Sunday, December 20, 2015

A Matter of Degree

In yesterday's post, it was shown how it possible that Primary wave four is becoming longer in time. One of the best pieces of supporting evidence for this count is wave degree. Typically, Elliott termed minor degree waves as those that showed up on the 'daily' chart, whereas intermediate degree waves were those that comprised the weekly chart, and Primary degree waves those that comprised the monthly chart. Please refer to the daily chart below for this discussion.


In our prior posts, we had counted down the daily waves to the August 2015 lows as Minor degree waves A, B, C or alternatively minor 1,2,3 (but 5 was not made in the SP500). We said 1,2,3 and A,B,C are equivalent until they are not.

One key point - and please don't miss it - is that the three minor waves lower form an Intermediate degree wave of some label. We had presumed it 'might' be intermediate (A) of a larger primary fourth wave triangle - and  that is still a possibility. Regardless of the specific label at the August low (A) or (W), we then have labeled three more minor waves higher to the November high. So, this structure now makes an Intermediate degree (X) wave - or less likely an Intermediate degree (B) wave. This type of degree labeling is proceeding simply, and smoothly and naturally. There is no 'guess work' or forcing of degrees to some preconceived notion or tortuous attempt to fit "degrees to points", and you can see that the A-B-C down to (W) and the A-B-C up to (X) consume 'roughly' the same amount of time.

But the next point to absorb is that under Elliott's structures, a Primary degree wave is composed of Intermediate degree waves. It would be a mistake to jump from minor degree labeling directly to Primary degree labeling, without explaining where the Intermediate degree went!

In the count above, the Intermediate degree is clearly shown. That is the major point - we are not leaving the Intermediate degree waves out of Elliott's Primary degree labeling.

Having said that, a wave (Y) - while the most likely course to make a 38.2% retracement of Primary 3, is not a 'for certain' wave. It is highly likely, but even it is 'not' for sure. Why not? Well price is currently down to the lower daily Bollinger Band. Sometimes, price bounces off of the lower band strongly. If and only if price makes a new high above (X), then it is 'possible' a barrier triangle is still in play for Primary 4. But that is nowhere near in evidence yet, and every attempt to reach the old highs has been rebuffed with a turn lower. More likely, a retreat from the lower Bollinger Band will only be towards the middle Bollinger Band (aka the 20-day SMA), before resuming lower.

But we think, besides the downward overlap, and the channel break illustrated, there are two more 'telling' pieces of evidence as to why we are still in a Primary 4th wave.

First, if you notice the structure from late August to late September, it forms a FLAT wave in the SP500. And second waves are 'usually' sharp zigzags, not flats. They 'can' be flats, but they are "usually' sharps. So, having a flat wave at this location is a serious warning. It fits the concept of a B wave much better than it does the concept of a second wave.

Second, we know by measurement that the C wave upward stopped just short of a C = 1.618 x A. In other words, it did not make the usual expectation for a strong and powerful third wave of 3 = 1.618 x 1.

Regardless of the eventual path, if we are making a Primary 4th wave, it must be composed of Intermediate degree wave labels that consume proportional amounts of time in the sideways or down direction to what the Intermediate degree labels have consumed in upward direction.

Cheers and enjoy the chart!

Saturday, December 19, 2015

Listen ! (to the Market)

In January 2015, while some Elliott Wave sites were looking for a "three of three" upward to just begin to take the market to exorbitant new highs in the S&P500, we took the contrary view - a view based only on the wave count as we saw it - that a contracting ending diagonal was about to end the wave structure - which it did. This view - which we posted in our YouTube channel before the fact - has now been confirmed by all of the major Elliott Wave services, and most blogs, after the fact. It was a correct prediction using Elliott Wave theory.

In our post of December 3, 2015 while some other Elliott wave sites were looking for a "three of three upward" to begin, we took the contrary view that the best 'hope' for a Primary fifth wave at the time was to complete a triangle or double-zigzag downward (sic.. not upward as they were calling for) to the lower parallel Elliott trend channel boundary. These sites and false pundits have done nothing but revise and revise their counts - even changing their degree of labeling! They have been so dogmatically incorrect that they have made statements like, "this wave needs to start acting like a three of three soon or we will be forced to change our count." Indeed they have!

The daily chart of the S&P 500 now confirms that prices have not only contacted the lower trend line boundary - but have exceeded it to the down side. Here is a chart of the daily cash S&P 500, with no wave labels since the August low to show how the lower trend line boundary was met & exceeded.

