Sunday, November 22, 2015

Three Examples of Long Term Elliott Log Trend Channels

Long term viewers of my YouTube channel will recall these posts, which were done as live updates at the time, showing the long term trend logarithmic channels in monthly Crude Oil ...

...and in monthly Gold.
To these .. one can add a two-weekly log channel in the Dow Jones Industrial Average, as below.
For each chart, the pattern of alternation is clearly stated. The last chart, that of the Dow also includes one of my favorite indicators. With 120 - 160 candles on the chart, wave iii of 3 is always at the maximum of the Elliott Wave Oscillator, the next major divergence is wave 3, and wave 4 should travel to or below the zero line - just as it has - but not more than 40% of height attained on wave 3 to the opposite side - the lower side - of the zero line... just as it has.

Elliott tells us to chart in log format for long term charts (weekly, monthly annually), but arithmetic is acceptable for shorter term charts (weekly, daily, hourly).

Cheers and enjoy the charts!

Galaxy - Update

In the post of October 10th, 2015 we showed a number of possible market paths and titled it, "A Hitch-Hiker's Guide to the EW Galaxy". In this post, we want to show where a number of those counts stand. In an October 29, 2015 post we showed how the truncated fifth wave of Primary 5 could already be counted: according to Glen Neely in "Mastering Elliott Wave" the upward wave is already more than a 90% retrace in some indexes, and when the upward wave exceeds 78.6% it is 'possible' to consider it as a truncated wave - provided the upward structure is a five-wave sequence. We showed then, using a leading diagonal, how a five-wave sequence 'could' be counted. So, we will not reproduce that chart here.

But, if the upward count is still taking more time, it possible to see the upward count as only a "three wave" sequence, at present.

The Dow Chart below shows, the upward structure as still a "three-wave" sequence and not a five-wave structure.

As the chart shows, the upward wave has 'not' attained 1.618 x wave i at this point. It is 'close', but no cigar, yet. Further the current upward wave has not, yet, attained a new high. (It could easily, but stay with the discussion for a moment). Further, the observation is that price as not returned to the lower parallel trend channel yet. Price could easily do this as a more complex wave iv as a double-zigzag, or as a triangle - before making a fifth wave (v), higher. This count follows typically seasonal bullish holiday patterns.

But, because price has not attained a 1.618 extension, yet, and is still above the mid-channel, it is also possible we are 'still' in a minute three wave higher, as the chart below shows. This count would also still follow typical seasonal patterns. Then, there would be a drop in a zigzag to the lower trend line channel. This count would also be compatible with the idea that it is third waves (minute iii, in this case) that have the power to break through prior highs or lows.


But because there are still only "three waves up" - at the present time, the larger Primary 4th "barrier triangle" option must still remain on the table. Ultimately, this count would also resolve to the upside, but it is more neutral in the short term. It also has more potential to take price into 2017 (2009 + 8). The chart is below, and it shows that an Intermediate (B) wave would be a complicated structure - such as a double zigzag, with it's key feature being that it would not make the new high, but come very close. Then, there would be Intermediate (C), (D), and (E) waves to follow.

The simple reason behind leaving this count on the table at this point is that the count off the August low is not 1 and a simple zigzag. It is one, and a FLAT wave. Usually, not always, second waves are zigzags or double zigzags. This one is either a, and a FLAT, or three-waves up, followed by three waves down.
Lastly, we will show the count which - other than three waves up - has the least price evidence for it. While this count is still possible, there is insufficient downward price movement to conclude that this pattern is underway. It is the downward diagonal count. It would be counter-seasonal.


This count recognizes that deeply retracing waves are a sign of a potential diagonal. At this point, we could not say whether such a diagonal would be a contracting one or an expanding one. This count would gain more credibility if new highs were not made, and the lower parallel trend line boundary were exceeded to the downside. There is 'some' evidence for this count, and that evidence is that other market averages (such as the $NYA, and the $RUT) have overlapped the upward August wave downward in mid-November; meaning that a fourth wave should not overlap a first wave. That would make the six-year upward count from March, 2009 Primary A, B, C, and not Primary 1, 2, 3.

