Sunday, December 20, 2015

A Matter of Degree

In yesterday's post, it was shown how it possible that Primary wave four is becoming longer in time. One of the best pieces of supporting evidence for this count is wave degree. Typically, Elliott termed minor degree waves as those that showed up on the 'daily' chart, whereas intermediate degree waves were those that comprised the weekly chart, and Primary degree waves those that comprised the monthly chart. Please refer to the daily chart below for this discussion.


In our prior posts, we had counted down the daily waves to the August 2015 lows as Minor degree waves A, B, C or alternatively minor 1,2,3 (but 5 was not made in the SP500). We said 1,2,3 and A,B,C are equivalent until they are not.

One key point - and please don't miss it - is that the three minor waves lower form an Intermediate degree wave of some label. We had presumed it 'might' be intermediate (A) of a larger primary fourth wave triangle - and  that is still a possibility. Regardless of the specific label at the August low (A) or (W), we then have labeled three more minor waves higher to the November high. So, this structure now makes an Intermediate degree (X) wave - or less likely an Intermediate degree (B) wave. This type of degree labeling is proceeding simply, and smoothly and naturally. There is no 'guess work' or forcing of degrees to some preconceived notion or tortuous attempt to fit "degrees to points", and you can see that the A-B-C down to (W) and the A-B-C up to (X) consume 'roughly' the same amount of time.

But the next point to absorb is that under Elliott's structures, a Primary degree wave is composed of Intermediate degree waves. It would be a mistake to jump from minor degree labeling directly to Primary degree labeling, without explaining where the Intermediate degree went!

In the count above, the Intermediate degree is clearly shown. That is the major point - we are not leaving the Intermediate degree waves out of Elliott's Primary degree labeling.

Having said that, a wave (Y) - while the most likely course to make a 38.2% retracement of Primary 3, is not a 'for certain' wave. It is highly likely, but even it is 'not' for sure. Why not? Well price is currently down to the lower daily Bollinger Band. Sometimes, price bounces off of the lower band strongly. If and only if price makes a new high above (X), then it is 'possible' a barrier triangle is still in play for Primary 4. But that is nowhere near in evidence yet, and every attempt to reach the old highs has been rebuffed with a turn lower. More likely, a retreat from the lower Bollinger Band will only be towards the middle Bollinger Band (aka the 20-day SMA), before resuming lower.

But we think, besides the downward overlap, and the channel break illustrated, there are two more 'telling' pieces of evidence as to why we are still in a Primary 4th wave.

First, if you notice the structure from late August to late September, it forms a FLAT wave in the SP500. And second waves are 'usually' sharp zigzags, not flats. They 'can' be flats, but they are "usually' sharps. So, having a flat wave at this location is a serious warning. It fits the concept of a B wave much better than it does the concept of a second wave.

Second, we know by measurement that the C wave upward stopped just short of a C = 1.618 x A. In other words, it did not make the usual expectation for a strong and powerful third wave of 3 = 1.618 x 1.

Regardless of the eventual path, if we are making a Primary 4th wave, it must be composed of Intermediate degree wave labels that consume proportional amounts of time in the sideways or down direction to what the Intermediate degree labels have consumed in upward direction.

Cheers and enjoy the chart!

Saturday, December 19, 2015

Listen ! (to the Market)

In January 2015, while some Elliott Wave sites were looking for a "three of three" upward to just begin to take the market to exorbitant new highs in the S&P500, we took the contrary view - a view based only on the wave count as we saw it - that a contracting ending diagonal was about to end the wave structure - which it did. This view - which we posted in our YouTube channel before the fact - has now been confirmed by all of the major Elliott Wave services, and most blogs, after the fact. It was a correct prediction using Elliott Wave theory.

In our post of December 3, 2015 while some other Elliott wave sites were looking for a "three of three upward" to begin, we took the contrary view that the best 'hope' for a Primary fifth wave at the time was to complete a triangle or double-zigzag downward (sic.. not upward as they were calling for) to the lower parallel Elliott trend channel boundary. These sites and false pundits have done nothing but revise and revise their counts - even changing their degree of labeling! They have been so dogmatically incorrect that they have made statements like, "this wave needs to start acting like a three of three soon or we will be forced to change our count." Indeed they have!

The daily chart of the S&P 500 now confirms that prices have not only contacted the lower trend line boundary - but have exceeded it to the down side. Here is a chart of the daily cash S&P 500, with no wave labels since the August low to show how the lower trend line boundary was met & exceeded.

Daily Cash S&P 500 Showing Channel Breach and Overlap
Further we note that there is now downward overlap with the upward August wave at 1993.46; it isn't much, but it is, in fact, overlap. We called this chart the best 'hope' for a Primary 5th wave because that's all it was - someone's hope. Not ours.

Rather, when the stock market does things like this, "we listen to it!" We do not ignore such Elliott Wave evidence, because it is the best chance at making another good prediction of what is to come. And that prediction is below on the two weekly chart of the S&P500 cash.


Before we explain, we need to tell you about another correct prediction. We said that because Primary wave 2 (circle 2) was a FLAT wave, with a higher (B) wave than Primary 1, we would not expect the (B) wave of Primary 4 (circle 4) to exceed the high. So far, it has not! Another correct prediction.

Now with the start of downward movement and overlap, we must conclude in a similar line of reasoning, that price will attempt to regain the lower two-weekly parallel Elliott trend channel line, and a 38.2% retracement of it prior wave three - Primary 3 (circle 3). Since we counted A-B-C down to the August low, we now see it as one zigzag of either a double zigzag - or equivalently - a flat-x-zigzag since wave (X) did attain within 90% of the high. Again, these would be identically equivalent structures in this case.

The key point is this : this is what the self-styled pundits and wave counters are missing - a sense of proportion and timing. Look at how long Primary 3 took in terms of time. It took almost four years! You don't correct a four year rise with a decline of only three-to-four months!

Wave fours tend to be very, very long structures in time compared to their wave two's. A wave four at (W) is just "too short" in terms of time, and a double zigzag for Primary 4 will still provide terrific alternation to the flat for Primary 2.

So - even though we can clearly see this count ahead - are we "locked in on it"? Unequivocally - No! Nothing has taken away the ability of Primary 4 to become a much larger sideways triangle, but the structure isn't right for a triangle yet. If it becomes correct, we will let you know! The bottom line is that Primary 4 'should' touch the lower trend channel line at some point, and it should try to effect a retrace of 38.2% of Primary 3. So, we remain completely flexible and non-dogmatic. We understand the issue of the Fourth Wave Conundrum - as we have called it in our YouTube Video, "A Critique of Elliott Wave for Trading" more clearly than most amateur wave counters, and it has helped us to be more patient, and responsive to the market as a result!

Listen to the market - not me!

Saturday, December 5, 2015

Defined Risk

With Friday's large point move, the jury is still out on whether a sideways triangle or a more forceful move upward is in progress. The daily triangle we are referring to was posted on 11/22 and again on 12/3 in this blog, and elsewhere.

Per the Elliott Wave Principle, triangles can never be 'called' until all five overlapping waves are in place: they can only be 'proposed' until then. The reason is that triangles can morph into a series of 1-2-i-ii, upward. That is because the waves in a sideways triangle contain higher lows.

If that occurs, so be it, and it's on to a structure that better defines the path of the wave. Psychologically, it's interesting how bearish sentiment was on Thursday's down move, and how quickly people turned to say 'wave three' up. And that may be the case : structurally the SP500 is still in a bull market until proven differently.

At times like this it is often more useful to concentrate on the "hard right-hand edge of the chart", where the decisions need to be made, rather than wallow on the pre-defined left-hand-side of the chart where all the "Elliott Wave degrees", and "wave labels" are located, and see what we can see.

The chart below shows only one way to count the movements in the 15-minute SP500 over the last three days. A proposed Elliott wave count is shown IF we are still in the triangle structure.

First, there are five waves down to an 'a' wave. Live and in real-time, we counted down the Wednesday waves as circle-1, 2,3, and 4, and said the fifth wave could easily extend - which it apparently did. Note that the entire sequence down to the 'a' wave is in one channel, and ends with no divergence on the EW Oscillator.