Daily Cash S&P 500 Showing Channel Breach and Overlap
Further we note that there is now downward overlap with the upward August wave at 1993.46; it isn't much, but it is, in fact, overlap. We called this chart the best 'hope' for a Primary 5th wave because that's all it was - someone's hope. Not ours.

Rather, when the stock market does things like this, "we listen to it!" We do not ignore such Elliott Wave evidence, because it is the best chance at making another good prediction of what is to come. And that prediction is below on the two weekly chart of the S&P500 cash.


Before we explain, we need to tell you about another correct prediction. We said that because Primary wave 2 (circle 2) was a FLAT wave, with a higher (B) wave than Primary 1, we would not expect the (B) wave of Primary 4 (circle 4) to exceed the high. So far, it has not! Another correct prediction.

Now with the start of downward movement and overlap, we must conclude in a similar line of reasoning, that price will attempt to regain the lower two-weekly parallel Elliott trend channel line, and a 38.2% retracement of it prior wave three - Primary 3 (circle 3). Since we counted A-B-C down to the August low, we now see it as one zigzag of either a double zigzag - or equivalently - a flat-x-zigzag since wave (X) did attain within 90% of the high. Again, these would be identically equivalent structures in this case.

The key point is this : this is what the self-styled pundits and wave counters are missing - a sense of proportion and timing. Look at how long Primary 3 took in terms of time. It took almost four years! You don't correct a four year rise with a decline of only three-to-four months!

Wave fours tend to be very, very long structures in time compared to their wave two's. A wave four at (W) is just "too short" in terms of time, and a double zigzag for Primary 4 will still provide terrific alternation to the flat for Primary 2.

So - even though we can clearly see this count ahead - are we "locked in on it"? Unequivocally - No! Nothing has taken away the ability of Primary 4 to become a much larger sideways triangle, but the structure isn't right for a triangle yet. If it becomes correct, we will let you know! The bottom line is that Primary 4 'should' touch the lower trend channel line at some point, and it should try to effect a retrace of 38.2% of Primary 3. So, we remain completely flexible and non-dogmatic. We understand the issue of the Fourth Wave Conundrum - as we have called it in our YouTube Video, "A Critique of Elliott Wave for Trading" more clearly than most amateur wave counters, and it has helped us to be more patient, and responsive to the market as a result!

Listen to the market - not me!

Saturday, December 5, 2015

Defined Risk

With Friday's large point move, the jury is still out on whether a sideways triangle or a more forceful move upward is in progress. The daily triangle we are referring to was posted on 11/22 and again on 12/3 in this blog, and elsewhere.

Per the Elliott Wave Principle, triangles can never be 'called' until all five overlapping waves are in place: they can only be 'proposed' until then. The reason is that triangles can morph into a series of 1-2-i-ii, upward. That is because the waves in a sideways triangle contain higher lows.

If that occurs, so be it, and it's on to a structure that better defines the path of the wave. Psychologically, it's interesting how bearish sentiment was on Thursday's down move, and how quickly people turned to say 'wave three' up. And that may be the case : structurally the SP500 is still in a bull market until proven differently.

At times like this it is often more useful to concentrate on the "hard right-hand edge of the chart", where the decisions need to be made, rather than wallow on the pre-defined left-hand-side of the chart where all the "Elliott Wave degrees", and "wave labels" are located, and see what we can see.

The chart below shows only one way to count the movements in the 15-minute SP500 over the last three days. A proposed Elliott wave count is shown IF we are still in the triangle structure.

First, there are five waves down to an 'a' wave. Live and in real-time, we counted down the Wednesday waves as circle-1, 2,3, and 4, and said the fifth wave could easily extend - which it apparently did. Note that the entire sequence down to the 'a' wave is in one channel, and ends with no divergence on the EW Oscillator.

Then, there is the up move beginning late Thursday and into Friday. Notice, for the waves we can see, the upward channel has already been broken to the downside. While this is not fatal for an upward move, it is a bit of a warning sign, and allows us to review an opportunity. Right now, the upward move is just a bit over a 78.6% retracement of the downward move. This is still within the range of an upward 'b' wave as shown. Further, the move did end on a slight divergence with the Elliott Wave Oscillator.

Given,  that a triangle in progress should have a downward sloping trend line, the upward move allows us to posit that the downward move within the daily triangle circle-c wave may fall within another, larger, downwardly sloping parallel. If it does, we can limit the risk on a downward trade by recognizing that price movement from the last price to the high is about 2 S&P points, or about $100 in risk - a very small risk compared to margin of a futures contract.