Again, at the present time, the best price evidence is upward. These charts are presented should that change. Why would it change? The best reasons would be a) a LOT of people are looking towards new highs, and b) maybe more time is needed so that bull market is a Fibonacci 8-years long.

Please do not be dismayed by this situation. Objectively, we have said in our YouTube Video (A Critique of Elliott Wave for Trading) ...well before the fact of this wave .. that fourth and fifth waves are notoriously difficult to predict. We have called this the "fourth wave conundrum" in the video. It happens at every degree of trend, and it just recognizes that it is extremely difficult to determine "in advance" whether fourth waves will be a simple zigzag, or extend to some more complex and time consuming structure like a flat, double flat, flat-x-zigzag or triangle. That is a reality of the Elliott Wave world, and recognition of it can help prevent some frustration with Elliott wave analysis.

Cheers and enjoy the charts!

Saturday, November 14, 2015

Implications of Overlap

The charts below show that two US Equity Indexes have now done something which, in the Elliott Wave world, is to be noted. That is that the New York Composite Index and the Russell 2000 Index have now overlapped the upward wave from the end of August, 2015 in the downward direction.

In each case, this overlap is shown as an arrow on the charts below. The implications for these indexes is that the downward wave can not now be a wave four of an impulse wave upward, precisely because, as you probably know, in an impulse wave the fourth wave is not allowed to overlap the first wave - especially on a closing basis. Now, we want to emphasize that for the Dow and the S&P500 there has not yet been such an overlap. But, if there was to be, then these indexes would fall into that same category - so keep a close eye on them.

This means that in these indexes, at least, one could look to some of the structures we provided in our October 10 post, "A Hitch-Hiker's Guide to the EW Galaxy", and in posts more recent than that. Again, we want to emphasize that precisely because the S&P500 is the "most-levered index", with the ES E-mini futures providing over ten times the volume as on the Dow Jones or London FTSE futures, that almost anything is still possible for the S&P500, in particular. We are going to know in the next few days and weeks whether upward impulse counting is still possible on that index. Our key concern is that the position of the above indexes, however, provide a significant warning sign. And so, for our part, we will remain patient, pending further information.

Thursday, November 5, 2015

Trading and Wave Counting as a Business

Over the course of the last several days and weeks, we have showed evidence that the market is likely making or has made a Primary 5th wave, higher. This is fine with us, because since our July, 2011 video published on YouTube, we have contended that the 'official' wave count from a well-known Elliott Wave service (that of primary A-B-C, upward) could be erroneous. Our post in this blog on October 31, 2015 showed how the NQ futures had made a new all-time high which can represent a Primary 5th wave. A few of you scoffed, with remarks like, "I never use futures in my work."

If you have been following the markets, you may have noted, that this month, the NQ futures have made even higher highs, but beyond that the cash $NDX index (Nasdaq 100 Index) has made higher all time highs - likely indicating wave 3 of a Primary 5th wave. See chart below.

This is all well and good for the technology sector. As of this writing, the Dow, the S&P, certainly the Dow Transports and even the Nasdaq Composite have not yet made the new all-time highs. At this point in time, the labeling of a third wave higher in the $NDX is consistent with the RSI(14) being in over-bought territory and with the maxim that it is usually third waves that have the power to bust through to new highs or lows, so that is the current labeling. We are assuming, of course, that a 4th and 5th wave higher are made in good form, but, again, that is an assumption. What if the three waves up are A,B,C of some larger structure like a triangle or diagonal in the $NDX, too? What happens IF wave 1 is overlapped downward before a fifth wave is completed?

We have shown the alternate count below during live chat, and on some web-sites. Again, we want to make it clear the count is an 'alternate' at this point. It attempts to answer questions like, "what happens if downward overlap occurs?", and "how does an up market get to the year 2017?" Keep in mind that 2009 plus a Fibonacci 8 years is 2017.

