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!

1. Loved it Joe! Thanks a lot for posting this update just in the nick of time. It answered all my questions.

Much appreciated

2. Excellent analysis.

3. One thing to note. the DJIA is bumping up against the 2000 / 2007 trendline (in log scale). It tagged it today intraday and reversed lower into the close. Trendlines always amaze me.

4. You did miss one count Joe. It probably ranks the lowest probability but wanted to note it at least. The old 1-2, 1-2 from a failure top starting from 7/20/15... Thanks for the posts. I did want to ask.. How do you determine your probabilities?

1. Hi Steve - Actually this count was not missed but ruled out for one reason. Usually within a 1-2-i-ii, the wave ii is 'smaller' than the wave 2 because the market is gathering momentum for the next bigger downside move, and the up move is smaller as a result. So, we have stayed away from that count for that reason. Also, it 'obviously' projects a huge downward movement if that count were to be the correct one, and the S&P has not even been able to break the lows yet, so, at present, it seems like an unrealistic wave scenario - until or unless there are new lows below the August low seen. If so, we can adjust at that time.

As for probability, it's a combination of three factors: sentiment, momentum, and number of allowable wave counts from the current formation. For example, there are some times that longer-term sentiment is so extreme it over-rules short term momentum almost entirely. And there are other times, when sentiment is just 'stuck in the middle' and provides no clues, so market momentum gets the nod at that point. But, in addition there is 'almost always' more than one path the market can take. For example, let's say a third wave has been seen. The market can 'almost always' in that case make either a flat fourth wave or a triangle. So, with momentum in gear, the probabilities are 50:50 on the exact pattern, but much higher that a fifth wave will follow. What takes time is assessing those probability on a longer term time frame.