Whether you analyze the chart the same way, is up to you. Whether you prefer to short the trade and limit your risk to the prior high at 2104, and assume a 7 point risk (about $350) is also a decision that is up to you. We are not telling you to take the trade, or advising you to do it. All decisions are yours. We are only illustrating how Elliott wave theory can be used to set the defined parameters for a trade. In this case, if we have counted correctly, the risk is $100, and the reward would be back down to the prior low around 2040, or a reward of 50 points or $2,500, or a 1 : 25 risk : reward ratio at it's best. Or, alternatively, there is a 1 : 7 risk-to-reward ratio at it's worst and that is even if we have not counted the upward wave correctly (or we have counted it correctly for what we can see, but there is more to come that we cannot yet see).

Furthermore, it is also possible to consider the implications of a non-triangle count, and realize it would also be an excellent location to set a stop & reverse trade. With either $100 of risk, or $350 of risk, then if the pattern is violated to the upside, it is likely all of the loss of the stop being hit could be recouped in a much stronger wave higher - if the 'proposed' triangle is broken to the upside.

If you are not familiar with why risk and reward is an important concept in setting trading decisions (instead of "wave counting" decisions), we encourage you to review the video on the Tutorials page of our web-site. The video is the Top Ten Technical Indicators by Thomas Long of Forex.com.

Thursday, December 3, 2015

Channels and Alternation for Potential Primary 5th

Prices forming channels were important to R. N. Elliott and most practicing Elliotticians today would probably agree channels are important in Elliott Wave work. That being the case, the scenario below is the ‘best’ scenario for making a Primary 5th wave upward – using modern Elliott Wave theory. You will note we posted this potential scenario back on Nov. 22nd. So, today's drop should not have come as a surprise to anyone. We emphasize .. repeatedly ... this is a potential scenario. If you are interested in more discussion of it, it is posted below the chart.

One of the reasons for positing this scenario is that a triangle represents "indecision and a balance of forces" before the Fed meeting in December. Keep in mind there is lots of 'volatility' that can happen in the first half of the month, including the payroll employment report this Friday, and the Fed meeting on Dec 16th. Perhaps after all that is out of the way, the 'smart money' will feel more relaxed and start a rally into year end, and into the first of the year. But, more importantly than that, a triangle would signify that the last wave in a sequence is dead ahead. That's how triangles work when they are in a fourth wave position.

We should note that some people have posted a 'truncated fifth' wave at b of our triangle.

The problem with that scenario besides the fact the b wave of the triangle was clearly counted in real time by more than one analyst we know as a "three" and not a "five" is one key factor. If wave 5 was 'there', then wave 5 would not equal wave 1, which is one of the most common wave relationships. In fact, it would be much shorter. Further, the upward wave to that location would not be in a channel; it would be a wedge. But wedges are 'usually' diagonals, and this one would not be - again greatly lowering the odds of such a forced count.

Rather, 'at this point in time' we would expect the Elliott Wave Oscillator to weave around the zero level in a fourth wave, providing enough time for price somehow to contact and/or slightly break the lower trend line boundary before resuming higher. This could occur in the triangle OR in a double zigzag lower to the trend line. Either a triangle or a double-zigzag would provide the expected level of 'alternation' needed for a true Primary 5th wave.

Tentatively, we have 'sketched in' a lower triangle trend line from circle-a to circle-c. We will allow the lower trend line to be 're-anchored' within limits, if, and when we know that circle-c has ended.

Then, wave 5 should be "about as long" as wave 1. And it would likely fail somewhere near the median line of the parallel Elliott trend channel.

At this point in time, there are other wave counts we have to consider. We have outlined these in the posts entitled "A Hitch-Hiker's Guide to EW Galaxy", and subsequent "Galaxy Update". We have also indicated why this is necessary at this time. The uncertainty is inherent in fourth and fifth waves, and it is not perfectly clear yet which degree of fourth wave are we in. We have called this situation the "Fourth Wave Conundrum" in our YouTube Video, Critique of Elliott Wave for Trading. And it occurs at every degree of trend!

For now, the situation is we are "range bound" between the May 2015 high and the August 2015 low. We are awaiting resolution of the range. We can not 'make up' waves that 'just aren't there' for our personal reasons, and we can not 'force a count' that we truly don't see. We will update as best as possible when the wave count makes the most sense.