This scenario of a Primary 4th wave still in progress has some benefits for the market : first it could prove frustrating to a lot of participants expecting quick new highs. Second, as we said, it would take time. Third, it could also provide a "measuring objective" in terms of an Inverted Head & Shoulders for the extent of the rise of Primary 5. But, also, it might just allow some indexes like the $RUT, and the $TRANS to play 'catch up' with the industrial and technology sectors.

The key requirement of such a barrier triangle is that it should have no closing higher highs in the S&P500, than the current all-time high before all five waves of the triangle is completed. Prices can put 'tails' above the prior all-time-high and still be in a barrier triangle, but they can not close higher than the all-time high. If they do close higher before the triangle is completed, it simply means the S&P500 is joining the $NDX in Primary 5 at the current time.

If the $NDX can already be counted as a Primary 5th wave, why do we bother looking at alternate counts for the Dow & the S&P. Won't the S&P simply follow in it's tracks? We don't know for sure. Why do we bother to have alternate counts at all?

We have suggested before, that if one is in business, it is a good idea to have a "Plan B" in order to help stay in business. We'd like to provide you with a good clear example. Let's say you are in the business of producing T-shirts for football game outcomes. Even more so, let's say you are just an 'excellent' handicapper of football outcomes. Because of your expertise, you are certain that the New England Patriots will win the SuperBowl next year.

So, as a businessman, you have two choices. First, even though the outcome of the game is not for 'certain' (it is 'probabilistic'), you could just blindly follow your own expertise and ONLY print T-shirts that show the Pats winning. So, you design the T-shirts, spend the expense to have them made and shipped to you, and you get ready to sell them 'earlier' than your competitors.

But what happens if the Pats don't win? What happens if the Denver Broncos win, instead? Is there any possibility that a good plan is to have the 'design' of the second t-shirt ready, so it doesn't take as long to print if you are incorrect on the outcome? Then, at least you still get to sell some t-shirts to help make a profit rather than sell none at all. What does the designing cost? Not much at all - it takes a little time and effort. Time that might be available during all the pre-game show commercials, or when nothing else is going on.

That is the idea behind an alternate count. It's just a 'design' which may or may not be needed. It's almost 'free'. And because it is, if the original idea pans out you just throw the alternate away: it was almost free. It's that simple.

And, keep in mind, this idea is in direct conflict with yourself as an 'excellent' handicapper of football games. But that's what it means to put your expertise in the larger context of your business. You are willing to put in a tad more effort because you realize not all outcomes are certain - in fact few of them are!

Cheers and enjoy the charts!




Tuesday, November 3, 2015

Ira Epstein Example - Part 2

In the previous post some of the advanced considerations were able to be outlined but not illustrated by way of example. We left off that post by saying there was an 'outside day down' which is defined as a higher high, a lower low and a lower close than the previous candle. With reference to the chart below, we want to illustrate, now, some of those more advanced considerations.

From Friday's candle, the "outside day down", clearly it can be seen that the futures traded down about 6 - 7 points in the pre-market Monday, but then clearly took out the high of the outside-day down. The consideration we outlined was that if the high of an outside-day down was taken out within the next two trading sessions, it would constitute a "bear trap" - as it is likely that a group of traders were caught short at the lows.

Follow-through by bullish participants can be seen on today's candle (Tuesday) with yet higher highs, putting more pressure on the bears.

So, then, very interestingly, Monday's candle is an "outside day up", and the same rule applies but in reverse. If the low of the outside candle up is taken out in the next two trading sessions, then it would constitute a "bull trap". So far, there is no sign of that, and it can only happen tomorrow or the signal is negated. What's good for the goose is good for the gander.

There remain several things to note on this chart. First, the slow stochastic is still fully embedded. Until the %K line (the red line) crosses back down under 80, it is not likely that price will try to regain the 20-day SMA.

