Probable contracting triangle in US stock indices since 21 Feb

E-mini S&P 500 futures, 150-minut bars

(Click on image for larger view)

Price action since 21 Feb is highly consistent (so far!) with a “contracting triangle” Elliott waveform. To confirm that diagnosis, however, price must make a new high above the high on Friday, 18 Feb before it makes a low lower than the one on 24 Feb; and ideally, there should continue to be a progression of lower highs and higher lows until there is sudden, “unexpected” (heh) upspike to a new high. If so, then that final upspike will be quickly reversed and completely retraced back down–with even greater downside action possible.

Caveat: Elliott Wave analysis is no different than any other technical analysis methodology: it’s probabilistic, not deterministic. Elliott Wave analysis is like playing “Wheel of Fortune,” where you try to guess the full phrase based on only some of the letters. Elliott Waves are easily determined once they are fully complete, but getting them right “in progress” more than about 2/3rds of the time is probably impossible (and you have to be REALLY good at it to even come close to that hit rate)

UPDATE [2011-03-10]: Today’s price action has made the contracting triangle interpretation far less probable—although the price structure could still evolve into a larger contracting triangle, into a flat, into a double three, or a downward zig-zag. Also possible is that a major new down trend has started, although there are non-Elliott wave reasons I don’t prefer that interpretation—yet.

Updated price chart [ES | 150-minute bars]

(Click on image for larger view]

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