Full Index Counts for $ES, $NQ, $RTY and $YM with Justifications

The indexes are expensive. They are stretched well above their long-term moving averages (with the exception of the Russell, which recently came close to its 250-EMA and isn’t all that far above it now). September and October are seasonally fairly bearish months. The rallies from the March of 2020 lows all seem very mature. One would, on the basis of all of that, expect imminent corrections in either time or price.

The real question then becomes, “How imminent?” I can’t know that for sure, but in an effort to incorporate my thoughts on the $VIX and the evidence I see that suggests we’re not too close to devastating corrections or market top type price action, I’ve laid out these counts on the indexes.

Friday’s $ES price action has led me to believe it will rally sharply at least in the short-term, and what it does from there is still a bit of an open question of course, but I tend to think it felt more like a “wave 2,” having not really broken down hard enough for my tastes. If we had already entered a larger degree correction (like my green 4 below), I would have expected an even sharper initial move down. If we get the rally I’m expecting in the short-term and it stalls, then I would be more likely to believe that my blue 5 (green 3) in the count below should actually be placed where I’ve got the little orange 1 just above us. But, we need to see lower prices, and most especially, we need to take out some prior lows.

It’s my belief that when one of these larger corrections comes along (the green 4, the orange 4), we won’t be asking if we’ve entered it. My trading strategy for the next weeks, even perhaps the next few months is to not be heavily long anywhere too close to the top of the channel, and to buy dips tentatively when short-term setups present themselves on the indexes, while looking for short-term setups in individual names. I am often both long and short at the same time, so I hope not to get caught off guard if these show up. Also, many people are expecting a huge swoon, maybe a 5-700 point drop for the intermediate 4 (large orange 4 on the very right). I’m not entirely convinced that we’re going to get it. It’s just as likely—I think—that if and when we enter these corrections, we correct as much in time as we do in price (and so I’ve drawn these possibilities as triangles on the right side of many of these charts, though the corrections can take any form).

ES

$NQ is very similar to $ES, as you would expect, given the weighting of these indexes. If it has entered a 4th wave here, it could go as low as the orange target box, but I say that with some doubt as all of the last wave fours we have had have not made it to their ideal fibs. If I am off on this count, it may be more like $ES above in that we’re going to go straight up to the green 5 now. I am leaving these counts as they are so that I can keep both alternatives in mind for both indexes, as they often follow each other closely. If I gain greater clarity during the course of the week, I will of course announce my thoughts as we go.

NQ

For the $RTY, I am going to stick with the bullish interpretation because this index of course is rate sensitive and I believe yields going up is more probable at this time. I’ve set these future labels based off of appropriate fibs, but it does look a bit rich, so it’s unclear if we’ll actually get that high. But, we’ll just have to watch the structure of things as it unfolds and adjust as we go along. The markets are probably incapable of rallying much from here without some real breadth improvement, and so if we do rally, it will probably mean that the broad Russell is doing very well in that time.

RTY

$YM is interesting because it’s been very lazy. This is the count I’ve supplied, and it requires a failed 5th here locally as it failed to make a new high. That said, I like the count because it puts the Dow already into its green 3 that I am expecting further ahead in $ES and $NQ. And that works well because the Dow often leads the other indexes (and the Russell even more so: note that the Russell is already past it’s big orange 4).

YM

I want to make sure I’m not risking the dangerous desperation of always saying, “Just a little bit higher…just a little bit higher…” but there are many things that I am trying to incorporate into the counts here. One of them is a difficult-to-quantify sentiment gut check, and it’s based in part on my sense of the bullishness or bearishness of the whole complex of analysts I follow on Twitter, Youtube and elsewhere on the web. And I just can’t shake the feeling that virtually everyone right now is looking for these same corrective periods that I am looking for. One difference is that many are expecting them right now, and so I’ve pushed mine forward a couple of weeks in an effort to not join that consensus.

One last thing I want to point out on $ES is something I have been watching develop for years now: the weekly RSI divergence:

ES-RSI-WEEKLY

Until we poked above the green trend line in May, this was to be interpreted as a long-term bearish indication. It comes from the whole “megaphone structure.” It is generally understood that so long as that line holds, one should expect another trip to the downside, and on the weekly chart, that means a catastrophe in the markets. However, though we still have divergence between January 2020 and now, we don’t have any divergence locally (orange). And the way we would normally want to interpret that is to expect higher prices over the next weeks if not even months. So, though we may be entering a corrective period, as of right now, I don’t think much of it will be catastrophic (though of course none of us will want to be caught levered long at any tippy top).

Have a great night guys, and gals, and let’s hope futures don’t crash when they open, immediately invalidating all of these counts.

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