As I write this morning, Dow futures are down 55 points.  Of course, that’s the perspective r an hour before the release of May durable goods orders and last week’s initial jobless claims, so anything can happen by the time the bell rings.  Any big gap (up or down) challanges us by hiding the underlying wave structure.  A gap of 55 points could be a half to a third of the entire move down we expect for a wave (v).  Should that move come on a gap, we’ll have a hard time figuring out if the move counts complete in our target range.  Such is our lot.

If we ask ourselves what the gap could hide, we can see that we haven’t fully considered the scenario of five waves down into Wednesday’s low shown as an alternate count in magenta on a 10 minute chart.  We dismissed this count without directly addressing it, so let’s talk about it.  This magenta alternate counts a triange where there is a properly formed triangle shape.  This is probably the single most attractive thing about the count.  The reasons to dismiss it were burried in other discussion.  Aside from having an rather extended fifth wave, the move doesn’t look good on technicals.  MACD and EWO lack divergences at fifth wave lows.  We switched to a 10 minute chart because it’s more appropriate for looking at technicals on a move of this length, although the technical picture is even more pronounced on a 15 minute chart.

A second factor to recommend this count is the fact that Wednesday’s post-FOMC bounce retraced 38.2% of what would be a five wave move.  This is an indication that markets recognize the move as an entity. 

Let’s be clear, this isn’t our most likely count, but we do need to consider it.  Therefore, we also need to consider the possibility that any move downward from Wednesday’s high has us in wave (iii) down and that’s where a gap open is problematic: if we can’t count a significant portion of the next move, then it may become more difficult to tell which case is more likely.

 

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