Then, there is the up move beginning late Thursday and into Friday. Notice, for the waves we can see, the upward channel has already been broken to the downside. While this is not fatal for an upward move, it is a bit of a warning sign, and allows us to review an opportunity. Right now, the upward move is just a bit over a 78.6% retracement of the downward move. This is still within the range of an upward 'b' wave as shown. Further, the move did end on a slight divergence with the Elliott Wave Oscillator.

Given,  that a triangle in progress should have a downward sloping trend line, the upward move allows us to posit that the downward move within the daily triangle circle-c wave may fall within another, larger, downwardly sloping parallel. If it does, we can limit the risk on a downward trade by recognizing that price movement from the last price to the high is about 2 S&P points, or about $100 in risk - a very small risk compared to margin of a futures contract.

Whether you analyze the chart the same way, is up to you. Whether you prefer to short the trade and limit your risk to the prior high at 2104, and assume a 7 point risk (about $350) is also a decision that is up to you. We are not telling you to take the trade, or advising you to do it. All decisions are yours. We are only illustrating how Elliott wave theory can be used to set the defined parameters for a trade. In this case, if we have counted correctly, the risk is $100, and the reward would be back down to the prior low around 2040, or a reward of 50 points or $2,500, or a 1 : 25 risk : reward ratio at it's best. Or, alternatively, there is a 1 : 7 risk-to-reward ratio at it's worst and that is even if we have not counted the upward wave correctly (or we have counted it correctly for what we can see, but there is more to come that we cannot yet see).

Furthermore, it is also possible to consider the implications of a non-triangle count, and realize it would also be an excellent location to set a stop & reverse trade. With either $100 of risk, or $350 of risk, then if the pattern is violated to the upside, it is likely all of the loss of the stop being hit could be recouped in a much stronger wave higher - if the 'proposed' triangle is broken to the upside.

If you are not familiar with why risk and reward is an important concept in setting trading decisions (instead of "wave counting" decisions), we encourage you to review the video on the Tutorials page of our web-site. The video is the Top Ten Technical Indicators by Thomas Long of Forex.com.

Thursday, December 3, 2015

Channels and Alternation for Potential Primary 5th

Prices forming channels were important to R. N. Elliott and most practicing Elliotticians today would probably agree channels are important in Elliott Wave work. That being the case, the scenario below is the ‘best’ scenario for making a Primary 5th wave upward – using modern Elliott Wave theory. You will note we posted this potential scenario back on Nov. 22nd. So, today's drop should not have come as a surprise to anyone. We emphasize .. repeatedly ... this is a potential scenario. If you are interested in more discussion of it, it is posted below the chart.

One of the reasons for positing this scenario is that a triangle represents "indecision and a balance of forces" before the Fed meeting in December. Keep in mind there is lots of 'volatility' that can happen in the first half of the month, including the payroll employment report this Friday, and the Fed meeting on Dec 16th. Perhaps after all that is out of the way, the 'smart money' will feel more relaxed and start a rally into year end, and into the first of the year. But, more importantly than that, a triangle would signify that the last wave in a sequence is dead ahead. That's how triangles work when they are in a fourth wave position.

We should note that some people have posted a 'truncated fifth' wave at b of our triangle.

The problem with that scenario besides the fact the b wave of the triangle was clearly counted in real time by more than one analyst we know as a "three" and not a "five" is one key factor. If wave 5 was 'there', then wave 5 would not equal wave 1, which is one of the most common wave relationships. In fact, it would be much shorter. Further, the upward wave to that location would not be in a channel; it would be a wedge. But wedges are 'usually' diagonals, and this one would not be - again greatly lowering the odds of such a forced count.

Rather, 'at this point in time' we would expect the Elliott Wave Oscillator to weave around the zero level in a fourth wave, providing enough time for price somehow to contact and/or slightly break the lower trend line boundary before resuming higher. This could occur in the triangle OR in a double zigzag lower to the trend line. Either a triangle or a double-zigzag would provide the expected level of 'alternation' needed for a true Primary 5th wave.

Tentatively, we have 'sketched in' a lower triangle trend line from circle-a to circle-c. We will allow the lower trend line to be 're-anchored' within limits, if, and when we know that circle-c has ended.

Then, wave 5 should be "about as long" as wave 1. And it would likely fail somewhere near the median line of the parallel Elliott trend channel.

At this point in time, there are other wave counts we have to consider. We have outlined these in the posts entitled "A Hitch-Hiker's Guide to EW Galaxy", and subsequent "Galaxy Update". We have also indicated why this is necessary at this time. The uncertainty is inherent in fourth and fifth waves, and it is not perfectly clear yet which degree of fourth wave are we in. We have called this situation the "Fourth Wave Conundrum" in our YouTube Video, Critique of Elliott Wave for Trading. And it occurs at every degree of trend!

For now, the situation is we are "range bound" between the May 2015 high and the August 2015 low. We are awaiting resolution of the range. We can not 'make up' waves that 'just aren't there' for our personal reasons, and we can not 'force a count' that we truly don't see. We will update as best as possible when the wave count makes the most sense.


Sunday, November 22, 2015

Three Examples of Long Term Elliott Log Trend Channels

Long term viewers of my YouTube channel will recall these posts, which were done as live updates at the time, showing the long term trend logarithmic channels in monthly Crude Oil ...

...and in monthly Gold.
To these .. one can add a two-weekly log channel in the Dow Jones Industrial Average, as below.
For each chart, the pattern of alternation is clearly stated. The last chart, that of the Dow also includes one of my favorite indicators. With 120 - 160 candles on the chart, wave iii of 3 is always at the maximum of the Elliott Wave Oscillator, the next major divergence is wave 3, and wave 4 should travel to or below the zero line - just as it has - but not more than 40% of height attained on wave 3 to the opposite side - the lower side - of the zero line... just as it has.

Elliott tells us to chart in log format for long term charts (weekly, monthly annually), but arithmetic is acceptable for shorter term charts (weekly, daily, hourly).

Cheers and enjoy the charts!

Galaxy - Update

In the post of October 10th, 2015 we showed a number of possible market paths and titled it, "A Hitch-Hiker's Guide to the EW Galaxy". In this post, we want to show where a number of those counts stand. In an October 29, 2015 post we showed how the truncated fifth wave of Primary 5 could already be counted: according to Glen Neely in "Mastering Elliott Wave" the upward wave is already more than a 90% retrace in some indexes, and when the upward wave exceeds 78.6% it is 'possible' to consider it as a truncated wave - provided the upward structure is a five-wave sequence. We showed then, using a leading diagonal, how a five-wave sequence 'could' be counted. So, we will not reproduce that chart here.

But, if the upward count is still taking more time, it possible to see the upward count as only a "three wave" sequence, at present.

The Dow Chart below shows, the upward structure as still a "three-wave" sequence and not a five-wave structure.

As the chart shows, the upward wave has 'not' attained 1.618 x wave i at this point. It is 'close', but no cigar, yet. Further the current upward wave has not, yet, attained a new high. (It could easily, but stay with the discussion for a moment). Further, the observation is that price as not returned to the lower parallel trend channel yet. Price could easily do this as a more complex wave iv as a double-zigzag, or as a triangle - before making a fifth wave (v), higher. This count follows typically seasonal bullish holiday patterns.

But, because price has not attained a 1.618 extension, yet, and is still above the mid-channel, it is also possible we are 'still' in a minute three wave higher, as the chart below shows. This count would also still follow typical seasonal patterns. Then, there would be a drop in a zigzag to the lower trend line channel. This count would also be compatible with the idea that it is third waves (minute iii, in this case) that have the power to break through prior highs or lows.


But because there are still only "three waves up" - at the present time, the larger Primary 4th "barrier triangle" option must still remain on the table. Ultimately, this count would also resolve to the upside, but it is more neutral in the short term. It also has more potential to take price into 2017 (2009 + 8). The chart is below, and it shows that an Intermediate (B) wave would be a complicated structure - such as a double zigzag, with it's key feature being that it would not make the new high, but come very close. Then, there would be Intermediate (C), (D), and (E) waves to follow.

The simple reason behind leaving this count on the table at this point is that the count off the August low is not 1 and a simple zigzag. It is one, and a FLAT wave. Usually, not always, second waves are zigzags or double zigzags. This one is either a, and a FLAT, or three-waves up, followed by three waves down.
Lastly, we will show the count which - other than three waves up - has the least price evidence for it. While this count is still possible, there is insufficient downward price movement to conclude that this pattern is underway. It is the downward diagonal count. It would be counter-seasonal.