Additionally, the 20-day SMA has recently crossed above the 100-day SMA constituting a "bull cross", the effects of which are already being seen in higher prices. How long this will last is not certain. Sometimes the cross happens very close to the point where the market enters a corrective phase, so even though the cross has happened, it, in itself, could sound a note of caution.

Lastly, note that there are still two gaps, circled in red, on the daily chart which are not yet closed. While some traders may not pay much attention to gaps, sometimes they form 'targets' for the Smart Money.

Disclaimer: Nothing in these observations is to be taken as trading or investment advice.

Sunday, November 1, 2015

Paraphrase of Ira Epstein's Rules for Trading

Ira Epstein is a broker who works for the Lind Group, and has published numerous videos on YouTube. From that information, a summary of his Rules for Trading that he provides to the public is distilled below.

Charting Requirement
These rules apply to the daily futures chart only. To follow his system, the following is needed.
  1. Daily OHLC bar chart
  2. Daily Bollinger Bands with 18-day Moving Average (20-day is acceptable)
  3. Daily Slow Stochastic Indicator, plotted as 14,3,3
  4. Daily 100-day Simple Moving Average (SMA)
  5. Swing line study (if available); i.e. higher highs, higher lows; lower highs, lower lows*
A current example chart that meets these requirements appears below.



Bollinger Band Theory 
Bollinger Bands are defined as a daily algorithm designed to keep the market trading within them 95% of the time. The Bollinger bands were developed by John Bollinger, and are 'volatility bands' constructed around the 18 day (or 20 day) moving average where the upper band and lower band are set at "two standard deviations from the moving average". The "two standard deviations" are what theoretically provide the 95% confidence level that the market will trade within the bands.

One does not want 100% confidence of trading within the bands because one is looking for signs of strength when price exceeds a band, and one is looking for signs of weakness when price can not quite hit a band as a price target.

These bands expand and contract with the volatility in the market. When they contract (get narrower) they often indicate a current period of 'consolidation' in the market. When they expand, they often indicate a time period when the market is trending. When the bands get narrow (consolidate), it often precedes a time when the market will trend.

Sometimes prices will be expected to close outside of the bands. Because of the small probability (5%) of trading outside of the bands, the number of consecutive closes outside of the band will typically be small 1 - 3 is common, whereas 4 - 7 closes outside of the bands is a very, very low probability event. The greater the number of consecutive closes, the lower the probability.

Slow Stochastic Theory
The slow stochastic (with parameters 14,3,3) is a price oscillator developed by George Lane, a large Chicago-based grain futures trader. The slow stochastic is a 'bounded' indicator, and can only travel between 0 & 100%. On the daily chart, values below 30% are defined as "over-sold", and values above 70% are defined as "over-bought".

Over-bought and over-sold on this indicator are potential reversal points in the market. However, an exception to over-bought and over-sold conditions is when the slow stochastic has 'embedded'. The slow stochastic is said to be embedded whenever one of these two conditions is met: both the %K and %D line of the slow stochastic is either over 80%, or under 20% for three consecutive days or more.

