Looking at the wave structure, I can't find a way to easily count a completed five waves down at minute degree and above. In the top chart below, I'm showing a 2D chart for an intermediate degree picture.
Sometimes it's not entirely clear whether a particular wave is extending. My assumptions are based on three guidelines of Elliott Waves. First, that second waves often deeply retrace the first wave. Second, that fourth waves are often sideways and drawn out affairs. And finally, that momentum is often the highest in the third wave.
Let's just step through the top chart where we are carving out an intermediate degree wave down. I've decided to look at each thrust down in isolation, and the size and shape of the ensuing retracement.
The first wave down:
I have labeled the first wave minor degree wave 1. The retracement of the first wave down that began on 5/2 was a shallow 38.2%. Shallow second waves are not very common, but in a strong trend, not unexpected either.
The second wave down:
The next wave down showed clear five wave subdivisions, but ended up being shorter than the first wave. For this to be a valid third wave, it would have to be longer than the next wave down (the third wave is never the shortest). Well that's off the table, as the next wave is the longest wave down yet. In addition, the retracement of the proposed third wave is greater than 61.8%, which would be very unusual for a third wave. Finally, it overlaps the first wave, which is a rule break. Based on deep retracement, and the size relative to the first wave down, I've decided to label this an extended first wave of minute degree, wave ((i)).
The third wave down:
The next wave down carried the greatest momentum we've seen so far, which fits in well with a third wave. Additionally, it was followed by a sideways, drawn out correction typical of a fourth wave. I've labeled this minute degree wave ((iii)).
Looking at the 4H chart to zoom in on the final thrust down, we appear to be carving out a fourth wave of subminuette degree. The momentum lows line up well with the third waves, and the proposed subminuette degree wave iv should terminate within the area of micro degree ((4)).
In summary, we need to trade lower short term to complete a fifth wave of minute degree, which will still only be a third wave of minor degree by my estimate. I expect that the upside work accomplished today will only last the overnight session, or the early part of the trading session tomorrow before the downtrend resumes.
The Ichimoku trending indicator seems to agree. The signal line is well below the base line on both time frames, and price is nowhere near testing cloud resistance. Price is trying very hard to get up to the base line in the lower chart. I have a feeling if it can even get there, it will bounce off it hard. This is a very bearish picture.
I remain short, and in fact decided to sell the short leg of my verticals today. We'll see how this strategy plays out this time around.
SPY
Looking at the equity markets, we are still carving out a minor wave 3 down by my estimation. It remains to be seen whether we are actually in the fifth wave down of minute degree, or just continued chop in minute ((iv)). I feel like just based on time, we need the next wave soon, or wave form becomes a problem.
The Ichimoku charts tell a very interesting story. You can tell that prior to June, price was well above the cloud support. On June 3, the signal line crossed below the base line. Thanks to TOS On Demand, you can see exactly what the chart looked like at the time.
The cross happened above the cloud, however, which is a weak signal. Also, the lagging line was ever so slightly below price, which was also weak bearish signal.
The attitude here should be get defensive if you're bullish, or possibly tighten stops. If you're bearish, and aggressive, you could try short at the cross, or wait for price to break cloud support. I think a strong rising cloud like this one should be respected though, and waiting for a retest of resistance makes sense.
If you were trying to religiously follow this to time the next leg down, even a conservative signal cross on 9/13 would have resulted in a stop loss. The next cross happened above the cloud bringing us current, where price is trying to test cloud resistance yet again. The big lesson here is to pay attention to the higher time frame. I think the wave principle also helps keep you from stepping in front of a freight train if you have an idea of where you might be in the wave structure.
Sentiment
The last thing I wanted to discuss is trader sentiment, which also helps form a contrary opinion at times. The chart below from stockcharts.com, is a chart of the 21 period EMA of the CBOE equity only put/call ratio. The first observation is that the current levels are at the lower end of the channel going back to January of this year. So it follows that we'll either head back up to the top of the channel, or we'll break out of the channel, starting a new intermediate trend. While the latter would be very bullish, it seems like a long shot. Odds have to go with the channel that's been in place for 9 months remaining in tact. Below the chart is an indictator that works like the MACD, comparing a fast and slow moving average. The PPO line has been holding below the signal line, but one could argue that after a month of sideways movement, we should soon get a pop in either direction.
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