With the move through 1484 on the E-mini futures, we directed our sights this past week to our "blue box" target of 1491-1497, and slightly exceeded it. So, as everyone keeps asking in our trading room, "Is this the top?"
No, it is not likely the top, but we are clearly going to be making a top. And once I hit a "blue box" target zone, I always suggest tightening stops, taking profits, and/or tailoring your risk positions.
So, now is a very good time for us to go through our Fibonacci Pinball once again, to maintain our perspective on expectations within the market. When you review this methodology, please remember that it is based upon probabilities, as these specific movements through Fibonacci extensions happen much more often than not, but they are not absolutes. I will be discussing the reasons behind how and why Fibonacci Pinball works so well in the equity markets at the upcoming Traders Expo in New York, so I hope to see you all there.
There are no such things as "absolutes" in a non-linear market, and it is only those who maintain a very rigid view of markets that set themselves up for failure. They are the ones who look at what the market is doing, and say that it just does not make "sense," so it clearly must be "manipulated." Whether they blame the Fed, or the "crooked banks," or whomever they deem at fault at the time, it really does not matter.
But markets do not move based upon sense or logic. So, always be mindful when listening to these supposed "experts" when they complain about the market (usually because they missed the rally or decline at issue), as they need someone to blame other than their own limited views of the market. This is why listening to anyone who is a "perma-anything" will never help you discern what the market is doing at any given time. Again, since markets are non-linear, you always need to take a non-linear perspective regarding their movements, and always maintain an open mind.
As for our Fibonacci Pinball, as you can see from the daily chart we linked to below, when we are in the heart of a wave iii of 3, our standard targets are either the 1.00 extension, or the 1.236 extension. This week, the market has hit our 1.00 extension target. So, the question now is if the market wants to push through the 1.00 extension on its way to the 1.236 extension before we see a correction. But make no mistake about it, a correction can clearly begin from the region we are in right now.
So, if the market begins the correction from the 1.00 extension, then the wave iv of 3 pullback most often targets the .618 extension, which in the cash market is in the 1460 region. However, in very strongly trending markets, the market may not drop below the .764 extension, which is within the 1475-1480 region in the cash market.
The way we know at which level we need to go long is by identifying the confluence level between one of those regions, along with where the a-wave of wave iv would have a standard Fibonacci relationship with the c-wave of wave iv. So, until the correction begins, we are not able to identify which of the two targets will most likely be the support for wave iv.
However, if the market were to push its way up to the 1.236 extension next week , which is represented by 1520 ESH3 �region in the futures and the 1527 region in the cash index, then it becomes highly unlikely that the market will see its way below the .764 extension for the wave iv pullback.
Either of these pullbacks set the stage for the next phase of the rally towards the 1.382 extension or the 1.618 extension, which means, after the wave iv of 3 pullback, we are headed up next to the 1550 region in the S&P 500. Yet, on the next pullback, if the market fails to maintain support over the .618 extension, this opens the door again to the yellow count represented on the 60-minute ES chart, which has become less likely (but still within the realm of possibility) with this move up this past week.
So, for now, while there may still be some room left on the upside, the greater risk is to the downside, as we are now dealing with a limited move up remaining. So, for those who were not able to join in the "fun" of the last rally, do not fret. Another bus will soon be arriving, as you can board on the next pullback for the run to the 1550 region before the next larger pullback takes hold.
See charts illustrating wave counts on the Emini S&P 500 and INX.
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