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!

Thursday, October 8, 2015

The Fourth Degree

When you ask someone for some information - if you do not inquire politely enough - it is sometimes referred to as giving them "the third degree". Politely or not, can we inquire as to where the market is in it's hourly count? In Tuesday's post, we clearly said that if the Dow made a higher high than the September high, then it would officially take all downward diagonals off of the table. Yesterday, the Dow did that, and in live chat room, and elsewhere, we removed the downward diagonal possibility and upped the odds of a Primary fourth wave in progress. We are currently at 70:30, that a Primary 4th wave is in progress.

We have shown in our weekend video, that if we are to make a Primary fourth wave triangle, there needs to be a clear Intermediate (B) wave up, that would start with a minor wave A. Originally, we were looking for a Leading Diagonal, upward. The first attempt at that count invalidated at two different levels. But, because of the look of the Dow's chart, in particular, and the position of the Bollinger Bands on the S&P 500, we are putting a Leading Diagonal Minor wave A back on the table.

In the chart below, you can see the S&P 500 has not yet made the higher high, but we would expect it to. Yet, the question is, can we better tell where we are in the hourly count? One key might be a structure in the 'fourth degree' .. well in the fourth wave position. If you examine this chart closely, you can see a structure that we have clearly labeled as a five-wave triangle (A,B,C,D,E,) and wave iv.

(More text below chart).
Triangle in Fourth Wave Position of wave iii

If the triangle is properly located in a wave iv, then it should precede the 'last wave up' in this wave sequence. Assuming a new high is made, then it is very possibly wave minute iii of such a Leading Diagonal. Since we never did count the September downward sequence as a 'five' and only as a 'three', then a diagonal structure can, in fact, still be on the table.

Of course, the requirements remain the same as for all diagonals. Minute wave iii (circle iii) must remain smaller than minute wave i, and minute wave iv must remain smaller than minute wave ii. Minute wave iv must then overlap minute wave i, in the downward direction, and minute wave v, up, must remain smaller than minute wave iii.

With further upward movement the Dow will overlap it's first downward minor wave (minor wave A).

See chart below.
Daily Dow Could Upwardly Overlap

If the overlap occurs, it may be enough to only consider the upward movement as a simpler W-X-Y of Intermediate (B) rather than requiring a full Leading Diagonal would form. So, we have clearly labeled this alternate count on the S&P 500. But, note the position of the daily slow stochastic being in over-bought territory.

The Dow's downward retrace in September was nowhere near as deep as the SP500's. Because the two counts are not in lock-step, it may be necessary for the S&P 500 to form a Leading Diagonal in order to effect a legitimate first wave higher, minor A. Whether a leading diagonal or W-X-Y, the market will have to tell us through valid formations which count is in play. In either case, the upward diagonal possibility would invalidate below the respective September lows.

Tuesday, October 6, 2015

Mission Accomplished, Commander

In our last post, we posited that it was possible in the light trading volume and general confusion of Elliott Wave counts, for the large players in the market to turn the trading algorithms on in a quasi Search and Destroy mission that was designed to fill the upward gaps in the price chart.

We are happy to report today, that the last upward gap, since the Fed meeting, has now been filled. In the chart, below, all of the upward gaps have been turned to green. Mission Accomplished!

SP500 Hourly All Gaps Since Fed Meeting Filled

The Elliott Wave count is a 'plausible' count. We do not suggest it is the 'only' count. It is, after all, possible, given the internal market breadth ratios, that (a), (b), (c), up, is only (i), (ii), (iii), up. And, if so, we will further adjust our market view. But, we do want to note that price has retraced to slightly beyond the 78.6% retracement level. This would be very acceptable for a second wave in a diagonal count, and 'at present' we see only "three waves up" with the hourly slow stochastic over-bought. A roll-over below 80 on this indicator would be interesting for the downward count.

Still, we must keep our eye not only on the SP500, but on the Dow. If the Dow trades above it's recent September high of 16,933, then we must remove a downward diagonal from consideration and look at other sideways or upward counts. That is simply the nature of Elliott Wave counting, and we will adjust accordingly if that happens. So far, the Dow has not invalidated a downward count.

One of the reasons why we remain very tentative on the Elliott Wave position of the market, is that not only are there the downward gaps remaining, that you still see as red circles on the chart, but there are also upward gaps from August that have not been filled yet, either. Which fill or fills first will be interesting in and of itself.

Cheers and enjoy the chart!