This count recognizes that deeply retracing waves are a sign of a potential diagonal. At this point, we could not say whether such a diagonal would be a contracting one or an expanding one. This count would gain more credibility if new highs were not made, and the lower parallel trend line boundary were exceeded to the downside. There is 'some' evidence for this count, and that evidence is that other market averages (such as the $NYA, and the $RUT) have overlapped the upward August wave downward in mid-November; meaning that a fourth wave should not overlap a first wave. That would make the six-year upward count from March, 2009 Primary A, B, C, and not Primary 1, 2, 3.

Again, at the present time, the best price evidence is upward. These charts are presented should that change. Why would it change? The best reasons would be a) a LOT of people are looking towards new highs, and b) maybe more time is needed so that bull market is a Fibonacci 8-years long.

Please do not be dismayed by this situation. Objectively, we have said in our YouTube Video (A Critique of Elliott Wave for Trading) ...well before the fact of this wave .. that fourth and fifth waves are notoriously difficult to predict. We have called this the "fourth wave conundrum" in the video. It happens at every degree of trend, and it just recognizes that it is extremely difficult to determine "in advance" whether fourth waves will be a simple zigzag, or extend to some more complex and time consuming structure like a flat, double flat, flat-x-zigzag or triangle. That is a reality of the Elliott Wave world, and recognition of it can help prevent some frustration with Elliott wave analysis.

Cheers and enjoy the charts!

Saturday, November 14, 2015

Implications of Overlap

The charts below show that two US Equity Indexes have now done something which, in the Elliott Wave world, is to be noted. That is that the New York Composite Index and the Russell 2000 Index have now overlapped the upward wave from the end of August, 2015 in the downward direction.

In each case, this overlap is shown as an arrow on the charts below. The implications for these indexes is that the downward wave can not now be a wave four of an impulse wave upward, precisely because, as you probably know, in an impulse wave the fourth wave is not allowed to overlap the first wave - especially on a closing basis. Now, we want to emphasize that for the Dow and the S&P500 there has not yet been such an overlap. But, if there was to be, then these indexes would fall into that same category - so keep a close eye on them.

This means that in these indexes, at least, one could look to some of the structures we provided in our October 10 post, "A Hitch-Hiker's Guide to the EW Galaxy", and in posts more recent than that. Again, we want to emphasize that precisely because the S&P500 is the "most-levered index", with the ES E-mini futures providing over ten times the volume as on the Dow Jones or London FTSE futures, that almost anything is still possible for the S&P500, in particular. We are going to know in the next few days and weeks whether upward impulse counting is still possible on that index. Our key concern is that the position of the above indexes, however, provide a significant warning sign. And so, for our part, we will remain patient, pending further information.

Thursday, November 5, 2015

Trading and Wave Counting as a Business

Over the course of the last several days and weeks, we have showed evidence that the market is likely making or has made a Primary 5th wave, higher. This is fine with us, because since our July, 2011 video published on YouTube, we have contended that the 'official' wave count from a well-known Elliott Wave service (that of primary A-B-C, upward) could be erroneous. Our post in this blog on October 31, 2015 showed how the NQ futures had made a new all-time high which can represent a Primary 5th wave. A few of you scoffed, with remarks like, "I never use futures in my work."

If you have been following the markets, you may have noted, that this month, the NQ futures have made even higher highs, but beyond that the cash $NDX index (Nasdaq 100 Index) has made higher all time highs - likely indicating wave 3 of a Primary 5th wave. See chart below.

This is all well and good for the technology sector. As of this writing, the Dow, the S&P, certainly the Dow Transports and even the Nasdaq Composite have not yet made the new all-time highs. At this point in time, the labeling of a third wave higher in the $NDX is consistent with the RSI(14) being in over-bought territory and with the maxim that it is usually third waves that have the power to bust through to new highs or lows, so that is the current labeling. We are assuming, of course, that a 4th and 5th wave higher are made in good form, but, again, that is an assumption. What if the three waves up are A,B,C of some larger structure like a triangle or diagonal in the $NDX, too? What happens IF wave 1 is overlapped downward before a fifth wave is completed?

We have shown the alternate count below during live chat, and on some web-sites. Again, we want to make it clear the count is an 'alternate' at this point. It attempts to answer questions like, "what happens if downward overlap occurs?", and "how does an up market get to the year 2017?" Keep in mind that 2009 plus a Fibonacci 8 years is 2017.

This scenario of a Primary 4th wave still in progress has some benefits for the market : first it could prove frustrating to a lot of participants expecting quick new highs. Second, as we said, it would take time. Third, it could also provide a "measuring objective" in terms of an Inverted Head & Shoulders for the extent of the rise of Primary 5. But, also, it might just allow some indexes like the $RUT, and the $TRANS to play 'catch up' with the industrial and technology sectors.

The key requirement of such a barrier triangle is that it should have no closing higher highs in the S&P500, than the current all-time high before all five waves of the triangle is completed. Prices can put 'tails' above the prior all-time-high and still be in a barrier triangle, but they can not close higher than the all-time high. If they do close higher before the triangle is completed, it simply means the S&P500 is joining the $NDX in Primary 5 at the current time.

If the $NDX can already be counted as a Primary 5th wave, why do we bother looking at alternate counts for the Dow & the S&P. Won't the S&P simply follow in it's tracks? We don't know for sure. Why do we bother to have alternate counts at all?

We have suggested before, that if one is in business, it is a good idea to have a "Plan B" in order to help stay in business. We'd like to provide you with a good clear example. Let's say you are in the business of producing T-shirts for football game outcomes. Even more so, let's say you are just an 'excellent' handicapper of football outcomes. Because of your expertise, you are certain that the New England Patriots will win the SuperBowl next year.

So, as a businessman, you have two choices. First, even though the outcome of the game is not for 'certain' (it is 'probabilistic'), you could just blindly follow your own expertise and ONLY print T-shirts that show the Pats winning. So, you design the T-shirts, spend the expense to have them made and shipped to you, and you get ready to sell them 'earlier' than your competitors.

But what happens if the Pats don't win? What happens if the Denver Broncos win, instead? Is there any possibility that a good plan is to have the 'design' of the second t-shirt ready, so it doesn't take as long to print if you are incorrect on the outcome? Then, at least you still get to sell some t-shirts to help make a profit rather than sell none at all. What does the designing cost? Not much at all - it takes a little time and effort. Time that might be available during all the pre-game show commercials, or when nothing else is going on.

That is the idea behind an alternate count. It's just a 'design' which may or may not be needed. It's almost 'free'. And because it is, if the original idea pans out you just throw the alternate away: it was almost free. It's that simple.

And, keep in mind, this idea is in direct conflict with yourself as an 'excellent' handicapper of football games. But that's what it means to put your expertise in the larger context of your business. You are willing to put in a tad more effort because you realize not all outcomes are certain - in fact few of them are!

Cheers and enjoy the charts!




Tuesday, November 3, 2015

Ira Epstein Example - Part 2

In the previous post some of the advanced considerations were able to be outlined but not illustrated by way of example. We left off that post by saying there was an 'outside day down' which is defined as a higher high, a lower low and a lower close than the previous candle. With reference to the chart below, we want to illustrate, now, some of those more advanced considerations.

From Friday's candle, the "outside day down", clearly it can be seen that the futures traded down about 6 - 7 points in the pre-market Monday, but then clearly took out the high of the outside-day down. The consideration we outlined was that if the high of an outside-day down was taken out within the next two trading sessions, it would constitute a "bear trap" - as it is likely that a group of traders were caught short at the lows.

Follow-through by bullish participants can be seen on today's candle (Tuesday) with yet higher highs, putting more pressure on the bears.

So, then, very interestingly, Monday's candle is an "outside day up", and the same rule applies but in reverse. If the low of the outside candle up is taken out in the next two trading sessions, then it would constitute a "bull trap". So far, there is no sign of that, and it can only happen tomorrow or the signal is negated. What's good for the goose is good for the gander.

There remain several things to note on this chart. First, the slow stochastic is still fully embedded. Until the %K line (the red line) crosses back down under 80, it is not likely that price will try to regain the 20-day SMA.

