Sunday, September 20, 2015

Always, Always, Always have a Plan B

Considerable discussion in the September 19th post, below, shows why a Primary fourth wave is 'still' possible in US Equities. We have clearly done our jobs as Elliotticians of describing the 'main' count. This count is chosen for several reasons. Among them are the following: 1) At the monthly level, trend in equities is still 'up', with higher monthly highs and higher monthly lows. 2) At the weekly level there is a curious and suspicious divergence between the DOW and the S&P500 Index. Why hasn't the SP500 made a lower weekly low, as the DOW has? Is the SP500 trying to signal that a Primary fourth wave is truly ahead of us? 3) At the daily level, short term the 'recent' trend is up, with higher daily highs and higher daily lows, and we don't like to 'fight the trend'. Longer term, we must agree the daily chart could convert to full-on bearish. 4) At the hourly level, there is a good possibility of a contracting Leading Diagonal, and 5) at the five-minute level there is a possibility of a contracting ending diagonal C wave - meaning higher prices could result from the 'bullish falling wedge pattern'.

So, those are the reasons for judging that a Primary fourth wave is 'possible'. And, to that end, we have provided a very 'clear' and unambiguous 'invalidation point', based again on sound Elliott Wave logic, where that pattern would invalidate.That level is below 1930, in the cash SP500 Index.

Yet, we have been a very vocal advocate that Elliott Wave reasoning is an exercise in 'probabilistic thinking'. For many counts there is a very good 'alternate'. Furthermore, no one has yet asked, "what is one to do if the invalidation point is hit?" Well, here again, we have been vocal advocates that if trading is looked at as a business, one should always have a plan B. What else are we to do as traders? Take our ball home and exit the game in shame?

Having an equally well thought-out plan B should be looked at with no more stigma than when, say, in a football game, the quarterback decided at the last minute to keep the ball and run for the first down, versus the original plan of passing that ball, but the receivers were covered this time. That's it. That's all. The point of the trading game is to make and keep profits. Once one gets the longer term trend of the market correct, then that will likely happen.

We are currently in the price-discovery phase where the market will tell us which path it plans to take. With that in mind, without any apology, but actually with the best intention of preparing myself, this chart of Plan B is offered.

Alternative Count for the SP500 Index, Five Minor Waves Lower to an Intermediate Wave
This count counts all of the previous waves to the August bottom as the same; 1, 2, 3 are exactly equivalent to A, B, C in the 'main' count. In this count there certainly is no overlap of wave 4 with wave 1, and wave 4 does not encroach even upon wave 2 territory. There 'would' be good alternation, if it occurs this way, because if wave 2 is properly seen as a FLAT, then wave 4 would be properly seen as a double zigzag. Furthermore, every numbered wave occurs on alternate sides of the EMA-34, thus providing good form and balance.

The only significant objection to this count is that wave 4 is quite a bit 'larger' than wave 2, and 'usually' it is smaller. Right now, I don't know of a 'rule' that prevents such a thing - as long as wave 1 is not overlapped. But I will go back through some of the guidelines of wave formation and review this situation to see if it is a critical objection or not.

There is also one minor objection to this count : right now the waves form a suspiciously 'perfect' channel. So, the count may still be corrective. 'Usually' impulse waves have 'some' sloppiness in their channeling. Wave three's in particular tend to exceed channel boundaries. Again, this is not a 'deal breaker', but it is 'something' to keep one's eye on.

Right now, this is the very best alternate I see. And, an impulse wave lower, would most likely, turn the overall tide of the market lower.

Importantly, we do not want to be caught on the 'slope of hope', hoping for a Primary 5th wave yet to follow when the market does intend to head lower so it is very important to listen to the market's message, and below 1930, cash S&P, the game takes on a different character.

If a minor wave 5 were to occur lower - in opposition to the main count - then it would likely stop on the mid-point of the channel line. But, again, right now, there is no price evidence for that, so that is getting ahead of ourselves.

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