bearish count now, and here’s why… true bottoms end with an obvious “ABC” pattern when you look back at it afterwards, and we don’t have that into the October 2022 low.

There’s a very clear 5 waves down pattern, not a 3 wave drop like the 2020 crash. Take a look at this chart of the 2020 drop, which as you can clearly see on the daily chart that the A wave was just a straight drop without any clear 5 waves inside it (I’m sure I could find then on a smaller time frame though), which bottomed on 2/28/2020.

Then a nice and clean “ABC” up for the B wave into 3/4, which was followed by a C wave down that subdivided into 5 wave pattern (which is pretty much required for C waves), and the Small 3 inside the C subdivided into 5 Tiny waves… again very common for wave 3′s too.

The bottom on 3/23 ended the 5th wave inside the C wave and was “the bottom” for that entire drop. Well guess what? Do you see that kind of wave count for the drop in 2022? I certainly don’t, and I’ve tried many different wave counts to see if they would fit but the don’t.

What does that mean you ask? It means that that entire year long drop was probably just the A wave and we’ve been in a B wave up ever since. That means we could be in the bearish count and a C down is still coming later this year. When I don’t know as Elliottwave can have waves subdivide and subdivide, which would extend the B wave longer then one might think.

But if I have the smaller degree waves labeled correctly then I should be able to get close to figuring out when it ends as there’s only so many subdivisions you can do before it has to end and complete the wave pattern.

Below is the bearish count on the weekly chart…

As you can see there’s really not much more left “time-wise” to complete this pattern… if it’s accurate, and there’s no way to know that until after the fact.  Assuming it is then this week and next we should complete the pullback for Tiny Wave 4 down, which might not be much more then down to the 4050-4100 area I suspect.

Then we’d start some 5 wave move up for Tiny Wave 5 into all of June probably, and maybe into July?  Again, they love to drag these things out to put the last bear to sleep right before they pull the rug out on the market.

Now if we top in June or July that doesn’t mean we are going to just crash right afterwards.  They might pull a sneaky move where they do a nice pullback of say 6-9% and then back up later to retrace 95% or so of that drop so every one thinks it’s over.  But that might just be the  Small Wave 1 down inside Medium C with the Small Wave 2 move back up shaking out all the bears again right before “The BIG One” hits… the Small Wave 3 inside Medium Wave C.

This could drag out into the fall and that’s where we see the big crash happen.  It could be that we top in July, drop for that Small Wave 1 in August, rally back up for the Small Wave 2 in September, and then the big drops in late September and October where Seasonality has the biggest weakness period.

Lastly, here is the Bearish Wave Count on the Daily Chart.  Have a blessed day.