Additionally, the 20-day SMA has recently crossed above the 100-day SMA constituting a "bull cross", the effects of which are already being seen in higher prices. How long this will last is not certain. Sometimes the cross happens very close to the point where the market enters a corrective phase, so even though the cross has happened, it, in itself, could sound a note of caution.

Lastly, note that there are still two gaps, circled in red, on the daily chart which are not yet closed. While some traders may not pay much attention to gaps, sometimes they form 'targets' for the Smart Money.

Disclaimer: Nothing in these observations is to be taken as trading or investment advice.

Sunday, November 1, 2015

Paraphrase of Ira Epstein's Rules for Trading

Ira Epstein is a broker who works for the Lind Group, and has published numerous videos on YouTube. From that information, a summary of his Rules for Trading that he provides to the public is distilled below.

Charting Requirement
These rules apply to the daily futures chart only. To follow his system, the following is needed.
  1. Daily OHLC bar chart
  2. Daily Bollinger Bands with 18-day Moving Average (20-day is acceptable)
  3. Daily Slow Stochastic Indicator, plotted as 14,3,3
  4. Daily 100-day Simple Moving Average (SMA)
  5. Swing line study (if available); i.e. higher highs, higher lows; lower highs, lower lows*
A current example chart that meets these requirements appears below.



Bollinger Band Theory 
Bollinger Bands are defined as a daily algorithm designed to keep the market trading within them 95% of the time. The Bollinger bands were developed by John Bollinger, and are 'volatility bands' constructed around the 18 day (or 20 day) moving average where the upper band and lower band are set at "two standard deviations from the moving average". The "two standard deviations" are what theoretically provide the 95% confidence level that the market will trade within the bands.

One does not want 100% confidence of trading within the bands because one is looking for signs of strength when price exceeds a band, and one is looking for signs of weakness when price can not quite hit a band as a price target.

These bands expand and contract with the volatility in the market. When they contract (get narrower) they often indicate a current period of 'consolidation' in the market. When they expand, they often indicate a time period when the market is trending. When the bands get narrow (consolidate), it often precedes a time when the market will trend.

Sometimes prices will be expected to close outside of the bands. Because of the small probability (5%) of trading outside of the bands, the number of consecutive closes outside of the band will typically be small 1 - 3 is common, whereas 4 - 7 closes outside of the bands is a very, very low probability event. The greater the number of consecutive closes, the lower the probability.

Slow Stochastic Theory
The slow stochastic (with parameters 14,3,3) is a price oscillator developed by George Lane, a large Chicago-based grain futures trader. The slow stochastic is a 'bounded' indicator, and can only travel between 0 & 100%. On the daily chart, values below 30% are defined as "over-sold", and values above 70% are defined as "over-bought".

Over-bought and over-sold on this indicator are potential reversal points in the market. However, an exception to over-bought and over-sold conditions is when the slow stochastic has 'embedded'. The slow stochastic is said to be embedded whenever one of these two conditions is met: both the %K and %D line of the slow stochastic is either over 80%, or under 20% for three consecutive days or more.

Other Definitions
  • Line in the sand - the 18 day (or 20 day) simple moving average is termed "the line in the sand". This is a line to which daily price often returns. It is considered to be the 'neutral point' on the chart. Prices often 'return to the line in the sand' to regroup either before or after an important economic announcement. This 18 day SMA is also a "battle ground between the bulls and the bears" and the point where one group tries to wrest control of the market from the other group.
  • Positive bias - the market is said to have 'positive bias' whenever it has closed above the "line in the sand".
  • Negative bias - the market is said to have 'negative bias' whenever it has closed below the "line in the sand".
  • Swing line uptrend - prices show higher highs and higher lows 'over' the 18-day SMA.
  • Swing line downtrend - prices show lower lows and lower highs 'under' the 18-day SMA.
  • Outside reversal day - same as in all technical analysis (outside day up or down).
  • Smart Money - Smart Money is defined as the large hedge funds and institutional traders who have  account sizes large enough to make a difference in price movement as seen on the chart as opposed to retail traders who account sizes typically don't affect the overall trend of price.
  • Riding the Bollinger Band - there are several times when prices will close exceptionally close to an upper band or a lower band for 'several days in a row'. This often happens when the slow stochastic 'goes embedded', either higher or lower. This is a strong trending sign for prices.
Basic Trading Concept
  1. One looks to buy a new long position when prices first exceed the 'line in the sand' to the upside. The target for this position is the "upper Bollinger band". This is because prices have shown they now have a positive bias, and the trade is in the direction of the prevailing trend.
  2. One does not look to buy long when price is below the 'line in the sand', because prices do not yet have a positive bias, and the trade is not yet in the direction of a prevailing trend.
  3. One looks to initiate a new short position when prices first exceed the 'line in the sand' to the downside. The target for this position is the "lower Bollinger band". This is because prices have shown they now have a negative bias, and the trade is in the direction of the prevailing trend.
  4. One does not look to initiate a new short position when price is above the 'line in the sand', because prices do not yet have a negative bias, and the trade is not yet in the direction of a prevailing trend.
  5. One looks to sell to 'take long profits only' at the upper Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up on long positions at the upper band. If new longs were initiated, this means the retail trader would be fighting what the Smart Money is doing.
  6. Similarly, one does not look to initiate new long positions at the upper Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.
  7. One looks to buy to 'take short profits only' at the lower Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up' on short positions at the lower band. If new shorts were initiated, this means the retail trader would be fighting what the Smart Money is doing.
  8. Similarly, one does not look to initiate new short positions at the lower Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.
Other Basic Trading Considerations
  1. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an up trend, this will most often be accompanied by a slow stochastic which is positively embedded over 80.
  2. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an down trend, this will most often be accompanied by a slow stochastic which is negatively embedded under 20.
  3. Since the third day defines day when the stochastic goes 'embedded or not', the second day over 80 or under 20, is the day 'most at risk' for prices to reverse since, most often, the slow stochastic does not embed. Most often, the slow stochastic just goes from over-sold to over-bought and vice-versa without embedding.
  4. When the slow-stochastic has been over-bought, then when the slow stochastic reverses to under the 80 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.
  5. When the slow-stochastic has been over-sold, then when the slow stochastic reverses to over the 20 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.
Advanced Trading Considerations
  1. When the slow stochastic has embedded in either direction, it is often seen - that when prices return to the "line in the sand" - then the line in the sand will be defended in the direction of the trend that embedded. In other words, price will generally 'bounce off' of the line in the sand and resume the trend. This doesn't always happen, but it often happens.
  2. When there has been an outside reversal day down, the high of that day should not be taken out higher in the next two trading days or else it constitutes a 'bear trap' - meaning that a number of players have been trapped in their positions at the lows.
  3. When there has been an outside reversal day up, the low of that day should not be taken out lower in the next two trading days or else it constitutes a 'bull trap' - meaning that a number of players have been trapped in their positions at the highs.
  4. When the 18-day SMA crosses above the 100-day SMA, some moving average followers will view this as a positive sign. If this happens when price is above the moving averages the cross over can be considered valid.
  5.  When the 18-day SMA crosses below the 100-day SMA, some moving average followers will view this as a negative sign. If this happens when price is below the moving averages the cross over can be considered valid.
  6. Often times the 100-day acts SMA acts as either a price target or support / resistance depending on it's relationship to the 18-day SMA, and/or the Bollinger Bands.
Example

While these rules may 'seem' complex, the example chart above helps to clarify them.