Other Definitions
  • Line in the sand - the 18 day (or 20 day) simple moving average is termed "the line in the sand". This is a line to which daily price often returns. It is considered to be the 'neutral point' on the chart. Prices often 'return to the line in the sand' to regroup either before or after an important economic announcement. This 18 day SMA is also a "battle ground between the bulls and the bears" and the point where one group tries to wrest control of the market from the other group.
  • Positive bias - the market is said to have 'positive bias' whenever it has closed above the "line in the sand".
  • Negative bias - the market is said to have 'negative bias' whenever it has closed below the "line in the sand".
  • Swing line uptrend - prices show higher highs and higher lows 'over' the 18-day SMA.
  • Swing line downtrend - prices show lower lows and lower highs 'under' the 18-day SMA.
  • Outside reversal day - same as in all technical analysis (outside day up or down).
  • Smart Money - Smart Money is defined as the large hedge funds and institutional traders who have  account sizes large enough to make a difference in price movement as seen on the chart as opposed to retail traders who account sizes typically don't affect the overall trend of price.
  • Riding the Bollinger Band - there are several times when prices will close exceptionally close to an upper band or a lower band for 'several days in a row'. This often happens when the slow stochastic 'goes embedded', either higher or lower. This is a strong trending sign for prices.
Basic Trading Concept
  1. One looks to buy a new long position when prices first exceed the 'line in the sand' to the upside. The target for this position is the "upper Bollinger band". This is because prices have shown they now have a positive bias, and the trade is in the direction of the prevailing trend.
  2. One does not look to buy long when price is below the 'line in the sand', because prices do not yet have a positive bias, and the trade is not yet in the direction of a prevailing trend.
  3. One looks to initiate a new short position when prices first exceed the 'line in the sand' to the downside. The target for this position is the "lower Bollinger band". This is because prices have shown they now have a negative bias, and the trade is in the direction of the prevailing trend.
  4. One does not look to initiate a new short position when price is above the 'line in the sand', because prices do not yet have a negative bias, and the trade is not yet in the direction of a prevailing trend.
  5. One looks to sell to 'take long profits only' at the upper Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up on long positions at the upper band. If new longs were initiated, this means the retail trader would be fighting what the Smart Money is doing.
  6. Similarly, one does not look to initiate new long positions at the upper Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.
  7. One looks to buy to 'take short profits only' at the lower Bollinger Band. This is because there is only a 5% probability or less (by definition of the band) that price will trade outside of the bands. The 'Smart Money' is lightening up' on short positions at the lower band. If new shorts were initiated, this means the retail trader would be fighting what the Smart Money is doing.
  8. Similarly, one does not look to initiate new short positions at the lower Bollinger band. This is because of the same probability that such a trade only has about 5% probability or less of success.
Other Basic Trading Considerations
  1. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an up trend, this will most often be accompanied by a slow stochastic which is positively embedded over 80.
  2. When the slow stochastic has 'embedded' it is one of the strongest of the technical signals. If prices are going to 'ride the bands' in an down trend, this will most often be accompanied by a slow stochastic which is negatively embedded under 20.
  3. Since the third day defines day when the stochastic goes 'embedded or not', the second day over 80 or under 20, is the day 'most at risk' for prices to reverse since, most often, the slow stochastic does not embed. Most often, the slow stochastic just goes from over-sold to over-bought and vice-versa without embedding.
  4. When the slow-stochastic has been over-bought, then when the slow stochastic reverses to under the 80 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.
  5. When the slow-stochastic has been over-sold, then when the slow stochastic reverses to over the 20 level, then it is most common for price and the 18-day moving average to meet. This does not always happen, but it usually does.
Advanced Trading Considerations
  1. When the slow stochastic has embedded in either direction, it is often seen - that when prices return to the "line in the sand" - then the line in the sand will be defended in the direction of the trend that embedded. In other words, price will generally 'bounce off' of the line in the sand and resume the trend. This doesn't always happen, but it often happens.
  2. When there has been an outside reversal day down, the high of that day should not be taken out higher in the next two trading days or else it constitutes a 'bear trap' - meaning that a number of players have been trapped in their positions at the lows.
  3. When there has been an outside reversal day up, the low of that day should not be taken out lower in the next two trading days or else it constitutes a 'bull trap' - meaning that a number of players have been trapped in their positions at the highs.
  4. When the 18-day SMA crosses above the 100-day SMA, some moving average followers will view this as a positive sign. If this happens when price is above the moving averages the cross over can be considered valid.
  5.  When the 18-day SMA crosses below the 100-day SMA, some moving average followers will view this as a negative sign. If this happens when price is below the moving averages the cross over can be considered valid.
  6. Often times the 100-day acts SMA acts as either a price target or support / resistance depending on it's relationship to the 18-day SMA, and/or the Bollinger Bands.
Example

While these rules may 'seem' complex, the example chart above helps to clarify them.

