Saturday, September 19, 2015

Thinking It Through with Gratitude

Successfully predicting the formation of an Ending Contracting Diagonal beginning in late December, 2014 in my YouTube channel and watching it form successfully through May, 2015 was both an emotionally exhilarating and emotionally exhausting experience. In case you are not familiar with the prediction, it appears below, as it was made.

Prediction of Ending Contracting Diagonal in the SP500 Index
It was exhilarating, of course, to see such a prediction come true, but it was also exhausting because of the rampant bullishness at the time, with some people making much higher price projections. Few people on blogs and web-sites thought this pattern would end or interrupt the bull market, and it was very exhausting trying to communicate with others - showing with sound Elliott wave logic - how their own reasoning could be off. Many refused to accept the idea but were forced to, as, day-by-day, prices headed lower. Stocks topped, at least temporarily in May 2015. The $DOW and $NYA have since made lower lows than the wave shown as circle-4, above, validating that a true diagonal occurred. The S&P has not, yet. It may or may not. But overall, one certainly has to have gratitude for this degree of foresight.

Most people are now familiar with the water-shed decline in prices that occurred in August, 2015. This daily chart will show that decline and subsequent wave action.

Daily S&P 500 Index Since the Top

Once again, it is important to try to apply sound Elliott Wave logic to this count. The logic goes as follows. IF the top was actually the end of a Primary-C wave, as certain publications have suggested, then by this time it should be 'exceptionally easy' to count five-waves lower from the top. I have tried that already. I could see where after the August decline, which some count as a third wave, there could have been a regular symmetric or barrier triangle to form a fourth wave, and that simply did not occur. Let me say it again. I 'tried' to count it that way. I expected it to happen. The market said, "sorry charlie", and was more bullish than a regular triangle. So, I 'will' listen to the market.

Some say, well the fifth wave down is actually the truncated wave that did not make a lower low at the end of August. Wait-a-minute! IF we had Primary-C up to May, and are starting a 'major decline' why are we having to invoke a truncated wave this early in the downward count?! That doesn't make sense and it questions the 'impulse down' theory.

But, furthermore look at the structure of the first wave down in June - the wave labeled as minor A. This wave clearly 'doesn't go anywhere', it doesn't even make a new low over the May low. This is often a sign of an "A" wave, and not a "1" wave. Next, the choppy sideways movement that goes until mid-August can best be counted as one unified - albeit complex - sideways flat wave. Why? Well, it has a lower low at circle-x, and a higher high than circle-w at circle-y. Next, subsequent down waves (a) and (c) ALSO do not make lower lows. The very hallmark of motive waves in a down trend is that they make lower lows, and these do not. So, as far as I can tell, the B wave is a sideways flat, until middle of August.

But that is the next problem for the "impulse down" theory. "Most often", a second wave is in the "sharp" category of waves - meaning either a zigzag or multiple zigzag. Clearly, thinking in terms of probabilities, this greatly reduces the probability of a second wave at this location. So, B wave it is.

Then, there is the watershed wave downward. It does 'in fact' have all the characteristics of a "third" wave. But, C waves are in the "third position" also, as the Elliott Wave Principle, by Frost & Prechter, clearly points out. So, when I add all of this together, it points me to think we have had an A-B-C down from the top, even as powerfully down as that end of August wave, down, was.

Then there is channeling. If you have not studied many 'true impulses', there is an observation by keen Elliott Wave technicians, like Jeffery Kennedy, that, in a true impulse, waves 1 & 2 often form the "base channel", and wave 3 will break it to the down side. That base channel is shown on the above chart (just drawn between A & B, as if they were 1 & 2). The prediction from "base channel" theory is that wave four will refrain from re-entering the base channel. That is because wave fours tend to be rather weak and sideways structures. As you can plainly see from the chart, above, recent price movement has, in fact, re-entered the base channel. This actually tilts the chart from bearish to 'somewhat more bullish' because of that.

That is one of the factors that changed my view of the current daily waves from a regular contracting or barrier triangle to a more bullish triangle - the contracting leading diagonal triangle. So far, all of the predictions for that leading diagonal have come to pass, including the higher wave minute-iii (circle iii) which occurred even as others were predicting much lower stock prices at the time.

Next, there is the "size" of this overall wave. Because some commercial Elliott Wave services still say, "well, the top is likely in, but there is one way for the market to rescue itself", it means that Primary 4, now, rather than Primary C at the top, is still on the table. There is no getting around it. Do I like that situation of uncertainty - heck, no. But, as market technicians, we must 'deal with it'.

In fact, if we have had "three waves down" A-B-C to the August lows, that is the 'worst imaginable' situation there could be for an Elliott Wave technician. In my YouTube video, "A Critique of Elliott Wave Theory for Trading", I describe that there are thirteen (13), yes, thirteen, legitimate patterns that can form from three waves down after a third wave up of an impulse has formed. A triangle is among those patterns.