  1. From June 17 - August 1, price could not attain the upper Bollinger Band, and this is a sign of weakness, not strength.
  2. In mid-July price made it's target of the lower Bollinger Band, this is a sign of weakness, not strength.
  3. Throughout early August, price can be seen to be trading for multiple days on "both sides of the line in the sand", there is clearly a battle going on for control of the market. Further, there is a narrowing of the Bollinger Bands indicating a period of consolidation, to be followed by a breakout in one direction or the other (more likely lower given the above information).
  4. When prices break below the mid-August low, the Bollinger Bands begin to widen to the down side, indicating a trend beginning. This breakdown occurs under the 20-day SMA, and would be sold, as the market would have lower lows and lower highs (a swing line trend) under the line in the sand.
  5. Prices begin to "ride the band lower" as the slow stochastic embeds under the 20-level indicating the down trend in force. Profits are allowed to build until the slow stochastic turns back above the 20 level, around August 23rd.
  6. When the slow stochastic turns back up over the 20 level, it is 'most often' expected for price to meet the line in the sand, and that is what occurs in mid-September.
  7. One does not initiate new shorts against the lower band in late August, per the above rationale as the probability of success is 5% or less (less for every day that price closes below the band).
  8. One does not initiate new long positions in early September as price has not closed above the "line in the sand". 
  9. A new long can be initiated in mid-September, after price closes back above the line in the sand. The target for this trade is the upper Bollinger band.
  10. One would not initiate new longs on September 19th, when price is very near the upper Bollinger Band, as the probability of success is only 5% or less, of success. However, profits should look to be taken.
  11. A new short position is not initiated in mid-September because price has not closed below the line in the sand.
  12. When the slow stochastic turns back under 80, it is 'most often' expected that price will meet the line in the sand, and that is what does happen in mid-September.
  13. A new short position can be initiated in late September after price closes below the line in the sand, with a target of the lower Bollinger Band. 
  14. One would not initiate new short postions in late September when price closes on the lower Bollinger Band, as the probability of success is only 5% or less. However, buying back shorts to take short profits should be initiated.
  15. One would not initiate new long positions in later September as price has not closed above the line in the sand.
  16. In early October, price closes above the line in the sand on the second trading bar. One then looks to initiate new long positions with a target of the upper Bollinger Band. 
  17. In late October, price has hit the upper Bollinger Band and one would look to take at least-some profits on long positions. The slow stochastic has not yet crossed back under the 80 level from being embedded, so a trader may still wish to let some partial positions run until it does. This is discretionary.
  18. The last daily bar is an "outside range day down", meaning if the high of this bar is taken out in the next two trading sessions, it could constitute a 'bear trap' - meaning some players have most likely been caught short in the trade - presumably giving the market more fuel for a further upside run.
  19. Because the slow stochastic is still embedded for many more than three days, when it eventually turns down under 80, and price and the moving average begin to meet, it is a high probability that the line in the sand will be defended! Meaning price will bounce off the 18-day SMA, and resume a turn higher. This does not always happen, but it often does!
Repeat this Cycle, and these Instructions Continuously!

We post this information to show two things: a) we care about trading as much as we do about counting Elliott Waves, and b) sometimes Elliott Wave counting can be a great 'assist' to trading, as in when the longer direction has been established. One can 'filter out' short trades or 'long trades' in the above system based on the Elliott wave count in the market. Other times, like now, Elliott Wave analysis can have clear alternatives, and, in such cases one may rely more on plain technical analysis or a trading system like this to help screen for potential trades.

Disclaimer: We make no claims for the profitability of the above rules. All trading results are determined by your decisions, and we accept no responsibility for them. (*) The Swing Line study is one developed by Ira Epstein, and only appears in charting software he provides. To respect the proprietary nature of this indicator, we have not reproduced it here. Instead, if you are interested in examples of the Swing Line study, go to YouTube, and search on Ira Epstein. Any one of his "End of the Day Financial" videos, "Currency" videos, or "Metals" videos will have the indicator applied to the chart.

Saturday, October 31, 2015

Halloween Horror

This brief note is aimed at those few hold-outs who will try to argue that if the S&P500 does not make a new all-time high (which it certainly could, yet), then a Primary 5th wave will not have occurred. Like it or not, five Primary waves have occurred, or are still occurring.

Below is the monthly chart of the NQ futures, since the high in 2007. What is most important is that because this contract just made new highs, there is no way under EW Theory to say that a 1-2 lower has been made. This month's high of 4,691, is higher than the prior high at 4,686. A secondary purpose of this chart is to show that (depending on the index) truncations do, indeed, occur. If you review the bottom of this NQ chart in March 2009 - you will note that while the S&P500 Cash Index made the famous new low at 666, the NQ did not come close to making a new low. It's value in March 2009, at Intermediate (5) was 1041, well off the prior low at 1018. How could this be, you scream in glorious Halloween Horror that all indexes don't exactly bottom at exactly the same time?!


Examining this chart, what we see are five primary waves with Primary 2 as a flat, and Primary 4 as a sharp, for excellent alternation, and a new high for Primary 5. (Again, we have not reached a firm conclusion that Primary 5 is done yet.). Futhermore, Primary 4 is in the area of the prior Intermediate (4) - the fourth wave of one lower degree.

The DOW and the S&P500 have now reached over a 78.6% upward retracement of it's Primary 4th downward wave, and that, according to Glen Neely, in Mastering Elliott Wave, is sufficient, to indicate a possible truncation - if it occurs.

The truncation at the March, 2009 lows in the NQ chart above, does not indicate that five waves down 'weren't' made. It merely indicates that this market was 'relatively stronger' than the S&P500 at the time. Similarly, if, for some reason, the S&P500 should not make a new all-time high, which it certainly could, it would not mean it didn't make five primary waves up. It might only mean that it was 'weaker' than the NQ at the time, and that the market indexes are, in fact, still topping at the same time.

Now I know how a lot of people read these things. They tend to say, "well he's saying the S&P500 Index won't make a new high", or "he's making an excuse for the Primary A, Primary B, Primary C count if the new high is not made". Neither of these is correct. I am merely trying to show you how one market index acted at a prior bottom - and that a truncation is the best explanation for it.

Cheers and enjoy the chart!

Thursday, October 29, 2015

Minimum P5 Met

This four-hourly chart of the DOW below shows 'five waves up' from the August lows, the fourth wave of which we clearly counted as a 'flat' wave. With wave 2 as a 'sharp' of approximately the same degree, the alternation pattern is acceptable.

With price now exceeding the August 10th minute wave iv (circle-iv), and the price retrace now exceeding the 78.6% level, this chart would outline the 'minimum requirement' for a Primary 5th wave according to typical truncation guidelines shown in Mastering Elliott Wave by Glenn Neely. We will further note that the NQ futures are also exceptionally near their Jul 2015 all-time highs.

We have placed a big question mark (?) on P5, because there is absolutely no price confirmation that the upward wave is over. We are 'only' saying that as a P5 wave, it has met the 'minimum' upward expectation for a truncated P5 wave. Could more upward price movement occur? Sure. But, if it doesn't, a truncation would be one of the two reasons why. More text below chart.
Dow Jones Industrials Four Hourly Chart - Truncation Count
What is the second reason why significantly more upside price movement 'might' not occur? That is because it is 'just' possible to also count the whole sequence upward as a large A-B-C. If I need to show that count later, I will. That means the upward wave 'could' be part of a large Intermediate (2) wave for a downward diagonal. The issue with that scenario at the present time is that there is no downward price evidence for it - none.

Further, more upward price movement could occur! You will note that with the P5 wave even though wave 3 is shorter than wave 1, wave 5 is not yet as long as wave 3. So wave 5 could extend some. Downward price movement today, so far, is minimal, so this certainly could occur. Since further upward price movement is not ruled out, we are more favorably disposed to say that a P5 wave has indeed occurred - even at this level. And, further, it is possible that wave 3 is not properly located yet. It may be the wave that crosses the top, meaning that the wave is still sub-dividing upward. But all of that is in the future, and we must have patience until there is more clarity, with larger downward waves and clear overlaps to help confirm the wave structure.

Cheers and enjoy the chart.

Sunday, October 25, 2015

Dollar Index Trade Example - Final Post

In our post of Sunday October 11, in how to prepare for a possible upside trade in the US Dollar Index, we stated that the daily chart had shown a triple zigzag count lower, and that in Elliott Wave work, "a triple zigzag is always terminal". We showed you the daily chart, and we also showed you a "two hourly" chart with a third wave in progress.  This third wave had followed on from a first wave which was clearly counted as an Expanding Leading Diagonal.

We also placed a Bill Williams style fractal on the chart at the 95.725 level that we would use as a "buy stop" to be "stopped into" the market if the Dollar Index turned out to be stronger than the count suggested. That original fractal is still shown as the green triangle on the chart, below, as it was on the two-hour chart. One of the reasons we used that fractal is also in accordance with accepted wave theory - at the location shown breaking that fractal would result in an 'upward overlap' of the originally labeled wave 1 -  thus breaking one of Elliott's key rules, which is not allowed.

But, further than that, we showed you how it would be possible to 'reduce the risk' of such a hypothetical trade by letting the third wave develop, and we posted an updated chart when the "minimum level" for the flat second wave in formation was reached on Wednesday October 14. We now provide this updated four hourly chart of the Dollar Index, as the last update in this trade set-up example.