  1. From June 17 - August 1, price could not attain the upper Bollinger Band, and this is a sign of weakness, not strength.
  2. In mid-July price made it's target of the lower Bollinger Band, this is a sign of weakness, not strength.
  3. Throughout early August, price can be seen to be trading for multiple days on "both sides of the line in the sand", there is clearly a battle going on for control of the market. Further, there is a narrowing of the Bollinger Bands indicating a period of consolidation, to be followed by a breakout in one direction or the other (more likely lower given the above information).
  4. When prices break below the mid-August low, the Bollinger Bands begin to widen to the down side, indicating a trend beginning. This breakdown occurs under the 20-day SMA, and would be sold, as the market would have lower lows and lower highs (a swing line trend) under the line in the sand.
  5. Prices begin to "ride the band lower" as the slow stochastic embeds under the 20-level indicating the down trend in force. Profits are allowed to build until the slow stochastic turns back above the 20 level, around August 23rd.
  6. When the slow stochastic turns back up over the 20 level, it is 'most often' expected for price to meet the line in the sand, and that is what occurs in mid-September.
  7. One does not initiate new shorts against the lower band in late August, per the above rationale as the probability of success is 5% or less (less for every day that price closes below the band).
  8. One does not initiate new long positions in early September as price has not closed above the "line in the sand". 
  9. A new long can be initiated in mid-September, after price closes back above the line in the sand. The target for this trade is the upper Bollinger band.
  10. One would not initiate new longs on September 19th, when price is very near the upper Bollinger Band, as the probability of success is only 5% or less, of success. However, profits should look to be taken.
  11. A new short position is not initiated in mid-September because price has not closed below the line in the sand.
  12. When the slow stochastic turns back under 80, it is 'most often' expected that price will meet the line in the sand, and that is what does happen in mid-September.
  13. A new short position can be initiated in late September after price closes below the line in the sand, with a target of the lower Bollinger Band. 
  14. One would not initiate new short postions in late September when price closes on the lower Bollinger Band, as the probability of success is only 5% or less. However, buying back shorts to take short profits should be initiated.
  15. One would not initiate new long positions in later September as price has not closed above the line in the sand.
  16. In early October, price closes above the line in the sand on the second trading bar. One then looks to initiate new long positions with a target of the upper Bollinger Band. 
  17. In late October, price has hit the upper Bollinger Band and one would look to take at least-some profits on long positions. The slow stochastic has not yet crossed back under the 80 level from being embedded, so a trader may still wish to let some partial positions run until it does. This is discretionary.
  18. The last daily bar is an "outside range day down", meaning if the high of this bar is taken out in the next two trading sessions, it could constitute a 'bear trap' - meaning some players have most likely been caught short in the trade - presumably giving the market more fuel for a further upside run.
  19. Because the slow stochastic is still embedded for many more than three days, when it eventually turns down under 80, and price and the moving average begin to meet, it is a high probability that the line in the sand will be defended! Meaning price will bounce off the 18-day SMA, and resume a turn higher. This does not always happen, but it often does!
Repeat this Cycle, and these Instructions Continuously!

We post this information to show two things: a) we care about trading as much as we do about counting Elliott Waves, and b) sometimes Elliott Wave counting can be a great 'assist' to trading, as in when the longer direction has been established. One can 'filter out' short trades or 'long trades' in the above system based on the Elliott wave count in the market. Other times, like now, Elliott Wave analysis can have clear alternatives, and, in such cases one may rely more on plain technical analysis or a trading system like this to help screen for potential trades.

Disclaimer: We make no claims for the profitability of the above rules. All trading results are determined by your decisions, and we accept no responsibility for them. (*) The Swing Line study is one developed by Ira Epstein, and only appears in charting software he provides. To respect the proprietary nature of this indicator, we have not reproduced it here. Instead, if you are interested in examples of the Swing Line study, go to YouTube, and search on Ira Epstein. Any one of his "End of the Day Financial" videos, "Currency" videos, or "Metals" videos will have the indicator applied to the chart.