So, when I next look at the fact that Primary 3 (if that's what it is) did indeed pass the 1.618 Fibonacci extension, as I measure it, then this says, regardless of the shallow decline in Primary 2, that the May, top, could , indeed, be Primary 3. BUT, if that is the case, how many months and months did that wave consume?! Fully 43 months by my count! Is it then reasonable to conclude that decline of only five months will correct a rise of 43 months??!! It just doesn't seem likely, so I don't think so.

Again, it is just wave logic that is telling me this correction may go on much longer. In the chart below, I have sketched in a plausible scenario - that Primary 4 takes up much, much, much more time in the form of a triangle. The five waves of the triangle must be Intermediate waves, shown properly as (A), (B), (C), (D), & (E). That is because it takes intermediate sized waves to make up a primary sized wave. Backing up to the current waves down from the May high, that means they are Minor sized waves, making up one intermediate wave, lower, intermediate (A) of the potential triangle.

A Possibility for a Primary Fourth Wave - Circle 4

Next, let's ask what a triangle represents. A triangle is a "pattern that moves prices sideways and takes up time. It represents a 'balance between the forces of buying and selling' and is often characterized by lower volume and indecision'." From an economic viewpoint, isn't that what we are seeing from the Fed? A complete lack of decision on when to hike interest rates? And isn't that what we are seeing from many, many wave pundits? Is it A-B-C or is it P1 - P3? Many wave followers describe themselves as confused. This situation both demonstrates and creates more indecision.

But further, many are probably giving back profits that were earned sitting long in P3 as the "whippy-ness" of the current market environment chops accounts around. This is characteristic in a triangle. The whippy, choppy action is something which has been foreseen. It could last a while.

Lastly, it must be said, we have no infallible view of Elliott Wave theory. We know things change. We know there are news announcements we can't foresee. How then do we know when the "pretty picture" above, is incorrect? Well, let's look at a short term, hourly chart.

Hourly S&P500 Index in a Leading Diagonal Minor Degree A Wave

So, we have been following this hourly pattern on the SP500 cash. From the August 24th lows, there is a clear pattern of higher highs and higher lows - the very definition of an up trend - at least short term. So far, the pattern looks like a contracting Leading Diagonal, with each numbered wave on an opposite side of the EMA-34 for good form and balance. Wave minute iv may have completed at Friday's low. For a contracting Leading Diagonal to form properly, wave minute iii must be less than wave minute i, which it is; wave minute iv must be less than wave ii - which it is currently. Wave minute v must be less than wave minute iii, and wave minute iv must overlap wave minute i - which it has already.

But, to maintain it's integrity as a Leading Diagonal, wave minute iv, we said, must be less than wave minute ii. Using a Fibonacci ruler, we can calculate that this pattern would invalidate below the low of 1930, because then a wave minute iv would be longer than wave minute ii and that is not allowed in a contracting leading diagonal. In addition, wave minute iii may not travel below the low of wave minute ii, but that level of invalidation has held, already, so the 1930 level takes precedence.

So, that's what is here - on the charts. What is not on the charts is also of some very great importance. There is no major commercial wave service I am aware of, or dedicated Elliott wave blogger, who has drawn a triangle pattern in the waves prior to May, 2015. This is very important because most technicians know, and Elliott Wave technicians almost always look for a triangle pattern to appear before the last wave in a sequence. That hasn't happened yet, and so we have to ask "why not?". Perhaps it is because the triangle will form as Primary 4. That would make the last wave Primary 5.

So, there you have it. We have tried to put the whole package together. From Primary counts, to Intermediate Counts, to Minor Counts to minute counts, using sound Elliott Wave logic. This may read in a boring manner. It's not as cute as pasting pictures of bears or bulls devouring something. We hope it is, in fact, something useful, and the type of analysis that doesn't cause you to jump out of your thirteenth floor window when you read it or receive the newsletter.


  1. Nice work Joe , I been following from another blog. Curious in your chart 2 leading to formation of capital B ( bold) wave it is wxyxz. It has an extra x . why wouldnt it be wxyz up to B with the w starting at 2048 where the (c) wave location finished?

    1. Hi John. Thanks for the comment. The reason for two x's, is that in Elliott Wave theory, the whole flat wave of B would be described as a "triple flat". The first flat is a-b-c to w, this is connected by an 'x' wave to a-b-c to y; so that makes two flats; w-x-y; then there is another x wave to connect the pattern to the third flat, flat which is a-b-c to z. Unfortunately, there isn't room on the chart for that last set of labels a-b-c to the z wave, but that "three up" after the diagonal was counted on the hourly chart 'live' and in real-time chat. Further, we know that because the z wave did not make a new high over the y wave, it 'must' be counted as a 'three wave sequence'. Hope this helps.

  2. Outstanding work Trader Joe. Thanks for sharing.