The four hourly-chart is posted above to show several key points about 'trading' more with "modern" Elliott Wave theory than with 'only' a strict interpretation of the counting rules and guidelines in the Elliott Wave Principle by Frost & Prechter. Here are the key points that should be examined and clearly understood.
  1. Leading Expanding Diagonals exist! - Yes, there are still some traders who don't think that Expanding Diagonals exist, that they can lead a downward movement, or that they 'always' require an extremely deep retrace. Clearly, the chart above, now proven in it's entirety by a higher high, shows the move began with an expanding leading diagonal, exactly as originally described. This is demonstrated objectively and numerically by the fact that the wave originally labeled as wave 3 is almost precisely 1.618 times the length of wave 1/A. There is no other way to count the downward waves that results in such a precise and simple statement of the waves than to accept that there was 'in fact' an expanding leading diagonal. And, then, too, the EWP says that when the ELD is only an 'A' wave, the "deep retrace" is not required. So, you need to accept the fact of diagonals - you have just seen one in action!
  2. Waves travel in channels. Yes, there are still traders who don't draw channels on their wave charts, and view 'any old way' they can count the supposed five waves automatically as an "impulse" count. Yet, when you view the above chart, it should be quite clear that the third wave clearly traveled in a channel. And, more importantly, when the whole downward wave left a larger channel around the whole move, then it was a key sign prices were getting about to turn higher. Do you draw channels on your charts? If not, you should.
  3. Equivalence of three-waves. We said in our post of October 13 that 1-2-3 and A-B-C are equivalent until they are not. Elliott tells us to start counting like an impulse until we can not. Viewing this chart there are several key warnings that the developing downward wave might stop at or before the gap support we cited on the daily chart. Those warning signs are a) the very 'choppy' nature of the third wave - even though it does count acceptably as a five wave sequence, itself, b) the fact that the third wave stopped just short of the 1.618 extension, shown in red as W1!, and c) the fact that there is a diagonal in the count. Diagonals are 'usually', 'most often' A waves, and this is another example of where this was the case.
  4. Back-test of channel. This event shown as W2! on the chart is another key that prices were stronger and would not form a fifth wave lower, from which they started their significant rise even before the ECB announcement was made.
  5. There is W-X-Y as a valid structure. Since this four-hour structure is clearly now shown as the blue A-B-C circles, keep in mind it was predicated from the daily chart with three waves down to circle-a in mid-September, and three waves up to circle-b in late-September. That means the structure is 3:3:3, as a flat because circle-b is as high or higher than wave 1, and that means the entire corrective structure from 1 counts as a-b-c-x-a-b-c, and the proper nomenclature for that is W-X-Y. This is unquestionably demonstrated by the fact that there is now a higher overall high on the four-hour chart. We continue to be dismayed by other analysts who now won't adopt such a simple modification to their counting scheme. The difference is this: a-b-c implies that c ends as a 'five', while w-x-y implies that y ends as a 'three' - just as in the above example.
One of the reasons we don't provide trading or investment advice - and never will - is that we don't know exactly how you will react as a trader. Did you believe your original daily Elliott Wave count of a triple zigzag lower in the DXZ15? Did that tell you to immediately stop trading the Dollar from the short side - as it did us? Did you believe the daily chart of the DX (sole contract, not daily nearest) that a new high 'had not' been made in this contract, and that therefore a flat wave with a lower low would likely occur - just as it did? When we showed a great place to reduce risk on an upside trade, did you do that?

More importantly, did you stubbornly and doggedly wait for a fifth wave lower to be made because a great Elliott analyst can't be incorrect? Or did you say in advance as we showed, "wait a minute, what if I'm wrong, how do I insure I get some of this trade?" and activate the clearly defined buy-stop. That is the flexibility the more modern Bill Williams style of trading offers. It is a little different than, "there can only be one count with no alternates", and it can still be successful because even if only the "buy stop" got one into the trade, the trade equity on one contract only is over $1,000 in two days - much more than that if the "reduced risk" post was used as the place to enter long.

How you trade a set-up like this depends largely how much time you have to give attention to the details of the contract - do you want to follow it daily or hourly? Do you want to follow each  contract month in detail - as we did to help indicate lower prices were possible first - which could be used to reduce your risk. Were you busy at work, or traveling (on the road) when the channel back-test occurred and couldn't follow it precisely at the time? Most importantly, are you willing to recognize the equivalence of certain Elliott Wave counts, and not 'lock onto one' until it is proven - meanwhile still being able to activate orders that result in profits, short term or long? The answers to those questions rests with you.

So what of the Dollar Index from here forward? With some backing and filling it should go on to make a higher high than the March, 2015 high, and maybe much more that that if the daily triple zigzag, lower, was only a second wave. Best to you all!

Wednesday, October 14, 2015

Reduction of Risk in the Potential Dollar Index Trade

Disclaimer: Nothing in this post is to be taken as trading or investment advice. This is an example of a trade set up using Elliott Wave theory. Futures trading may not be suitable for all, and may result in loss of some or all capital. Consult your own financial adviser regarding the suitability of any herein contained information relative to your own situation. Any trades taken are solely your responsibility.

We indicated in the post on October 11, that, if there is to be an eventual upward count in the Dollar Index, following a triple zigzag, lower, then  the best upward count is as a wave 1, followed by a-b-c as a flat wave 2. We came to this conclusion by reviewing the "December only" futures and eliminated a possible upward diagonal count because a higher high was not, in fact, made when the contract rolled over. We also indicated this would be better confirmed when the contracted crossed the 94.440 level as it would also positively rule out a "contracting diagonal"- because a wave (iv) should not be longer than wave (ii).

We said at that time, that the risk in taking an upward position would be over $2,300 per contract - which is quite substantial for smaller accounts. An updated chart of the daily Dollar Index is below. As you can see - price is now, not only below 94.440, but is also below the minute a (circle a) wave of a second wave lower. This is the 'minimum' expectation for a flat wave, but it could still go further.


As of this time, there is no indication of a turn - yet we have shaved almost $1,000 in risk off the potential trade, by doing our homework, evaluating the murky count at the time, and counting according the rules of Bill Williams' system. And all of this hasn't cost us a dime. So next, we watch the activity at the prior gap, and see if the gap fills or acts as support.

Another update will follow. Cheers! And enjoy the chart.

Tuesday, October 13, 2015

Principle of Equivalence

The primary purpose of this post, is to advise that, as of this writing, a marginally higher high over the Sep 2015 high has been made on the S&P500. That means that several upward counts can now pertain to the market. For example, on this daily chart, minute i, minute ii and minute iii are now valid waves of a potential Leading Diagonal upward for example for the minor wave A of the intermediate (B) wave of a triangle. We have shown those waves as circle-i, circle-ii, and circle-iii, which would mean circle-iv and circle-v would follow if this count would play out. We are writing this mid-day, and the day is not done, so minute iii can go higher - if it wants. We again want to emphasize that this is a valid potential count. For the count to be realized, it must play out according to the definition. That has not occurred yet.

However, keep in mind that in Elliott Wave theory, it is 'required' that the all of the legs of a diagonal be zigzags. So that means that since minute i and minute ii must be zigzags for a diagonal, they must also be functionally equivalent to a W-X-Y count : a double zigzag count. That's why on the chart, below, we are showing the same labels simultaneously.

At this moment in time, minute i, minute ii, and minute iii of a diagonal are logically and functionally equivalent to a-b-c-x-a-b-c, or W-X-Y. So, strictly on a 'wave labeling' basis it is difficult to tell them apart.

So, what then provides a road map for the future? Well, first it is very often a 'third' wave that makes a new high or low in the market. It is the wave with the power. Isn't that what we have here? A third wave (in this case of a potential diagonal) making a new high in the market? So, this may be one indicator the current count is correct. However, we also know that in a true contracting leading diagonal, wave iii can not be longer than wave i.

So, that IF wave iii were to become longer than wave i, then the better count may simply be W-X-Y. A long enough interior wave could invalidate a diagonal, and upwardly overlap the minor A wave down. It that case then the wave could be long enough to have formed Intermediate (B), of a triangle all by itself. (We want to emphasize, that, at this point in time, no such formation is in evidence, but it 'could' occur.) But it could, emphasize could, also be W-X-Y of a much larger correction like a potential second wave up, although, here again, there is insufficient price evidence to draw such a conclusion at this time.

