Saturday, March 19, 2016

A Tale of Two Fractals

The theory of fractals states fractals are “self-similar” patterns: you will see in a part what you see in the whole and vice-versa. R.N. Elliott discovered the first fractal; the repeating 5:3:5:3:5 pattern of a bull-market at every different degree of scale. This discovery was later confirmed mathematically by Benoit Mandelbrot. Fractal theory is now widely accepted.

The fractal theory of Elliott Wave says that for this reason, you will “often” see in a smaller structure what you see in the whole structure, and vice-versa. Below is a comparison between the most recent hourly up wave since the 1810 bottom, and the most recent weekly wave from the March 2009, low.

So, let’s agree on what we “don’t” know first. We don’t ‘know’ that the hourly movement up from the 1810 low has ended. If upward hourly movement continues and puts on a wave 4, and then a wave 5, we might then get five waves up from the low.

Isn’t that just what the bulls are looking for to make the case for a Primary V, higher? Could such a move ‘truncate’ and not make a new high? Yes, but ‘only’ if there are a clear five waves up.

In both cases, from a pure Elliott Wave perspective, we can not 'assume' the up move is over until a fourth wave overlaps a first wave. In the case of the hourly chart, a downward wave would have to overlap wave 1. In the weekly chart an overlap of wave I would be needed. We already know that the weekly chart has "at least" made or started a fourth wave down, IV, and may be in the process of a wave V, up. So, both charts 'may' be in sync at this time.

Please note that on the hourly chart, while there may be a pull-back or a significant down move in this price area, because price is nearing the upper daily Bollinger Band, the slow stochastic (particularly on the ES) is still fully embedded over the 80 level. There is absolutely nothing that says that prices can't also "lock on to" the upper daily Bollinger Band and 'ride' it higher per our paraphrase of Ira Epstein's Rules for Trading which we have posted on this blog, and you can find at this LINK. Prices are not currently near a Fibonacci level (either a 78.6% retracement or a 1.618 extension, yet).

Again, our posture remains that as long as prices still remain within the two-weekly up channel from the 2009 lows, one should not get 'overly' concerned about upward price movement. We still see that patience and flexibility will continue to pay off in terms of the eventual wave count.

And, oh, yes, it is 'already possible' to consider the hourly up movement as a completed five-wave structure, with March 14th, as the wave 3, March 15th as the wave 4, low, and March 18 or 21 as the wave 5, high. (There just is not sufficient downward movement to firm up such a conclusion at this point in time.) In such a case the entire hourly up movement so far from 1810 can be counted as Minor wave 1, and a Minor wave 2 down could develop. Yes! You still have to 'pay' for your wave 1's with wave 2 retracements. Nothing has repealed that law of Elliott Wave.

When we look at our sentiment gauge this week, the reading is only 46% bullish. So, there are still some skeptics that abound, and the data indicate this is primarily individuals, and not the newsletter writers or the professionals. However, the daily put/call ratio has now sunk to 0.55, and is now back in the "speculative" area of sentiment readings, but not excessively so. The $VIX, too, has sunk to a new yearly so, so some type of pull-back, at minimum, may be brewing.

Again, patience and flexibility will go a long way. Cheers and enjoy the chart!


  1. Do you think the price gap around 1864 would be a target for a wave 2 correction on the hourly chart?

    1. Hi John. It's too early to say because we can not conclude that upward movement of the hourly chart is over. Once we do make that conclusion, then a 61.8 - 78.6% retrace would be in order. Most stock chart packages will let you make that measurement.

  2. Excellent work, Joe!
    Thanks a lot.

  3. In the first picture the 0-2 line is violated by wave 3, do you use Neowave rules?

    1. Well, that's a good observation. Thanks for making it! I'm familiar with the Neowave rules, and you are right the loss of momentum makes one very cautious here. So I remain open and flexible. One thing I will say is that Elliott did not necessarily use the NeoWave rules, so let's see how this pans out, and put it in the records for future reference.