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!


  1. What are your thoughts on the S and P or have you give up on that?

  2. Thanks Joe
    Excellent insightful evaluation.
    Trust you're in the best of health