Also if Minor A-B-C, down & W, up provide an almost perfectly parallel channel, then a back test of the channel as minute iv, overlapping minute i, staying shorter than ii, without making lower  low  than X is also a very plausible scenario. It would continue the pattern of 'whippy' moves in the market. This might then be followed by another zigzag higher to make minute v, which, in a diagonal must then be shorter than minute iii.

Ok. Fine, but there are two problems here, too. The first is that diagonals should be relatively rare patterns. And, do you see the second problem here? In such a scenario, then the equivalent pattern is W-X-Y-X-Z which could be just a triple zigzag to make intermediate (B) of a triangle - formed of zigzags high enough to have the S&P500 overlap with it's minor wave A, down.

For this reason, it takes a keen view of market oscillators, technical internals, channels and Bollinger bands to sort things out at this time. From our vantage point, we simply wanted to use this live example to show exactly why there are often 'alternates' in a market. Just part of the reason, is that in Elliott Wave counting 1-2-3 is often equivalent to A-B-C (until it isn't by adding a fourth and fifth wave), and a diagonal must be comprised of double and triple zigzags.

Hope this helps!

Sunday, October 11, 2015

Example EW Trade Setup Preparation - US Dollar Index

Disclaimer: Nothing in this post is to be taken as trading or investment advice. This is an example of a trade set up using Elliott Wave theory. Futures trading may not be suitable for all, and may result in loss of some or all capital. Consult your own financial adviser regarding the suitability of any herein contained information relative to your own situation. Any trades taken are solely your responsibility.

Many people have complained that there are "too many options under Elliott Wave Theory", "you show too many changed counts", and, of course, there are famous accounts of bad Elliott Wave calls (that we won't go into here), so "how could Elliott Wave theory be of any use in real trading?" Well, we're going to show you a real situation where the market sends a "mixed message" and see what some of the newer tools of Elliott Wave trading can tell us. I'm going to ask you at the outset, "what do you think you get paid for in trading?" Do you think you get paid to read a newsletter or watch a video and take the person's advice, putting on a trade when you are not really sure "why you did"?

No, you are paid for doing work - doing hard work to try to create an edge for your position that others don't have. If you get paid, it is for clearly defining your risk and your reward, and trying to do as much as possible to capture the reward. The market is not going to hand you money as a retail trader, when it could hand it to a much better capitalized hedge fund manager who has a staff of people, one of whom can doing nothing more than spend all day analyzing your favorite stock, ETF or futures contract, and who has more 'staying power' in almost any market by virtue of their size. And you need to realize that, sometimes, and actually, often, for all this hard work you don't get paid. In fact, just the opposite, the market says, "thanks for all the hard work, but you get to have a loss today." So, if you ready to do some work - under these conditions - then roll up your sleeves, and let's go. Clearly, if you have a full time job, or don't have a few hours a day to put into market analysis, then this style of trading may not be practical for you. That's something you have to decide.

Your Prework - DXZ15
Please take a monthly chart of the DXZ15 or $USD from 2008, forward. Clearly, you can see there are higher highs and higher lows. The chart moves from the lower left to the upper right. We won't show you this chart. It is your work. Now do the same thing for the weekly chart. Again, there are higher highs and higher lows. The chart moves from the lower left to the upper right.

These charts - going from the lower left to the upper right - mean we do not want to take any short trades. We want to trade in tune with the larger picture of the market, and only trade long on pull-backs of smaller degrees than these larger trends.

Daily DXZ15
When we look at the daily chart, below, we see the DX has been in such a pull-back. In fact, the move has been pulling back for six-to-seven months, since last March.

This move is currently all in a "corrective channel". Impulses lower don't form nearly perfect channels and at such shallow angles of descent. As best we can count it, the move counts as a triple zigzag. Since, under Elliott Wave Theory, "triple zigzags are always terminal", it means that this count should end the move lower, and higher prices would be expected. Well, prices have moved smartly off that z wave, low. So, does that mean that we "buy right now?".

No, it means, "we prepare to buy".

So what does 'preparation' mean?

First, we assess the current situation on the daily chart, above. Here are the steps ..
  1. Note that current price at 94.915 is quite a long way from the that August low candle of 92.520 and that would be over $2,300 of risk per contract! That's quite a bit.
  2. Note the position of the daily slow stochastic. While it 'is' in technically over-sold territory, it has not curled up, yet. It can still move lower before crossing up.
  3. Note that the histogram of the Elliott Wave Oscillator is red and still below the zero line.
  4. Note that price is still below the blue EMA-34.
The assessment leads us to conclude that regardless of what we thought before about the Elliott Wave count, price can still go lower before it goes higher.

Second, we assess the Elliott Wave counts that are 'possible' for the waves after the 'z' wave. At this point, we completely forget and ignore any and all waves that are prior to the August low. Here is the first attempt.

Aha, we say. We have a 'gap up' and the makings of a Leading Diagonal wave, and it's wave (iv) has busted the trend line in a 'trap' to get people short, when they should be long. Well, it's 'possible' and price 'can' go down to 94.440 before wave (iv) becomes longer than wave (ii), invalidating a contracting diagonal. So, "I've seen this. It must be the case. I need to rush to my computer and put in an order right now". Um .. no. We just said from the assessment above, there is a good chance price goes lower, first. Is there any more information we can get?

Well, the first thing you need to realize is that the above chart is of the "Daily Nearest Futures". This is one of the most common ways that charting packages display their data: they string together the previous September and current December contract, and look right where that supposed wave (iii) is. Why it's right on the contract expiration week! So, maybe we need to do some more homework.

Let's look at the "December Futures Only" only. This is available on line several places for free.
So, when we look at this chart, what do we see? Well, in fact, there might have been no higher high at all! So, that means a diagonal would not have formed. Now, ask yourself, honestly, "did you think to perform this step to get as much information as you can"? Well, if not, that's OK, you might now know to do it in the future. Taking this action now downgrades the possibility of a diagonal - and upgrades some kind of different count, but now we have to think of what 'that' is. Keep in mind, we have not placed a single order yet with a broker, or spent a dime of anything but our time.

Well, without the higher high, it also means that we don't need to spend much time considering the possibility of 1-2-i-ii. If there was a higher high, we would consider that too. But what count is it that agrees with the assessment we started with, that "lower prices are possible first". Well, here it is.

This would be the possibility that there is a first wave up, 1, and then a FLAT, for a,b,c where the b wave is nearly equal to (single contract month case) or exceeds (daily nearest case) the prior high. This chart would say that the 'c' wave could come down below the the 'a' wave. Well, isn't that interesting!?

That is a case that would both agree with the above assessment, and allow us to cut the risk significantly, if it occurred! Well, that's just ducky, but how do we know how far down the 'c' wave will go? Well, obviously, the gap highlighted with the red circle is a clue. The gap is either going to provide support, or it's going to fill. And, we'll watch to see what happens - patiently. It may be a few days before that happens. But, so what? We haven't spent any money yet.

Yes, I know you are likely impatient: you are looking for a trade you can put on 'this minute'. But stick with me. What can we do in the mean time? How do we know we are likely correct in our assessment of a 'c' wave lower? Well, this is where Bill Williams' tools come into play. Bill's methods call for us to now focus on only the one wave - the 'c' wave lower. From b to c. And now what you do is 'find' the time frame that puts 120 - 160 candles on the chart. Let me say it again, you 'find' the time frame: you don't say, "I've always traded the half-hour chart before, and that's good enough for me." You 'find' the time frame. So, below, when I've done that I find the 2-hourly chart puts 115 candles on the chart. A four hourly chart would put too few (58), and an hourly chart too many (230). So here is that chart.

When we do that, Bill says, "wave iii of 3 will almost always be at the low of the Elliott Wave Oscillator". And, then, you be sure to put the EMA-34 on the chart (or you can use the 'balance line of Bill's alligator : for this purpose they are equivalent). And then the chart begins to "pop to life!"

And isn't that somehow exactly what we have? We have the lowest prices on the lowest oscillator value and the lowest RSI agrees with it. So, we're on to something.

