Welcome, Readers,
This is a review of the week’s price action in the IWM. This
week, we saw the IWM continue to climb in what I currently believe is the wave
(ii) pullback of a larger degree five-wave decline. We saw some promising
action on Wednesday that could have signaled a top in wave (ii). However, price
rallied on Thursday striking a new overnight high in the RTY futures before beginning
a sharp decline into RTH open on Friday morning. The two 1-hour IWM charts
below summarize where we began the week and where we ended the week.
It appears based on the bottom chart that we may have completely filled out the final bars of the wave (ii) pullback overnight Thursday and into Friday morning. What I am looking for now is an initial five-wave decline to signal the start of the larger-degree third wave. This wave should take price all the way down to the 160-170 region in the IWM. The decline itself should also be subdivided into five separate waves of which waves 1, 3, and 5 of that smaller-degree five-wave structure should also subdivide into their own five-wave structures. That’s simply what it means for markets to be fractal in nature. If we look at the 15-minute chart on the IWM shown below, you can see that I have labeled the decline into the end of Friday as wave i with a question mark.
There are three things I am looking for to convince myself that this really is wave (i) of the larger decline in price. First, I want to see if this structure can cleanly subdivide into its own five-wave structure. Second, I want to see an overlapping and corrective pullback that terminates into a micro resistance level. Third, I need to see price turn back down and take out the low of the day struck towards the end of trading on Friday. For starters, we should be able to find the answer to the first of these three criteria on the 5-minute chart. Let’s take a look.
I’ve labeled what I believe to be the sub-wave structure of this initial decline in price. We see a small wave (i) and deep retrace for wave (ii), a large wave (iii), a wave (iv) retrace, and a drawn out wave (v) that saw several extensions lower in price. For clarity, I’ve tried to differentiate between the prior wave labels in wave (ii) and the labels for this new decline in wave (i) of (iii) with blue and red coloring. I’m satisfied with this micro five-wave structure. As for the corrective wave (ii) retrace that I’m looking for, I need it hold micro resistance levels directly overhead in price. In other words, no new higher highs. I’ve used Fibonacci confluence zones to sketch out the overhead resistance levels in red on the chart below.
The lowest level of overhead resistance at ~205 is where I am expecting price to turn down first. It is the level that coincides with the fourth wave of one lesser degree. In this case wave iv of this initial wave (i). This is a guideline from the Elliott Wave principle which states that a corrective retrace often terminates in price within the vicinity of the fourth wave of one lesser degree. You’ll see that the first resistance level coincides closely in price with this area. So, I’ll look there first. I will note though that the only true rule for wave (ii) is that it cannot retrace 100% of wave (i). Therefore, I’ll look as high as the 205.75 level in price for a retrace. Should we see a corrective retrace into these levels, I then want to see price take out the low of the day on Friday. If this occurs, we should start to see a rapid decline as we enter the “third-of-the-third” or wave iii of (iii). This is the strongest wave in any move. Below I’ve included a projection for what the larger-degree five-wave structure may look like on the 15-minute chart if we see follow-through in the coming days. Should we retrace higher on Monday followed by a decline that takes out Friday’s low I will look to enter an aggressive short position as well as add to my existing short swing options. The analysis I have provided here is very similar for the RTY/M2K futures contracts. I will also look for opportunities and setups there as well.
For those wondering, I did not short the decline in RTY Friday
morning. I missed my entry signals. That’s why you didn’t see an analysis
article from me on a trade playing that decline. However, it did serve as an
excellent early-warning alarm for the other indices, and I made a decent entry
on the micro NQ futures. Sometimes, an index you are watching happens to lead
the others and if you are quick, you can make a go at a position in one of
those. Now for the full disclosure, I gave a significant portion of those NQ
profits back to the market attempting to reload shorts on what I believed to be
end of its wave (iv) retrace. I should have stopped myself out and waited for a
complete retrace and entry signal, but I got greedy and stopped focusing on
what had worked for me all last week. I ended the day with a P/L of $36 rather
than $295. Lesson learned, control your emotions and manage your risk. Keep my
mistakes in mind and learn from them as you move into next week Until next time, take care of yourself, manage
your risk, and always keep learning.
Update #1 (9:45 a.m., May 13): Wow, we came up a lot higher than I was expecting. Even though we traded past my resistance levels, we managed to hold the high struck last Thursday. I opened an additional swing short position in the expectation of a larger decline coming throughout this month.
BTO 6x IWM 201P (May 23 expiration, average fill 1.42)
Best,
DW
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