As we expected, the market tested the 2030/2040 support level and bounced above 2050 in what looks like a completed ending diagonal. This can be significant as it either indicates the completion off a 5-wave ending diagonal pattern, leading back to new highs — or it is only the completion of a leading diagonal – which will result in a pop and then a drop.
The S&P drifted lower into Friday’s 8:30am Jobs report without a bounce. Shortly before the report it, the market drifted lower below 2040 support — and once the report hit, we pushed down towards 2031 — which is the support level we’ve been talking about.
In an alert to subscribers, I said that:
“There’s support in the 2041/2035 ES Region — may be a buying opportunity here in the low 2040s or upper 2030s if support holds.”
Indeed, we kept testing the 2040 level multiple times on Wednesday and Thursday.
On Friday – we briefly tested the 2031 region in the pre-market –marketing the end of the ending diagonal (see below) and then rocketed up at the open in an A wave up.
What followed next was a B-wave down in the 2034 region, before making its way up .
We ended the week above 2050 with noticeable momentum after the close.
Usually contracting diagonals occur in the wave 5 position, but occasionally they can happen in the C-wave position — as is the case above.
Actually, the diagonal in the Nasdaq did occur in the wave 5 position, but in the S&P, it occurred in the C-wave position.
Now, the question is whether this contracting diagonal is a leading contracting diagonal or an ending diagonal.
This contracting diagonal pattern can either be completing wave 5 as shown in the diagram on the far left.
Or it can be in the wave 1 position of what would be a very bearish market — after an initial wave 2 pop.
Unlike the S&P, which developed a diagonal in the C-wave position, the Nasdaq, developed the diagonal in the wave 5 position. It had already fallen 4 waves before the diagonal formed. This makes me see the diagonal in the Nasdaq as an ending diagonal (bullish), not a leading diagonal (bearish).
Now, here’s the thing — if the Nasdaq is in an ending diagonal and is bullish, then is it possible for the S&P to be in the opposite – a leading diagonal, which is bearish?
I don’t believe that’s possible.
Notice how the Nasdaq found support at the 4300 region — a level I pointed out several days ago. We’ve been spending a lot of time in this region –and the reason I think is because we were forming an ending diagonal in which blue wave i touched 4300 — while the remaining pattern had to play out further into this support region.
From a daily chart perspective, it’s possible that we completed a wave 2 drop –and that a 3rd wave up is just beginning –IF we indeed just completed an ending diagonal in the wave 5 position.
This chart is clear in hindsight, but as the waves are developing it’s not simple easy to immediately recognize the above.
Instead, during the process of labeling, I use a series of 1-2-3-4’s to help. With this technique, what you’ll notice is that you will see lots of high 4th waves — but really they are forming an ending diagonal, which is clear in the above diagram, but not so clear as the waves develop.
The Nasdaq broke the down trend line Friday shortly before the close. Of course, we brought this to our subscribers‘ attention in timely manner — without other extraneous noise.
The Russell also formed a contracting diagonal — though there wasn’t that much overlap as there was with the Nasdaq and S&P diagonals. Since this diagonal is coming off of the top in the Russell — it is possible that this diagonal is occurring in the wave 1 position — which partially contradicts the wave 5 position diagonal in the Nasdaq. Wave 1 position usually suggests much more bearishness. Wave 5 position usually suggests reversal.
So what happens this coming week? Well, most likely in the first few days, the market will rally. The question is how will the market react to resistance near the top of wave 2 in this diagonal. If it reacts strongly from it and turns down, it could be a sign of a wave 3 down. However, if it holds steady, then it could be that we will be coiling for new highs in all indexes.
My gut says that since the Nasdaq has already retraced to the 61.8% mark of the entire rally from the February lows, it would be a bit excessive for the Nasdaq to fall even further. I’m leaning towards an ending diagonal being put in place in all indices – which means the Nasdaq could potentially be starting the first portion of a wave 3 up — while the S&P and Russell could be starting a 5th wave up to complete a larger wave I.
I recognize that this contradicts a lot of bearish viewpoints out there. A lot of people were seeing this ending diagonal as a 1-2-i-ii setup to the downside — with the possibility of wave 3 down starting with the 8:30 am jobs report on Friday.
But the exact opposite happened. And I think it’s because the leading/ending diagonal is often confused with a 1-2-i-ii- wave setup. The fact that a 3rd wave down did not happen should invalidate that set up.
So right now, I am looking to see how the market reacts to resistance zones — as that should give us clues as to what will be playing out.