Second, you'll note a downward expanding leading diagonal from 25 Sep to 03 Oct. Because of the overlaps, this otherwise confusing wave sequence really can't be counted another way. Note that within the diagonal, every numbered wave is on an opposite side of the EMA-34 for "good form an balance". Wave v is greater than wave iii, wave iii is greater than wave i, wave iv is greater than wave ii, wave iv overlaps wave i, and they are all zigzag sequences. Picture perfect! So, we assign this structure as wave 1, because it's Elliott Wave Oscillator dropped below the prior EWO low.

Then, we have a zigzag upward, the likely 'a' wave of which doesn't cross the EMA-34 (often a sign of a correction coming), and then the 'c' wave of which does cross the EMA-34. So, we have another numbered wave! Wave 2. And now what do we have? We have a second wave which is a 'sharp', a zigzag. Again, second waves are 'most often' zigzags.

Third, we really suspect a third wave "of some type" because now the Elliott Wave Oscillator is even lower than that first wave lower we cited above.

Further, we have a wave in a channel, and if we use the EMA-34 as the "wave counting tool", then we've had one pierce below it, and only one pierce above it; these are likely waves i & ii, making us, as Bill Williams says, likely in iii. Now, it 'could' be iii of C, but it is 'most often' iii of 3. And, you'll note, we had 115 candles on the chart. There are still up to 160 candles that can complete the wave.

Now, like in Sherlock Holmes, the Hounds of Baskerville, the Elliott Analyst must ask, "what is not on the chart"? or as Sherlock asked, "why didn't the dog bark?".

What's not on the chart is 1) that the channel has not been breached  to the upside, 2) that there is no obvious horizontal or contracting triangle on the chart, and 3) there is no obvious ending diagonal.

Well, since price is not above the channel, there still is no imperative to buy at this level. We need to wait for 'c' to finish. And since wave 1 is a Leading Diagonal, it is very likely that wave 5 will not be a diagonal wave. Since wave 2 is a zigzag, wave 4 could be a FLAT or TRIANGLE. And that will be our clue that price is getting low enough to place a buy order with a closer stop.

We will follow this trade set up in the next few days but before leaving the two hour chart - you see that green triangle above 95.500? That is a Bill Williams, 'up' fractal. With no orders currently in that market, if we should be correct about the triple zigzag, and the market should 'unexpectedly' immediately head higher into a very strong and powerful up wave, then we 'want' to be in that move.

That up fractal is a "buy stop", meaning if price goes beyond it, the buy stop converts to a buy market order, and we would be long one contract at that point. This is key. Suppose our downward analysis is incorrect? Suppose it is just A-B-C down, and the fractal gets hit in the overnight? We don't want to miss that move, and then we would implement 'trailing stops' rather than a 'hard stop' based on a wave count that I will cover in the in follow-up posting. This what is different about Bill Williams than Bob Prechter.

You won't find such clear instructions on 'how' to construct a wave in Prechter. You won't find such clear instructions in how to count a wave in Prechter. You won't find 'clear' instructions in how to use the fractal breaks in Prechter. This is one of the additions you 'will' find in modern Elliott Wave theory. We know you don't have a full appreciation of it, yet. We'll keep you posted with exact details as this wave progresses!

Cheers and enjoy the charts!




Saturday, October 10, 2015

A Hitch-Hiker's Guide to the EW Galaxy

Because some people keep posting the same information in chat rooms, repeatedly, and because others think I am some kind of Elliott Wave monster - out to seek and destroy other chat rooms - or that I claim that my counts are 'always correct', or others say I am here to promote myself, I want to use that energy to update with this post.

With apologies to 'A Hitch-Hiker's guide to the Galaxy', I am going to offer you these six realistic Elliott Wave scenarios, any of which 'could' occur without any breaking of the Elliott Wave rules. There may be others I have missed. If there are, let me know.

Clearly because they are offered for free, and also because I am not selling anything (check my web site- any and all 'Products' for sale have been removed), I hope it reduces the perception of any pandering or self-interest, other than that people actually learn to count Elliott Waves, as they are described in the texts. Why am I doing this now? First, because this is the most difficult time in history to make good Elliott wave predictions. The market will lurch & jolt; it will cause gains and losses, it will cause people to have a surge in optimism of new highs, and then it will disappoint with overlaps of some kind. If you can learn to survive in this environment, then counting impulse waves higher or lower, will seem like a walk in the park at some later point in future.

The second reason I am posting this, now, is people almost always drag out the very tired comparison to Robert Prechter. Saying, "you know he thought he was always right, too" or some other such nonsense. The fact is Prechter's organization has almost always posted alternate counts, whether you want to acknowledge that or not, or whether you wanted to use them or not! So, please take that argument and use it on someone else.

The third reason is that people keep telling me that because, somehow, a wave did not conform to my expectations that it means that you can't possibly trade using it! Bingo! I agree with that statement to some - even a large - degree. I have made an entire video, posted on YouTube, about "A Critique of Using Elliott Wave for Trading", particularly if it is used alone or in isolation. If you haven't watched it, you should! We are in that period now called "The Fourth Wave Conundrum" in that video: many, many options. And I maintain, that when a wave label invalidates it provides a lot of information for the future.

So, without further delay, here are six plausible scenarios for the future. You will have to decide what you like and what you don't like, and let the market decide the outcome.

Scenario 1 - P5 Failure

Clearly for this scenario, you have to think there have been three Primary waves of a Cycle Impulse upward to at or beyond P3 = 1.618 x P1. That's fine it might work that way in the U.S. It's just not working that way for the London FTSE. One reason to question this scenario is how short P5 would be in relation to P1. It's not a 'deal-breaker' though. It could happen. It just needs five waves up from P4. Other comments are on the chart.

Scenario 2 - Regular P5

This chart has many of the same features as the prior one - just that P5 is allowed to take on a more reasonable length in relationship to P1. Who knows, perhaps P5 would produce a "throw-over" of the channel that would end the move - like the Gold market did. It's plausible. The one thing about this chart is it ignores the overhead supply of the seven month diagonal from last November to this May.

Scenario 3 - Triangle
One advantage to this chart is that P4 is allowed to consume more time in relationship to P2, and price is allowed to contact the lower channel line, and perhaps make a 'false breakout below it' while still producing acceptable alternation in the count.

Scenario 4 : Double Zigzag or Flat-X-Zigzag
This scenario allows price not only to contact the lower channel line, but also re-define it. In other words, we would re-draw the P2 to P4 trend line, when we 'know' where the new P4 is. Then P5 could head upward, and make a wave that is more like P5 = P1. It might also allow a 38.2% retrace of P3 in the U.S., but it might mean more ugliness in foreign markets.

Sceanrio 5 : Leading Diagonal Downward
This scenario would be ugly, indeed, because a deep retrace for a second wave (ii) of a diagonal would have most convinced that new highs are in the offing - yet this scenario would both recognize the overhead supply created, and allow the S&P500 to validate it's ending diagonal triangle - that formed in May, 2015 - like many other stock indexes have done. It would also recognize the extreme leverage and number of people that participate in the market via the ES futures rather than buying traditional stocks, for example. In this scenario, wave (ii), to follow the rules, must now form with a similar structure as wave (B) of the triangle, start with a Leading Diagonal, A, then retrace for a B, then make a C wave up to form a legitimate zigzag.

Scenario 6 - Regular Impulse

 It's funny, but the wave iv of a simple impulse downward has 'not yet invalidated'. Certainly, it has a high risk of doing so - which is why it is presented last. But, still, we can not rule it out just yet. The Dow is only points away. If we can rule it out, we get to take one scenario "off the table". If not, that will tell us something, too.

So, here are six scenarios. And you might ask, "what's the point"? The point is that based on Elliott Wave theory it is 'very to hard say' where exactly one is in the wave count. But it is 'largely' because the down movement consisted of, or started with, three waves down. That very same 'conundrum' happens on all degrees of wave counting - whether you want to accept it or not. That's why Bill Williams developed some indicators that can help in that decision and why they are incorporated into some products like Advanced GET, E-Signal or Motivewave (I have no business relationship with any of them).

Yes, as of Friday momentum looks up. Want to fight that? That's up to you. So, if it's hard to tell where one is, one might want to at least remain flexible, do the best job of short-term wave counting possible, and, if possible, let the market clear up some of the confusion.!

Cheers and the best to you always!