Saturday, October 3, 2015

Search and Destroy

In our last post, we stated we would 'have to be flexible to what the market dictates'. Friday was such a day with a large reversal after a significant down opening. Many people are still playing the guessing game of, "is it Primary 5, yet, or is it still Primary 4?" and many other similar questions to maintain a bullish outlook. Our last weekend video downgraded the chances of P4 to about 5%. This means, "it still could happen, but based on recent price formations it does not look very likely".

How is it (if it does happen) that a 5% probability could come to pass if it does? It could happen in the same way that in a game of flipping a coin, the outcome of four-heads-in-a-row is not impossible. If you do the math, you will see roughly the same probability (.5 x .5 x.5 x .5 = .06 = 6%).  So, even if an outcome has a low probability, we can not dismiss the chances of seeing it come to pass in reality. From an objective viewpoint we, however, can not invalidate downward counts until the high of what is labeled minor wave 4, in the chart below, is exceeded higher. Why is that? Because downward diagonals can form with legs that retrace 66 - 89% of their downward legs, if there are three-wave sequences.

So how then does one understand the current environment? From my perspective, the environment of a sideways triangle or downward diagonal both involve significant volatility. This is such a time near an all-time market high - which makes the probability of outright volatility very high. The last several trading sessions have been no exception, and we patiently wait for clarity on the wave count.

In the meanwhile, Search and Destroy or Seek and Destroy was a military strategy that became popularized in the Vietnam war. In this context, however, it refers to the activity of the "big money", the players with accounts large enough to make a difference in market movement. See chart below.

Note Where the Gaps Are

Anyone who actively charts the market might note where price gaps are. Certainly, the downward gap created on Friday by the payroll report was filled quickly. We could have shown it here with a green circle (to indicate a 'filled gap'), but for clarity we did not. Of note, a gap down from Friday 25 Sep was also filled on this day. It is shown with a green circle.

But note there are two higher gaps - one at the 61.8% retrace level, and one smaller one, at the 78.6% retrace level. Isn't it interesting where those gaps are located? These gaps are shown with red circles. Could it be that in all the uncertainty, and smaller positions because of it, that the big players might have the trading algorithms cranked up to seek out those gaps? We honestly do not know if one or both of those higher gaps will 'fill' or act as resistance to an up move. We are beyond the 50% retrace, so it seems likely the upward price movement will continue at some point.

We 'do' know, from a technical perspective, that on Friday both the cash S&P and the futures got back to their daily middle Bollinger Band and it is possible that the upper Bollinger Band might become an interim price target, either with backing-and-filling or without.

If price 'should' hit the upper band, it 'could' act as resistance without exceeding the minor 4 high - in which case a downward diagonal is still a good possibility. A key downward warning sign would be if price gets 'near' the upper Bollinger Band, without actually contacting it. That will be an interesting 'tell' regardless of contact or not.

Beyond that, from an Elliott Wave perspective, it is the market that will have to tell us, and not the other way around. We can actually see two paths lower (diagonal minor 5 or continued triangle minor 4 - more especially on the Dow and S&P futures than cash S&P), and while we can see an upward path, it is more problematic at this point in time, and new higher highs would have to be made first.

Cheers and enjoy the chart!

Thursday, October 1, 2015

Fifth Waves

Fifth waves of impulses, lower, have a distinct tendency to end at the median lines of their channels. This represents the "loss of momentum" that helps identify them as fifth waves, distinct from third waves. This chart shows a plausible count for minor wave 5 in the form of a contracting ending diagonal. Such a count would allow the fifth wave to 'begrudgingly' make a new lower low beneath minor wave 3. Diagonals are very difficult to count, and even more difficult to trade. The whipsaws within them are what helps keep the public out of the market at key turning points.

Possible Ending Contracting Diagonal for Wave 5

While we can not guarantee even to ourselves that such a count 'will' come true, all we can say is that it is a 'very good possibility' based on the current information. Part of that information is that this morning cash failed at the back-test line of the upward bullish flag that formed minor wave 4. Of course, the day isn't over yet, so we must be responsive to what the market dictates. That said, we can not find a downward triangle of large enough degree to have ended the downward count. Such a triangle, if sufficiently large, would have said 'last wave downward upcoming'. Again, we don't see such a triangle.

In this count wave minute v must be shorter than minute iii, wave minute iii must be shorter than minute i, minute iv must be shorter than minute ii, minute iv must overlap minute i, and there must be all 'three wave' sequences.

This is 'not' the only downward count possible from this location. Another possibility would be that of a 'expanding' diagonal for wave 5, as well, but there is less price evidence for that count at this point. That possibility could form if there is a surprising positive reaction to the upcoming payroll employment report on Friday.

Cheers! and enjoy the chart.